2016
Annual Report to Shareholders
April 26, 2017
To Our Fellow Investors,
Tiptree’s book value per-share, as exchanged, as of year-end 2016 was $10.141, which combined with
dividends, resulted in a total return for the year of 15.1%. On a consolidated basis, we earned $32.3 million of
net income which translates to $78.9 million of Adjusted EBITDA1, both significant increases from 2015.
As our first decade of operations comes to a close, Tiptree has successfully transformed its strategy away
from its origins as an opportunistic asset investor to becoming a long-term owner of operating companies.
Original investors who participated in Tiptree Financial Partners, L.P.’s June 12, 2007 initial capital raise have
experienced a compounded annual return of 10.7%2 through the end of 2016, as measured by growth in book
value per share plus dividends received, as compared to 6.6% for the S&P 500 and 6.9% for the Russell 2000
over the same period.
Our public share price does not (as of the writing of this letter) reflect our GAAP book valuation. In addition, as
we move forward GAAP accounting may not always accurately capture the intrinsic value of our businesses
which we believe will likely exceed our GAAP book value, potentially substantially. As long-term holders, it
may be many years, if ever, that this difference between GAAP vs. intrinsic value is recognized. However, we
believe that through the actions currently being undertaken by management to simplify our business model
and financial reporting, along with producing consistent, long-term performance, market participants will
ultimately recognize consistent, superior results and value an investment in our shares accordingly.
We are focused on enhancing shareholder value by generating consistent growth and profitability at our
operating companies. We will continue to look for acquisition opportunities that have the following attributes:
(1) strong and experienced management teams, (2) attractive and stable cash returns, (3) complement
existing businesses or strategies, and (4) have sustainable and scalable business models. There will be years
where we do not find any acquisitions, but we will always be focused on creating shareholder value and
improving our existing companies.
CONSOLIDATED RESULTS
In 2016, we continued to focus on building a company that can generate stable and repeatable earnings. As a
result, we were very pleased by our financial results which outperformed prior years by almost every metric:
• Net income was $32.3 million, an increase from $8.8 million in 2015
• Diluted earnings per share of $0.78, an increase from $0.17 in 2015
• Adjusted EBITDA of $78.9 million, an increase of 35.1%
• Book value per share, as exchanged, of $10.14, an increase of 13.9%; when including dividends
received the total return to shareholders was 15.1% for 2016
• Returned $47.8 million to investors through $43.8 million of share buy-backs and $4.0 million of
dividends
(1) For a reconciliation to GAAP financials, see “Non-GAAP Measures” beginning on p. 45 of the attached Form 10-K.
(2) Total annualized return from June 2007 to December 2016 to original investors of Tiptree Financial Partners, L.P. and is defined as total dividends received per share plus GAAP book value per share,
as exchanged, as of December 31, 2016.
1
In the last three years, our company has transformed significantly which makes comparisons of our financial
performance from year-to-year difficult. We believe 2015 and 2016 are the most comparable year-over-year
results.
GAAP FINANCIAL HIGHLIGHTS
(dollars in millions, except per share data)
Total revenues
Pre-tax income from continuing operations
Income before non-controlling interests
Net income attributable to Class A common stockholders
Diluted earnings per Class A share
Cash dividends paid per share
Total assets
Total investments and cash and cash equivalents
Debt
Total stockholders’ equity
NON-GAAP FINANCIAL HIGHLIGHTS (1)
Adjusted EBITDA
Book Value per share, as exchanged
Total cash returned to investors
SPECIALTY INSURANCE
2016
2015
2014
$567.2
43.3
32.3
25.3
0.78
$0.10
$438.5
(12.4)
8.8
5.8
0.17
$0.10
$80.3
0.8
4.6
(1.7)
(0.10)
-
$2,894.8
1,079.6
793.0
390.1
$2,495.0
951.4
667.0
397.7
$8,202.4
456.7
363.2
401.6
$78.9
10.14
47.8
$58.4
8.90
8.2
$58.9
9.00
-
Our specialty insurance operations had a strong year delivering $60.5 million of Adjusted EBITDA, up from
$43.3 million in 2015. In the second quarter, we made a strategic decision to contribute approximately $103
million of capital to Fortegra to better capitalize the company. Subsequently, Fortegra’s financial strength
rating was upgraded to “A-” by A.M. Best, and we believe the improved rating will provide substantial
opportunities for growth and product expansion. For the year, gross written premiums were $708 million, a
3.3% increase versus 2015, while net written premiums were $337 million, up 85.2% from prior year. This
increase in net written premiums was substantially driven by our captive reinsurance subsidiary assuming
$138 million of previously ceded credit protection premiums, resulting in a significant decrease in our
reinsurance costs and gaining additional investment capacity. Despite the significant growth in our net
written premiums, we were able to maintain our underwriting discipline as evidenced by our combined ratio
of 89.5%, as adjusted1, which represents an underwriting profit.
We entered the insurance business in 2010 and as we have evolved into a specialty insurance underwriter, we
have found the insurance sector to have several financial characteristics that we find attractive, particularly
the ability of insurers to receive premiums upfront and pay claims later. As our net written premium volume
increases, we are able to retain incremental premiums collected which can be invested. We believe our asset
management experience allows us to differentiate our insurance operations by combining strong
underwriting results with higher yielding investment income as a result of our access to alternative
investment opportunities.
(1) For a reconciliation to GAAP financials, see “Non-GAAP Measures” beginning on p. 45 of the attached Form 10-K.
2
For 2016, our investment portfolio1 grew to $352 million, a 31.0% increase from 2015. We actively manage our
insurance investments across multiple asset classes, sectors and geographies. As a result, the average annual
yield1 on our investment assets improved from 2.5% in 2015 to 8.0% in 2016 primarily driven by an increased
allocation to higher yielding investments.
Going forward, we expect to be a leading provider of specialty insurance products and anticipate our growth
to be driven primarily by expansion of our warranty products and specialty programs business.
ASSET MANAGEMENT
Our asset management operations significantly improved in 2016 contributing pre-tax earnings of $25.3
million compared to a loss of $6.8 million in 2015. Fee-earning assets under management remained steady at
$1.9 billion as we issued our seventh CLO which partially offset run-off from our older vintage CLOs. Our
financial results were positively impacted by the fair market valuations of our investments in the subordinated
notes of our CLOs driven by a significant rebound in the credit markets. Historically, our earnings have been
significantly exposed to market volatility as a result of these investments. In January 2017, we decided to sell
down our total investment to $41.4 million of fair market value, which we believe should decrease our
exposure to market volatility in this segment.
Going forward, we are optimistic that our asset management business will grow from expanding both our
product and distribution capabilities. In 2015, we decided we would selectively seed new investment products
to build an investment performance history in advance of offering products to investor clients. The first new
product we seeded was a credit focused fund that now has a 21 month investment track record.
SENIOR LIVING
Our senior living operations continued to grow in 2016 with Adjusted EBITDA1 of $10.5 million, up 59.1% from
2015. We completed 5 acquisitions for $106 million, bringing the total number of properties to 29 with an
aggregate purchase price of $338 million. As net operating income grew and NOI margins expanded in 2016,
our GAAP pre-tax earnings improved and our GAAP loss declined to $5.8 million which included $14.2 million
of depreciation and amortization. While depreciation from real estate provides us with favorable tax benefits,
it reduces the value of the real estate holdings on our balance sheet for GAAP reporting purposes. As a result,
we believe it creates an economic separation between GAAP book value and what we believe is the intrinsic
value of our real estate assets. Total accumulated depreciation on our properties, which is approximately the
difference between current GAAP book value and our initial purchase price valuation, was $38.2 million as of
December 31, 2016.
We believe a combination of the demographics of an aging nation and current low financing rates creates the
potential for stable and attractive returns. We also believe our real estate portfolio positions us well for any
inflationary tail-winds that may arise. We expect growth in this segment to be driven by increases in
profitability at existing properties and through continued acquisition activity.
(1) For a reconciliation to GAAP financials, see “Non-GAAP Measures” beginning on p. 45 of the attached Form 10-K.
3
CREATING LONG-TERM VALUE FOR OUR SHAREHOLDERS
Efficient deployment of your capital is a top priority for us. We aim to find the best use of capital to help us
create long-term value for shareholders. We will do this through a combination of acquisitions, additional
investments in our existing businesses, opportunistic share repurchases and paying a consistent dividend. We
approach these capital allocation decisions not just as managers but as owners because we are owners; as of
March 31st, 2017, directors, officers, employees and related family trusts owned 21.8% of an economic interest
of Tiptree.
We seek to maintain a prudent capital structure and use debt carefully and sparingly. When we do use debt,
we seek to limit recourse, avoid market-value margin requirements and have debt payment terms that closely
match the cash flows of a specific asset or business.
In 2016, we repurchased 6.8 million shares, or 16% of the outstanding shares as of December 31, 2015, which
were completed at a 30% discount to book value per share.
When determining whether to buy-back shares or pay a dividend, Tiptree’s board considers many factors
including estimated corporate tax obligations, near-term cash needs, acquisition opportunities and capital
commitments, as well as the potential impact on shareholder value. Based upon Tiptree’s 2016 performance
and our positive outlook, the board has approved a dividend of $0.03 per share payable in the first quarter, a
20% increase from prior quarters.
LOOKING AHEAD
Our long-term objective is to grow Tiptree to scale, as we believe this will better provide liquidity to investors,
and improve the price at which our public shares trade. As a growing company, our subsidiaries will have a
continual need for capital to support operations and for acquisitions. We believe that our approach to capital
allocation will produce growth in long-term shareholder value, and we will continually evaluate our
performance primarily by our shareholders’ total return, as measured by Adjusted EBITDA, and growth in
book value per share and dividends received.
We believe Tiptree is well positioned as a result of the changes implemented since going public. Performance
is expected to benefit from continued growth in each of our businesses. And importantly, we believe that our
efforts to better position the company for growth and increase clarity and transparency in our financial
reporting should allow investors to better understand the intrinsic value of Tiptree.
With best regards,
Michael Barnes
Executive Chairman
Jonathan Ilany
Chief Executive Officer
4
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
OR
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
(State or Other Jurisdiction of
Incorporation of Organization)
780 Third Avenue, 21st Floor, New York, New York
(Address of Principal Executive Offices)
38-3754322
(IRS Employer
Identification No.)
10017
(Zip Code)
(212) 446-1400
(Registrant’s Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act: Class A Common Stock, par value $0.001 per share
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
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
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes
No
As of June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s voting and
non-voting common equity held by non-affiliates of the registrant was approximately $139,742,466, based upon the closing sales price of $5.48 per share as reported
on the NASDAQ Capital Market. For purposes of this calculation, all of the registrant’s directors and executive officers were deemed to be affiliates of the registrant.
As of March 9, 2017, there were 34,988,864 shares, par value $0.001, of the registrant’s Class A common stock outstanding (including 6,514,768 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.
Documents Incorporated by Reference
Certain information in the registrant’s definitive proxy statement to be filed with the Commission relating to the registrant’s 2017 Annual Meeting of Stockholders is
incorporated by reference into Part III.
TIPTREE INC.
Table of Contents
Annual Report on Form 10-K
December 31, 2016
ITEM
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Consolidated Balance Sheets for December 31, 2016 and December 31, 2015
Consolidated Statements of Operations for the three years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the three years ended December 31, 2016, 2015 and 2014
Consolidated Statement of Changes in Stockholders’ Equity for the three years ended December 31, 2016, 2015
and 2014
Consolidated Statements of Cash Flows for the three years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
(1) Organization
(2) Summary of Significant Accounting Policies
(3) Acquisitions
(4) Dispositions, Assets Held for Sale & Discontinued Operations
(5) Operating Segment Data
(6) Investments
(7) Fair Value of Financial Instruments
2
Page
Number
5
6
14
25
25
25
26
26
26
27
27
56
F- 1
F- 4
F- 5
F- 6
F- 7
F- 9
F- 11
F- 11
F- 11
F- 27
F- 30
F- 31
F- 34
F- 39
TIPTREE INC.
Table of Contents
Annual Report on Form 10-K
December 31, 2016
ITEM
(8) Notes and Accounts Receivable, net
(9) Reinsurance Receivable
(10) Goodwill and Intangible Assets, net
(11) Derivative Financial Instruments and Hedging
(12) Assets and Liabilities of Consolidated CLOs
(13) Debt, net
(14) Liability for Unpaid Claims and Claim Adjustment Expenses
(15) Other Assets
(16) Other Liabilities and Accrued Expenses
(17) Other Income and Other Expenses
(18) Stockholders’ Equity
(19) Accumulated Other Comprehensive Income (Loss)
(20) Stock Based Compensation
(21) Related Party Transactions
(22) Income Taxes
(23) Commitments and Contingencies
(24) Earnings Per Share
(25) Summarized Quarterly Information (Unaudited)
(26) Subsequent Events
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
3
Page
Number
F- 47
F- 48
F- 51
F- 52
F- 55
F- 57
F- 59
F- 62
F- 62
F- 62
F- 63
F- 65
F- 65
F- 68
F- 70
F- 72
F- 73
F- 75
F- 77
63
63
64
64
64
64
64
TIPTREE INC.
Table of Contents
Annual Report on Form 10-K
December 31, 2016
ITEM
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
Page
Number
64
64
65
65
66
66
4
PART I
Forward-Looking Statements
Except for the historical information included and incorporated by reference in this Annual Report on Form 10-K, the information
included and incorporated by reference herein are “forward-looking statements” within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Forward-looking statements provide our current expectations or forecasts of future events
and are not statements of historical fact. These forward-looking statements include information about possible or assumed future
events, including, among other things, discussion and analysis of our future financial condition, results of operations and our strategic
plans and objectives. When we use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “seek,” “may,” “might,”
“plan,” “project,” “should,” “target,” “will,” or similar expressions, we intend to identify forward-looking statements.
Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, many
of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or
forecasted in the forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including, but not limited to, those described in the section entitled “Risk Factors” and
elsewhere in this Annual Report on Form 10-K 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K, references to:
“1940 Act” means the Investment Company Act of 1940, as amended.
“Administrative Services Agreement” means the Administrative Services Agreement between Operating Company (as assignee of
TFP) and BackOffice Services Group, Inc., dated as of June 12, 2007.
“AUM” means assets under management.
“Care” means Care Investment Trust LLC.
“CFPB” means the Consumer Financial Protection Bureau.
“CLOs” means collateralized loan obligations.
“Code” means the Internal Revenue Code of 1986, as amended.
“consolidated CLOs” means Telos 5, 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.
“Dodd-Frank Act” means the Dodd-Frank Wall Street Reform and Consumer Protection Act.
“EBITDA” means earnings before interest, taxes, depreciation and amortization.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Fortress” means Fortress Credit Corp., as administrative agent, collateral agent and lead arranger, and affiliates of Fortress that are
lenders under the Credit Agreement among the Company, Fortress and the lenders party thereto.
“Fortegra” means Fortegra Financial Corporation.
“GAAP” means U.S. generally accepted accounting principles.
“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.
“PFG” means Philadelphia Financial Group, Inc.
“Reliance” means Reliance First Capital, LLC.
5
“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.
“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.
Item 1. Business
OVERVIEW
Our Business
Tiptree is focused on enhancing shareholder value by generating consistent growth and profitability at our operating companies. Our
consolidated subsidiaries currently operate in the following businesses - specialty insurance, asset management, senior living and
specialty finance.
We aim to:
•
•
•
be a leading provider of specialty insurance products, while maintaining our strong underwriting performance;
continue to grow and expand our seniors housing and asset management businesses; and
generate enhanced, risk adjusted investment returns.
When assessing potential acquisitions, we look for opportunities that:
have strong and experienced management teams;
generate attractive and stable cash returns;
complement existing businesses or strategies; and
have sustainable and scalable business models.
•
•
•
•
We evaluate our performance primarily by our shareholders’ total return, as measured by Adjusted EBITDA, growth in book value
per share and dividends received.
As of December 31, 2016, Tiptree and its consolidated subsidiaries had 1,068 employees, 26 of which were at corporate headquarters.
Our Competitive Advantage
We believe our structure as a public company gives us the ability to have a long-term perspective focused on maximizing returns to
our shareholders. We believe our long-term perspective provides us the flexibility to focus on strategy and profitability through multiple
market cycles, including those that may negatively affect the value of our holdings in the short term. In addition, we have the flexibility
to assess and evaluate complex situations, which we believe gives us advantages over competitors with limited capital allocation
parameters and fixed time horizons.
6
Competition
Our businesses face competition, as discussed under “Operating Businesses” below. In addition to the competition our businesses
face, we are subject to competition for acquisition opportunities. Our competitors for acquisitions include commercial and investment
banks, mortgage companies, specialty finance companies, insurance companies, asset managers, private equity funds, hedge funds,
family offices, real estate investment trusts, limited partnerships, business development companies and special purpose acquisition
vehicles. Many of our competitors are significantly larger, have greater access to capital and other resources and may possess other
competitive advantages.
Our businesses are subject to regulation as described under “Operating Businesses” below. The 1940 Act may limit the types and
nature of businesses that we engage in and assets that we may acquire. See “Risk Factors-Risks Related to Regulatory and Legal
Matters-Maintenance of our 1940 Act exemption will impose limits on our operations.”
OPERATING BUSINESSES
Specialty Insurance
Our specialty insurance segment is conducted through Fortegra Financial Corporation (together with its subsidiaries, “Fortegra”), an
insurance holding company incorporated in 1981. Through its subsidiaries, Fortegra underwrites and administers specialty insurance
products, primarily in the United States, and is a leading provider of credit and asset protection products and administration services.
Our diverse range of products and services include credit protection insurance, warranty and service contract products, and insurance
programs which front and underwrite niche personal and commercial lines of insurance. We also offer various other insurance related
products and services throughout the U.S. through our non-regulated subsidiaries.
Products and Services
Credit Protection Insurance Products - Our credit protection insurance products are designed to offer consumers protection from
life events that limit a borrower’s ability to make payments on outstanding loan balances. These products offer consumers the option
to protect credit card and installment loan balances or payments in the event of death, involuntary unemployment or disability.
Warranty and Service Contract Products - Our warranty and service contract products provide consumers with coverage on
automobiles, recreation vehicles, mobile devices, consumer electronics, appliances and furniture and bedding protecting them from
certain covered losses. These products offer replacement, service or repair coverage in the event of mechanical breakdown, accidental
damage, theft and water damage. Some of our warranty and service contract products are extensions of warranty coverage originally
provided by original equipment manufacturers.
Programs - Our program business is focused on fronting and underwriting certain niche commercial and personal lines insurance
coverages for general agents and other program managers that require broad licensure, an “A-” or better A.M. Best rating, and
specialized knowledge and expertise to distribute their products. We grant these general agents and program managers authority to
produce, underwrite and administer policies subject to our underwriting and pricing guidelines. We typically transfer all or a substantial
portion of the underwriting risk on these programs to third-party reinsurers for which we are paid a fee. We have a particular focus
on “short-tail” lines of business where the time between the issuance of a policy or contract and reporting and payment of the claim
tends to be shorter.
Services and Other - We have several non-insurance products which provide value-add services to Fortegra customers, including
premium finance and business processing services.
Marketing and Distribution
Our credit protection and warranty products are marketed through financial services companies, retailers, automobile dealerships and
mobile device service providers. Our program insurance products are generally marketed through a network of independent insurance
brokers and managing general agencies. In each case, we pay a commission-based fee to our marketing partners. A significant portion
of our marketing partnership commission agreements are on a retrospective commission basis, which allows us to adjust commissions
on the basis of claims experience. Under these types of arrangements, the compensation to our marketing partners is based upon the
actual losses incurred compared to premiums earned. We believe these types of contractual arrangements align their economic interests
with ours, help us to better manage our risk exposure and deliver more consistent profit margins with respect to these types of
arrangements.
7
Investment Portfolio
Our investment strategy is designed to achieve attractive risk-adjusted returns across select asset classes, sectors and geographies
while maintaining adequate liquidity to meet our claims payment obligations. We rely on conservative underwriting practices to
generate investable funds while minimizing our underwriting risk. We invest a majority of our investable assets in high quality
corporate, government and municipal bonds with relatively short durations, designed to deliver sufficient liquidity to meet claims as
incurred. The balance of our investable assets are invested in asset classes that we believe will produce higher risk- adjusted returns
over the long term, a significant portion of which are managed by other Tiptree subsidiaries.
Risk Management
Consistent with standard industry practice for most insurance companies, we use reinsurance to manage our underwriting risk and
efficiently utilize capital. For example, a significant portion of our distribution partners of credit protection insurance products have
created captive reinsurance companies to assume the insurance risk on the products they distribute. These captive reinsurance companies
are known as producer owned reinsurance companies (“PORC”) and in most instances each PORC assumes almost all of the
underwriting risk associated with the insurance products they distribute. In these instances we act in a fronting and administrative
capacity on behalf of each PORC, providing underwriting and claims management services. We receive an administration fee that
compensates us for our expenses associated with underwriting and servicing the underlying policies. We generally require cash
collateral to secure the reinsurance recoverable in the event that a PORC is unable to pay the claims it has assumed. In our insurance
program business, our reinsurers tend to be highly rated, well-capitalized professional third-party reinsurers.
Competitive Strengths
Specialty Focus - We have a history of operating in niche markets that require specialized knowledge and expertise to profitably
service and/or underwrite. Our expertise and focus, developed over our thirty five year history in credit insurance, has contributed to
our position as one of the leading providers of credit insurance products in the United States. In addition, our “A-” (Excellent) A.M.
Best rating provides us the opportunity to write niche commercial and personal lines insurance programs through general agents and
other program managers. We believe these specialty markets tend to have fewer competitors and higher barriers to entry than other
segments of the insurance market, providing us with greater flexibility on pricing and terms, and better, more consistent underwriting
margins. We expect to continue to expand into other niche markets where we can capitalize on opportunities presented by our
underwriting expertise.
Broad Service Delivery Expertise- Over the years, Fortegra has developed the expertise to provide a variety of products and services
for our marketing and distribution partners, including policy underwriting and issuance, back office processing and administration,
claims management. Integrated, proprietary technology delivers low cost, highly automated services to our clients, while our scalable
technology infrastructure affords Fortegra the opportunity to add new clients and services without significant additional expense.
The Company believes its capabilities are a key contributor to its high client retention rates. In our credit products our annual renewal
rates are consistently in excess of 90%, which we believe distinguishes us from many of our peers.
Significant Fee-based Revenue - We seek to complement our underwriting income with substantial fee-based revenues from the
various value-added services we provide our marketing and distribution partners. As a result, a significant portion of our revenues are
derived from fees, and are not solely dependent upon the underwriting performance of our insurance products, resulting in more
diversified and consistent earnings. Our fee based revenues are primarily generated in both our regulated insurance entities as well
as non-regulated service companies. We believe fees generated outside of regulated insurance entities afford us greater financial
flexibility than traditional insurance carriers.
Superior Investment Capabilities - Our specialty insurer’s affiliation with Tiptree provides access to extensive investment expertise
and investment opportunities. We believe our specialty insurer’s ability to source investments through Tiptree allows it to better select
assets that meet its liability profile, and provides the opportunity to generate superior risk-adjusted investment returns over the long
term compared to what our specialty insurer could produce on its own, which we believe distinguishes our specialty insurer from
many other insurance companies.
Competition
We operate in several markets, and believe that no single competitor competes against us in all of our business lines. The competition
in the markets in which we operate is a function of many factors, including price, industry knowledge, quality of client service, sales
force effectiveness, technology platforms and processes, the security and integrity of information systems, financial strength ratings,
breadth of products and services, brand recognition and reputation. Our credit protection products and warranty service contracts
compete with similar products of insurance companies, warranty companies and other insurance service providers. Many of our
competitors are significantly larger, have greater access to capital and may possess other competitive advantages. These products
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compete with several multi-national and regional property and casualty companies that may have expertise in our niche products. Our
competitors include: The Warranty Group, Inc., Assurant, Inc., eSecuritel Holdings, LLC, Asurion, LLC, AmTrust Financial Services,
Inc., State National Companies Inc. and several smaller regional companies.
Regulation
We are subject to federal, state, local and foreign regulation and supervision. Our insurance subsidiaries are generally restricted by
the insurance laws of their respective domiciles as to the amount of dividends they may pay without the prior approval of the respective
regulatory authorities. Generally, the maximum dividend that may be paid by an insurance subsidiary during any year without prior
regulatory approval is limited to a stated percentage of that subsidiary’s statutory surplus as of a certain date, or net income of the
subsidiary for the preceding year.
Our insurance company subsidiaries are domiciled in California, Delaware, Georgia, Kentucky and Louisiana. The regulation,
supervision and administration by state departments of insurance relate, among other things, to: standards of solvency that must be
met and maintained, restrictions on the payment of dividends, changes in control of insurance companies, the licensing of insurers
and their agents and other producers, the types of insurance that may be written, privacy practices, the ability to enter and exit certain
insurance markets, the nature of and limitations on investments and premium rates, or restrictions on the size of risks that may be
insured under a single policy, reserves and provisions for unearned premiums, losses and other obligations, deposits of securities for
the benefit of policyholders, payment of sales compensation to third parties, approval of policy forms and the regulation of market
conduct, including underwriting and claims practices. As part of their routine regulatory oversight process, state insurance departments
conduct periodic detailed examinations of the books, records, accounts and operations of insurance companies that are domiciled in
their states.
Our insurance company subsidiaries are also subject to certain state regulations which require diversification of our investment
portfolios and limits on the amount of our investments in certain categories. Failure to comply with these regulations would cause
non-conforming investments to be treated as non-admitted assets in the states in which we are licensed to sell insurance policies for
purposes of measuring statutory surplus and, in some instances, would require us to sell those investments. Such investment laws are
generally permissive with respect to federal, state and municipal obligations, and more restrictive with respect to corporate obligations,
particularly non-investment grade obligations, foreign investment, equity securities and real estate investments. Each insurance
company is therefore limited by the investment laws of its state of domicile from making excessive investments in any given security
(such as single issuer limitations) or in certain classes or riskier investments (such as aggregate limitation in non-investment grade
bonds).
The NAIC provides model insurance laws and regulations for adoption by the states and standardized insurance industry accounting
and reporting guidance. However, model insurance laws and regulations are only effective when adopted by the states, and statutory
accounting and reporting principles continue to be established by individual state laws, regulations and permitted practices. The NAIC
has adopted a model act with risk-based capital (“RBC”) formulas to be applied to insurance companies to measure the minimum
amount of capital appropriate for an insurance company to support its overall business operations in light of its size and risk profile.
State insurance regulators use RBC standards to determine appropriate actions relating to insurers that show signs of weak or
deteriorating conditions. The domiciliary states of our insurance company subsidiaries have adopted laws substantially similar to the
NAIC’s RBC model act.
Fortegra is subject to the state insurance holding company statutes which may require prior regulatory approval or non-disapproval
of material transactions between an insurance company and an affiliate or of an acquisition of control of a domestic insurer and
payments of extraordinary dividends or distributions.
We own reinsurance company subsidiaries that are domiciled in Turks and Caicos. These subsidiaries must satisfy local regulatory
requirements, such as filing annual financial statements, filing annual certificates of compliance and paying annual fees.
We are also subject to federal and state laws and regulations related to the administration of insurance products on behalf of other
insurers. In order for us to process and administer insurance products of other companies, we are required to maintain licenses of a
third party administrator in the states where those insurance companies operate. We are also subject to the related federal and state
privacy laws and must comply with federal and state data protection and privacy laws. We are also subject to laws and regulations
related to call center services.
Seasonality
Our financial results historically have been, and we expect to continue to be, affected by seasonal variations. Revenues may fluctuate
seasonally based on consumer spending, which has historically been higher in September and December, corresponding to the back-
to-school and holiday seasons. Accordingly, our revenues have historically been higher in the third and fourth quarters than in the
first half of the year. Member benefit claims on mobile device protection are typically more frequent in the summer months, and
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accordingly, claims expense from those products have historically been higher in the second and third quarters than other times of the
year.
Intellectual Property
We own or license a number of trademarks, patents, trade names, copyrights, service marks, trade secrets and other intellectual property
rights that relate to our services and products. Although we believe that these intellectual property rights are, in the aggregate, of
material importance to our business, we also believe that our business is not materially dependent upon any particular trademark,
trade name, copyright, service mark, license or other intellectual property right. Our insurance subsidiaries have entered into
confidentiality agreements with their clients that impose restrictions on client use of our proprietary software and other intellectual
property rights.
Employees
At December 31, 2016, our specialty insurance segment employed 433 employees, on a full or part time basis.
Asset Management
Our asset management segment is conducted through TAMCO, an SEC-registered investment adviser that is primarily a holding
company for our asset management subsidiaries. We specialize in managing credit related assets, on behalf of pension funds, hedge
funds, other asset management firms, banks, insurance companies and other types of institutional investors. We earn management
fees based on the amount of assets under management (“AUM”) that we manage, incentive income based on the performance of our
funds or investment vehicles, and investment income from investments we make in our own funds and investment vehicles. Our fee
paying AUM is primarily comprised of CLOs.
Our strategy is focused on growing our AUM and expanding our products by executing on the following objectives:
• Retain and attract talented investment professionals;
• Expand our investment products to diversify our product mix and attract new clients; and
•
Pursue strategic opportunities that we believe can expand our product capabilities and strengthen our distribution capabilities.
As of December 31, 2016, TAMCO had approximately $1.9 billion of fee earning AUM.
Investment Products
CLOs: We currently manage $1.8 billion of fee earning AUM in CLOs. The term “CLO” generally refers to a special purpose vehicle
that owns a portfolio of senior secured loans and issues various tranches of debt and subordinated note securities to finance the purchase
of those investments. Most CLOs have a defined investment period during which they are allowed to make investments and reinvest
capital as it becomes available. Several of our CLOs have passed their reinvestment period dates.
Other: We plan to grow our fee earning AUM, and to the extent that market conditions warrant, to grow our business by offering new
investment products. In 2015, we seeded a credit fund focused on investing in leveraged loans. We seed capital for new investment
products to enable the portfolio manager to begin building an investment performance history in advance of the product receiving
sustainable client assets. The length of time we hold our seed capital investment will vary for each new investment product as it is
highly dependent on how long it takes to generate cash flows into the portfolio from unrelated investors.
Investments
Historically, we have made investments in funds managed by us including CLOs and seed capital for new investment strategies. The
length of time we hold these investments varies and is generally based on market conditions. As of December, 31 2016, we had
investments in our CLO subordinated notes and related participations in management fees with a fair market value of approximately
$56.8 million.
Competitive Strengths
Experience - We have a history of hiring talented and experienced investment professionals. The depth and breadth of experience of
our management team enables us to source, structure, execute and monitor our investment products.
Alignment of Interests - We have approximately $56.8 million invested in our own funds, which we believe aligns our interests with
that of investors in our funds and investment vehicles. Additionally, senior members of our investment teams have significant
investments in some of the funds they manage.
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Competition
We compete for business with other asset managers, including those affiliated with major commercial or investment banks and other
financial institutions. Many of these organizations offer products and services that are similar to, or compete with, those Tiptree and
its asset management subsidiaries may offer, and many of these organizations have substantially more personnel and greater financial
resources. Some of these competitors have proprietary products and distribution channels that may make it more difficult for us to
compete with them. Some competitors also have greater portfolio management resources, greater name recognition, have had managed
client accounts for longer periods of time, have greater experience over a wider range of products or have other competitive advantages.
The factors considered by clients in choosing us or a competitor include the past performance of the products managed, the background
and experience of key personnel, the experience in managing a particular product, overall reputation, investment advisory fees and
the structural features of the investment products offered.
Regulation
The asset management industry in the U.S. is subject to extensive regulation under federal and state securities laws as well as the rules
of self-regulatory organizations. TAMCO (collectively with Telos, the “Advisors”), is registered with the SEC as an investment adviser,
and its subsidiaries rely on TAMCO’s registration. The Advisers are also required to make notice filings in certain states. Virtually
all aspects of the asset management business, including related sales and distribution activities, are subject to various federal and state
laws and regulations and self-regulatory organization rules. These laws, rules and regulations are primarily intended to protect the
asset management clients and generally grant supervisory agencies and bodies broad administrative powers, including the power to
limit or restrict an investment advisor from conducting its asset management business in the event that it fails to comply with such
laws and regulations. In addition, investment vehicles managed by the Advisers are subject to various securities laws and other laws.
Employees
As of December 31, 2016, our asset management segment employed 9 employees on a full or part time basis.
Senior Living
Our senior living segment is conducted through Care, a real estate investment company focused on the acquisition, ownership and
leasing of senior housing properties. We own senior apartments, independent living, assisted living, skilled nursing, and memory
care facilities. Some properties may combine more than one type of service in a single building or campus. The rental and related
services income paid by our residents is substantially all private pay, with limited reimbursement exposure to Medicare and Medicaid.
As of December 31, 2016, our portfolio is comprised of 13 Triple Net Lease Properties and 16 Managed Properties. Our 29 properties
are located across 11 states.
In Triple Net Lease Properties, we own the real estate and enter into a long term lease with an operator who is typically responsible
for bearing property level operating costs, including maintenance, utilities, taxes, insurance, repairs and capital improvements. The
property level operating costs of Triple Net Lease Properties are not consolidated since we do not own or manage the underlying
operations. We earn rental income from the lease and substantially all expenses are passed through to the tenant.
In Managed Properties, we generally own between 65-90% of both the real estate and the operations, with affiliates of the management
company owning the remainder. As a result, we consolidate all of the assets, liabilities, income and expense of the Managed Properties
operations in our financial results. We partner with experienced managers to run the day-to-day operations at the properties while
affiliates of the managers own the remaining percentage of the properties and operations.
Our strategy is to identify strong and experienced managers and operators of senior housing facilities who are looking to expand and
diversify their operations by partnering with a capital provider. We intend to continue to grow our portfolio primarily through
acquisitions and further diversify by tenant, asset class and geography.
Competitive Strengths
Strong Relationships with Operators: We have developed strong relationships with a network of local and regional operators.
Several of our operators have entered into multiple transactions with us. These types of repeat transactions help support our future
growth potential by providing additional investment opportunities.
Structuring Flexibility: We believe our non-REIT status provides us the ability to be flexible in transaction and investment structures
which we believe enhances our ability to source acquisition opportunities and attract new operator relationships.
Stable Occupancy Rates: The average annual occupancy rate of our portfolio of properties has remained stable between 86-88%
over the past three years.
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Competition
We compete for property acquisitions with other real estate investment companies and real estate investment trusts, real estate
partnerships, private equity firms and hedge funds, finance/investment companies, taxable and tax-exempt bond funds, health care
and senior living operators and developers. We compete for investments based on a number of factors including investment structures,
underwriting criteria and reputation. Our ability to successfully grow is impacted by economic and demographic trends, availability
of acceptable investment opportunities, ability to negotiate beneficial investment terms, availability and cost of capital and new and
existing laws and regulations.
All of our properties compete with other properties that provide comparable services on both a local and regional basis. The competition
to attract and maintain residents at our properties is based on a number of factors including the perceived quality of service, reputation,
physical appearance of properties, location, services offered, family preferences, staff and price.
Regulation
The senior living and healthcare industry is highly regulated by federal, state and local licensing requirements, facility inspections,
reimbursement policies, regulations concerning capital and other expenditures, certification requirements and other laws, regulations
and rules. In addition, regulators require compliance by our tenants and third party operators with a variety of safety, health, staffing
and other requirements relating to the design and conditions of the licensed facility and quality of care provided. The failure of any
tenant, manager or operator to comply with such laws, requirements and regulations could affect a tenant’s, manager’s or operator’s
ability to operate the facilities that we own. Some of these laws and regulations impose joint and several liabilities on tenants, owners
or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the
contamination were legal.
Our properties may be affected by our operators’, managers’ and lessees’ operations, the existing condition of land when acquired,
operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties.
The presence of hazardous substances, or the failure to properly remediate these substances, may make it difficult or impossible to
sell or rent a property.
Employees
At December 31, 2016, our senior living segment employed 5 full time employees. We do not include the employees of the managers
or the affiliates of our Managed Properties in our employee totals.
Specialty Finance
Our specialty finance segment consists of our mortgage origination operations, and our controlling ownership interest in a finance
company that provides asset-based loans. The growth in our specialty finance operations is expected primarily to come from increased
origination volume, new products, and, to a lesser extent, through acquisition.
Our mortgage business originates residential mortgage loans which are typically sold to secondary market investors. Revenues are
generated from gain on sale of loans, net interest income and loan fee income. We currently use two production channels to originate
or acquire mortgage loans: loan officers in retail sales offices (commonly referred to as “retail”); and a broker channel (commonly
referred to as “wholesale”).
Our commercial finance lending business originates, structures, underwrites and services senior secured asset-based loans for small
to medium sized companies operating across a range of industry sectors. Our core product offerings include revolving lines of credit
and term loans. The loans we offer our clients are typically used to fund working capital needs and are secured by eligible, margined
collateral, including accounts receivable, inventories, and, to a lesser extent, other long-term assets.
Competition
The residential mortgage and commercial loan markets are highly competitive. There are a large number of institutions offering these
products, including many that operate on a national scale, as well as local savings banks, commercial banks, and other lenders. Many
of our competitors are larger and have access to greater financial resources. In addition, many of the largest competitors are banks or
are affiliated with banking institutions, the advantages of which include, but are not limited to, having access to financing with more
favorable terms, including lower interest rate bank deposits as a favorable source of funding.
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Regulation
We are subject to extensive regulation by federal, state and local governmental authorities, including the CFPB, the Federal Trade
Commission and various state agencies that license, audit and conduct examinations. Our mortgage operations must comply with a
number of federal, state and local consumer protection and privacy laws including laws that apply to to loan origination, fair lending,
debt collection, use of credit reports, safeguarding of non-public personally identifiable information about customers, foreclosure and
claims handling, investment of and interest payments on escrow balances and escrow payment features, and mandate certain disclosures
and notices to borrowers.
Employees
At December 31, 2016, our Specialty Finance segment employed 595 people.
STRUCTURE
On an as exchanged basis, we had 36,436,645 shares of Class A common stock as of December 31, 2016 (which excludes 6,596,000
shares of Class A common stock held by consolidated subsidiaries of the Company). “As exchanged” assumes the full exchange of
the limited partnership units of TFP for Tiptree Class A common stock.
Tiptree’s Class A common stock trades on the NASDAQ Capital Market. All of Tiptree’s Class B common stock is owned by TFP on
behalf of limited partners of TFP. Tiptree’s Class B common stock has voting but no economic rights. The limited partners of TFP
(other than Tiptree itself) are able 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.
The following chart is a simplified version of our organizational structure:
We were incorporated in Maryland in 2007. For more information on our ownership and structure, see Note-(1) Organization and
Note-(18) Stockholders’ Equity, within the accompanying consolidated financial statements.
AVAILABLE INFORMATION
We are required to file annual, quarterly and current reports, proxy statements and other information with the SEC. The public may
read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C.
20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In
addition, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC at http://www.sec.gov.
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Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are also available free of charge on our
Internet site at www.tiptreeinc.com as soon as reasonably practicable after such reports are electronically filed with or furnished to
the SEC. The information on our website is not, and shall not be deemed to be, a part hereof or incorporated into this or any of our
other filings with the SEC.
Our Investor Relations Department can be contacted at Tiptree Inc., 780 Third Avenue, 21st Floor, New York, NY, 10017, Attn: Investor
Relations, telephone: (212) 446-1400, email: IR@tiptreeinc.com.
Item 1A. Risk Factors
We are subject to certain risks and uncertainties in our business operations which are described below. The risks and uncertainties
described below are not the only risks we face. Additional risks and uncertainties that are not presently known or are currently deemed
immaterial may also impair our business, results of operations and financial condition.
Risks Related to our Businesses
We operate in highly competitive markets for business opportunities and personnel, which could impede our growth and
negatively impact our results of operations.
We operate in highly competitive markets for business opportunities in each of our areas of focus. Many of our competitors
have financial, personnel and other resource advantages relative to us and may be better able to react to market conditions. These
factors may place us at a competitive disadvantage in successfully competing for future business opportunities and personnel, which
could impede our growth and negatively impact our business, financial condition and results of operations.
Acquisitions may have unforeseen operating difficulties and may require greater than expected financial and other resources
and we may fail to successfully integrate the businesses we acquire which would have an adverse effect on our business results of
operation and financial condition.
We regularly evaluate opportunities for strategic growth through acquisitions. Acquired companies and operations may have
unforeseen operating difficulties and may require greater than expected financial and other resources. In addition, potential issues
associated with acquisitions could, among other things include:
•
•
•
•
•
our ability to realize the full extent of the benefits, synergies or cost savings that we expect to realize as a result of
the completion of an acquisition within the anticipated time frame, or at all;
receipt of necessary consents, clearances and approvals in connection with the acquisition;
diversion of management’s attention from other strategies and objectives;
motivating, recruiting and retaining executives and key employees; and
conforming and integrating financial reporting, standards, controls, procedures and policies, business cultures and
compensation structures.
If an acquisition is not successfully completed or integrated into our existing operations, our business, results of operations and financial
condition could be materially adversely effected.
The amount of statutory capital and reserve requirements applicable to our insurance subsidiaries can increase due to factors
outside of our control.
Our insurance subsidiaries are subject to statutory capital and reserve requirements established by applicable insurance regulators
based on risk-based capital formulas. In any particular year, these requirements may increase or decrease depending on a variety of
factors, most of which are outside our control, such as the amount of statutory income or losses generated, changes in equity market
levels, the value of fixed-income and equity securities in the subsidiary’s investment portfolio, changes in interest rates and foreign
currency exchange rates, as well as changes to the risk-based capital formulas used by insurance regulators. Increases in the amount
of additional statutory reserves that our insurance subsidiaries are required to hold may adversely affect our financial condition and
results of operations.
Our insurance subsidiaries’ actual claims losses may exceed their reserves for claims, which may require them to establish
additional reserves that may materially and adversely affect their business, results of operations and financial condition.
Our insurance subsidiaries maintain reserves to cover their estimated ultimate exposure for claims with respect to reported claims,
and incurred, but not reported, claims as of the end of each accounting period. Reserves, whether calculated under GAAP or statutory
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accounting principles, do not represent an exact calculation of exposure. Instead, they represent our insurance subsidiaries’ best
estimates, generally involving actuarial projections, of the ultimate settlement and administration costs for a claim or group of claims,
based on our assessment of facts and circumstances known at the time of calculation. The adequacy of reserves will be impacted by
future trends in claims severity, frequency, judicial theories of liability and other factors. These variables are affected by external
factors such as changes in the economic cycle, unemployment, inflation, judicial trends, legislative changes, as well as changes in
claims handling procedures. Many of these items are not directly quantifiable, particularly on a prospective basis. Reserve estimates
are refined as experience develops. Adjustments to reserves, both positive and negative, are reflected in the statement of income of
the period in which such estimates are updated. Because the establishment of reserves is an inherently uncertain process involving
estimates of future losses, we can give no assurances that ultimate losses will not exceed existing claims reserves. In general, future
loss development could require reserves to be increased, which could have a material adverse effect on our insurance subsidiaries’
business, results of operations and financial condition.
We may need to raise additional capital in the future or may need to refinance existing indebtedness, but there is no assurance
that such capital will be available on a timely basis, on acceptable terms or at all.
We may need to raise additional funds in order to grow our business or fund our strategy or acquisitions. Additional financing
may not be available in sufficient amounts, if at all, or on terms acceptable to us and may be dilutive to existing stockholders.
Additionally, any securities issued to raise such funds may have rights, preferences and privileges senior to those of our existing
stockholders. If adequate funds are not available on a timely basis, if at all, or on acceptable terms, our ability to expand, develop or
enhance our subsidiaries’ services and products, enter new markets, consummate acquisitions or respond to competitive pressures
could be materially limited.
Our information systems may fail or their security may be compromised, which could damage our specialty insurance business
and materially and adversely affect our results of operations and financial condition.
Our specialty insurance business is highly dependent upon the effective operation of our information systems and our ability
to store, retrieve, process and manage significant databases and expand and upgrade our information systems. Our specialty insurance
business relies on these systems for a variety of functions, including marketing and selling our products and services, performing our
services, managing our operations, processing claims and applications, providing information to clients, performing actuarial analyses
and maintaining financial records. The interruption or loss of our information processing capabilities through the loss of stored data,
programming errors, the breakdown or malfunctioning of computer equipment or software systems, telecommunications failure or
damage caused by weather or natural disasters or any other significant disruptions could harm our specialty insurance business by
hampering its ability to generate revenues and could negatively affect client relationships, competitive position and reputation. In
addition, our information systems may be vulnerable to physical or electronic intrusions, computer viruses or other attacks which
could disable our information systems and our security measures may not prevent such attacks. The failure of our systems as a result
of any security breaches, intrusions or attacks could cause significant interruptions to our operations, which could result in a material
adverse effect on our business, results of operations and financial condition.
Fortegra is dependent on independent financial institutions, lenders and retailers for distribution of its products and services,
and the loss of these distribution sources, or their failure to sell Fortegra’s products and services could materially and adversely
affect its business, results of operations and financial condition.
Fortegra is dependent on financial institutions, lenders and retailers to distribute its products and services and its revenue is
dependent on the level of business conducted by such distributors as well as the effectiveness of their sales efforts, each of which is
beyond Fortegra’s control because such distributors typically do not have any minimum performance or sales requirements. Further,
although its contracts with these distributors are typically exclusive, they can be canceled on relatively short notice. Therefore,
Fortegra’s growth is dependent, in part, on its ability to identify and attract new distribution relationships and successfully implement
its information systems with those of its new distributors. The impairment of Fortegra’s distribution relationships, the loss of a
significant number of its distribution relationships, the failure to establish new distribution relationships, the failure to offer increasingly
competitive products, the increase in sales of competitors’ services and products by these distributors or the decline in their overall
business activity or the effectiveness of their sales of Fortegra’s products could materially reduce Fortegra’s sales and revenues and
have a material adverse effect on its business, results of operations and financial condition.
Fortegra may lose clients or business as a result of consolidation within the financial services industry.
There has been considerable consolidation in the financial services industry, driven primarily by the acquisition of small and
mid-size organizations by larger entities. We expect this trend to continue. Fortegra may lose business or suffer decreased revenues
if one or more of its significant clients or distributors consolidate or align themselves with other companies. While Fortegra’s business
has not been materially affected by consolidation to date, it may be affected by industry consolidation that occurs in the future,
particularly if any of its significant clients are acquired by organizations that already possess the operations, services and products
that it provides.
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A downgrade in our insurance subsidiaries’ claims paying ability or financial strength ratings could increase policy surrenders
and withdrawals, adversely affecting relationships with distributors and reducing new policy sales.
Claims paying ability ratings, sometimes referred to as financial strength ratings, indicate a rating agency’s view of an insurance
company’s ability to meet its obligations to its policy holders. These ratings are therefore key factors underlying the competitive
position of insurers. Some distributors of insurance products may choose not to do business with insurance companies that are rated
below certain financial strength ratings. Our insurance subsidiaries currently have a rating of “A-” from A.M. Best Company, Inc.
Rating agencies can be expected to continue to monitor our insurance subsidiaries’ financial strength and claims paying ability, and
no assurances can be given that future ratings downgrades will not occur, whether due to changes in their performance, changes in
rating agencies’ industry views or ratings methodologies, or a combination of such factors. A ratings downgrade or the potential for
such a downgrade in a rating could, to the extent applicable to a particular type of policy, adversely affect relationships with distributors
of insurance products, reduce new policy sales and adversely affect our ability to compete in the insurance industry.
Our insurance subsidiaries may incur losses if reinsurers are unwilling or unable to meet their obligations under reinsurance
contracts.
Our insurance subsidiaries use reinsurance to reduce the severity and incidence of claims costs, and to provide relief with regard
to certain reserves. Under these reinsurance arrangements, other insurers assume a portion of our losses and related expenses; however,
we remain liable as the direct insurer on all risks reinsured. Consequently, reinsurance arrangements do not eliminate our obligation
to pay claims and we assume credit risk with respect to our ability to recover amounts due from reinsurers. The inability or unwillingness
of any reinsurer to meet its financial obligations could negatively affect our financial condition and results of operations.
Fortegra’s reinsurance facilities are generally subject to annual renewal. Fortegra may not be able to maintain its current
reinsurance facilities and its clients may not be able to continue to operate their captive reinsurance companies. As a result, even where
highly desirable or necessary, Fortegra may not be able to obtain other reinsurance facilities in adequate amounts and at favorable
rates. If Fortegra is unable to renew its expiring facilities or to obtain or structure new reinsurance facilities, either its net exposures
would increase or, if it is unwilling to bear an increase in net exposures, it may have to reduce the level of its underwriting commitments.
Either of these potential developments could have a material adverse effect on our results of operations and financial condition.
Due to the structure of some of Fortegra’s commissions, it is exposed to risks related to the creditworthiness of some of its
agents.
Fortegra is subject to the credit risk of some of the agents with which it contracts to sell its products and services. Fortegra
typically advances agents’ commissions as part of its product offerings. These advances are a percentage of the premiums charged.
If Fortegra over-advances such commissions to agents, the agents may not be able to fulfill their payback obligations, which could
have a material adverse effect on Fortegra’s results of operations and financial condition.
Our investable assets include NPLs, which have inherent risks that may be exacerbated due to geographic concentrations
and reliance on third parties.
We acquire NPLs where the borrower has failed to make timely payments of principal and/or interest. We purchase these
loans at a discount to face value of the loan, relying on the underlying value of the property as collateral for recovery of our investment.
If actual results are different from our assumptions in determining the prices for such loans, particularly if the market value of the
underlying property decreases significantly, we may incur a loss.
Furthermore, our acquisition of NPLs are not subject to any geographic diversification or concentration limitations.
Accordingly, our portfolio of NPLs may be concentrated by geography and borrower demographics, increasing the risk of loss to us
if the particular concentration in our NPL portfolio is subject to greater risks or undergoes adverse developments. A material decline
in the demand for housing in the areas where we will own assets may materially and adversely affect us. Lack of diversification can
increase the correlation of non-performance and foreclosure risks among our investments in NPLs.
In addition, we rely on various third parties to help us effectively run our NPL business. For example, we use a third party
asset manager to identify, evaluate and coordinate our NPL acquisitions as well as to manage our NPL portfolio, including loan
modifications and conversion to REO. Furthermore, we rely on third party servicers to service our NPLs, including managing
collections. If the servicers are not vigilant in encouraging borrowers to make their monthly payments, the borrowers may be far less
likely to make these payments. We also rely on our servicers to provide all of our property management and renovation management
services associated with the real properties we acquire upon conversion of NPLs to REO. If our agreements with any such third party
terminates and we are unable to obtain a suitable replacement at attractive costs, our ability to acquire, resolve or dispose of our NPLs
could be adversely affected.
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Changes in CLO spreads and an adverse market environment could make it difficult for us to launch new CLOs thereby
reducing management fees paid to Telos, which could adversely affect our profitability.
Telos generates management and advisory fees based on the amount of assets managed, and, in certain cases, on the returns
generated by the assets managed. The ability to issue new CLOs is dependent, in part, on the amount of excess interest earned on a
new CLO’s investments over interest payable on its debt obligations. If the spread is not attractive to potential CLO equity investors
we may not be able to sponsor the issuance of new CLOs, which could have a material adverse impact on Telos’ business. A reduction
in fees paid to Telos, due to an inability to issue new CLOs at attractive terms, termination of existing management agreements,
reduction in assets managed (for example, as a result of exercise of optional call provisions by subordinated noteholders) or lower
than expected returns could adversely affect our results of operations.
In advance of issuing and managing a new CLO, we expect to enter into warehouse agreements which may expose us to
substantial risks.
In connection with our potential investment in and management of new CLOs, we expect to enter into warehouse lending
agreements with warehouse loan providers to finance the purchase of investments that will be ultimately included in a CLO. We
typically select the investments in the warehouse subject to the approval of the warehouse provider. If the relevant CLO transaction
is not issued, the warehouse investments may be liquidated, and we may experience a loss if the aggregate sale price of the collateral
is less than the warehouse loan amount. In addition, regardless of whether the CLO is issued or consummated, if any of the warehoused
investments are sold before such issuance or consummation, we may have to bear any resulting loss on the sale. The amount at risk
in connection with a warehouse agreement will vary and may not be limited to the amount, if any, that we invest in the related CLO
upon its issuance. Although we would expect to complete the issuance of a particular CLO within six to nine months after establishing
a related warehouse, we may not be able to complete the issuance within such expected time period or at all.
Our real estate operating entities expose us to various operational risks, liabilities and claims that could adversely affect
our ability to generate revenues or could increase our costs and could adversely affect our financial condition and results of
operations.
Our ownership of real estate operating entities exposes us to various operational risks, liabilities and claims that could increase
our costs or adversely affect our ability to generate revenues, thereby reducing our profitability. These operational risks include
fluctuations in occupancy levels, the inability to achieve economic resident fees (including anticipated increases in those fees), rent
control regulations, increases in the cost of food, materials, energy, labor (as a result of unionization or otherwise) or other services,
national and regional economic conditions, the imposition of new or increased taxes, capital expenditure requirements, professional
and general liability claims, and the availability and cost of professional and general liability insurance. Any one or a combination of
these factors could result in operating deficiencies in our operating assets, which could adversely affect our financial condition and
results of operations.
Liability relating to environmental matters may decrease the value of our real estate assets.
Under various federal, state and local laws, an owner or operator of real property may become liable for the costs of cleanup
of certain hazardous substances released on or under its property. Such laws often impose liability without regard to whether the owner
or operator knew of, or was responsible for, the release of such hazardous substances. The presence of hazardous substances may
adversely affect an owner’s ability to sell real estate or borrow using real estate as collateral. To the extent that any of our owned real
estate encounters environmental issues, it may adversely affect the value of that real estate. Further, in regard to any mortgage
investment, if the owner of the underlying property becomes liable for cleanup costs, the ability of the owner to make debt payments
may be reduced, which in turn may adversely affect the value of the relevant mortgage asset held by us. In addition, in certain instances,
we may be liable in part or in full for the cost of any required remediation or clean up.
Violation of fraud and abuse laws applicable to our real estate tenants, lessees and operators may jeopardize a tenant’s,
lessee’s or operator’s ability to make payments to us.
The federal government and numerous state governments have passed laws and regulations that attempt to eliminate healthcare
fraud and abuse by prohibiting business arrangements that induce patient referrals or inappropriately influence the ordering of specific
ancillary services. In addition, numerous federal laws have continued to strengthen the federal fraud and abuse laws to provide for
broader interpretations of prohibited conduct and stiffer penalties for violations. Violations of these laws may result in the imposition
of criminal and civil penalties, including possible exclusion from federal and state healthcare programs. Imposition of any of these
penalties upon any of our tenants, lessees or operators could jeopardize their ability to operate a facility or to make payments to us,
thereby potentially adversely affecting us, or our financial condition and results of operations.
In the past several years, federal and state governments have significantly increased investigation and enforcement activity
to detect and eliminate fraud and abuse in the Medicare and Medicaid programs. In addition, legislation and regulations have been
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adopted at state and federal levels, which severely restricts the ability of physicians to refer patients to entities in which they have a
financial interest. It is anticipated that the trend toward increased investigation and enforcement activity in the area of fraud and abuse,
as well as self-referrals, will continue in future years and could adversely affect our prospective tenants, lessees or operators and their
operations, and in turn their ability to make payments to us.
Some of our investments are made jointly with other persons or entities, which may limit our flexibility with respect to
such jointly owned investments and could, thereby, have a material adverse effect on our business, results of operations and
financial condition and our ability to sell these investments.
Some of our investments are made jointly with other persons or entities when circumstances warrant the use of such structures
and we may continue to do so in the future. Our participation in such joint investments is subject to the risks that:
• we could experience an impasse on certain decisions because we do not have sole decision-making authority, which could
•
•
•
•
•
•
require us to expend additional resources on resolving such impasses or potential disputes;
our partners could have investment goals that are not consistent with our investment objectives, including the timing, terms
and strategies for any investments;
our partners might become bankrupt, fail to fund their share of required capital contributions or fail to fulfill their obligations
as partners, which may require us to infuse our own capital into such venture(s) on behalf of the partner(s) despite other
competing uses for such capital;
our partners may have competing interests in our markets that could create conflict of interest issues;
any sale or other disposition of our interest in such a venture may require consents which we may not be able to obtain;
such transactions may also trigger other contractual rights held by a partner, lender or other third party depending on how
the transaction is structured; and
there may be disagreements as to whether consents and/or approvals are required in connection with the consummation of
a particular transaction with a partner, lender and/or other third party, or whether such transaction triggers other contractual
rights held by a partner, lender and/or other third party, and in either case, those disagreements may result in litigation.
The volume of our mortgage loan originations is subject to a variety of factors, which include the level of interest rates,
overall conditions in the housing market and general economic trends.
Changes in interest rates and the level of interest rates are key drivers that impact the volatility of our mortgage loan
originations. The historically low interest rate environment over the last several years has created strong demand for mortgages. The
Federal Reserve recently raised rates and has indicated an intention to continue raising rates in the near future. Further increases in
interest rates could result in us having lower revenue or profitability. The overwhelming majority of our mortgage loan originations
have historically been refinancing existing homeowner’s mortgage loans. With rates at or near historically low levels, we have been
able to continue to grow our mortgage loan originations by focusing on refinances. With rising interest rates, we may not be able to
continue to do so in the future.
Our mortgage business is highly dependent upon programs administered by GSEs, such as Fannie Mae and Freddie
Mac, and Ginnie Mae, to generate revenues through mortgage loan sales to institutional investors. Any changes in existing U.S.
government-sponsored mortgage programs could materially and adversely affect our mortgage businesses, financial condition
and results of operations.
There is uncertainty regarding the future of Fannie Mae and Freddie Mac, including with respect to how long they will
continue to be in existence, the extent of their roles in the market and what forms they will have. The future roles of Fannie Mae and
Freddie Mac could be reduced or eliminated and the nature of their guarantees could be limited or eliminated relative to historical
measurements. The elimination or modification of the traditional roles of Fannie Mae or Freddie Mac could adversely affect our
mortgage businesses, financial condition and results of operations. Furthermore, any discontinuation of, or significant reduction in,
the operation of these GSEs and Ginnie Mae, or any significant adverse change in the level of activity of these agencies in the primary
or secondary mortgage markets or in the underwriting criteria of these agencies could materially and adversely affect our business,
financial condition and results of operations.
We may be unable to obtain sufficient capital to meet the financing requirements of our mortgage business.
We fund substantially all of the loans which we originate through borrowings under warehouse financing and repurchase
facilities. Our borrowings are in turn repaid with the proceeds we receive from selling such loans through whole loan sales. As we
expand our operations, we will require increased financing.
There can be no assurance that such financing will be available on terms reasonably satisfactory to us or at all. An event of
default, an adverse action by a regulatory authority or a general deterioration in the economy that constricts the availability of credit-
similar to the market conditions experienced in recent years-may increase our cost of funds and make it difficult for us to obtain new,
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or retain existing, warehouse financing facilities. If we fail to maintain, renew or obtain adequate funding under these warehouse
financing facilities or other financing arrangements, or there is a substantial reduction in the size of or increase in the cost of such
facilities, we would have to curtail our mortgage loan production activities, which could have a material adverse effect on our business,
financial condition and operating results in specialty finance.
In our mortgage business, we may sustain losses and/or be required to indemnify or repurchase loans we originated, or
will originate, if, among other things, our loans fail to meet certain criteria or characteristics.
The contracts with purchasers of our whole loans contain provisions that require us to indemnify or repurchase the related
loans under certain circumstances. While our contracts vary, they contain provisions that require us to repurchase loans if:
•
our representations and warranties concerning loan quality and loan circumstances are inaccurate, including
representations concerning the licensing of a mortgage broker;
• we fail to secure adequate mortgage insurance within a certain period after closing;
•
• we fail to comply, at the individual loan level or otherwise, with regulatory requirements in the current dynamic regulatory
a mortgage insurance provider denies coverage; or
environment.
We maintain reserves that we believe are appropriate to cover potential loan repurchase or indemnification losses, but there
can be no assurance that such reserves will, in fact, be sufficient to cover future repurchase and indemnification claims. If we are
required to indemnify or repurchase loans that we originate and sell that result in losses that exceed our reserve, this could adversely
affect our business, financial condition and results of operations.
Furthermore, in the ordinary course of our mortgage business, we are subject to claims made against us by borrowers and
private investors arising from, among other things, losses that are claimed to have been incurred as a result of alleged breaches of
fiduciary obligations, misrepresentations, errors and omissions of our employees, officers and agents (including our appraisers),
incomplete documentation and our failure to comply with various laws and regulations applicable to our business.
In addition, should the mortgage loans we originate sustain higher levels of delinquencies and/or defaults, we may lose the
ability to originate and/or sell FHA loans, or to do so profitably and investors to whom we currently sell our mortgage loans may
refuse to continue to do business with us, or may reduce the prices they are willing to purchase our mortgage loans and it may be
difficult or impossible to sell any of our mortgage loans in the future. Any of the foregoing risks could adversely affect our
business, financial condition and results of operations in our mortgage business.
We may be limited in the future in utilizing net operating losses incurred during prior periods to offset taxable income.
We previously incurred net operating losses. In the event that we experience an “ownership change” within the meaning of
Section 382 of the Code, including as a result of the contribution transactions that occurred on July 1, 2013, which we refer to as the
“Contribution Transactions”, or the exchange by TFP’s limited partners of their partnership units in TFP for Tiptree Class A common
stock, our ability to use those net operating losses to offset taxable income could be subject to an annual limitation. The annual
limitation would be equal to a percentage of our equity value at the time the ownership change occurred. In general, such an “ownership
change” would occur if the percentage of our stock owned by one or more 5% stockholders (including certain groups or persons acting
in concert) were to increase by 50 percentage points during any three-year period. All stockholders that own less than 5% of our stock
are treated as a single 5% stockholder. In addition, the Treasury Regulations under Section 382 of the Code contain additional rules
the effect of which is to make it more likely that an ownership change could be deemed to occur. Accordingly, our ability to use prior
net operating losses to offset future taxable income would be subject to a limitation if we experience an ownership change.
A portion of our assets are illiquid or have limited liquidity, which may limit our ability to sell those assets at favorable
prices or at all and creates uncertainty in connection with valuing such assets.
Our assets include real estate, non-controlling interests in credit assets and related equity interests which may be illiquid or
have limited liquidity. It may be difficult for us to dispose of assets with limited liquidity rapidly, or at favorable prices, if at all. In
addition, assets with limited liquidity may be more difficult to value and may be sold at a substantial discount or experience more
volatility than more liquid assets. We may not be able to dispose of assets at the carrying value reflected in our financial statements.
Our results of operations and cash flows may be materially and adversely affected if our determinations regarding the fair value of
our illiquid assets are materially higher than the values ultimately realized upon their disposal.
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We leverage our assets and a decline in the fair value of such assets may adversely affect our financial condition and results of
operations.
We leverage our assets, including through borrowings, generally through warehouse credit facilities, secured loans, derivative
instruments such as total return swaps, securitizations (including the issuance of CLOs) and other borrowings. A rapid decline in the
fair value of our leveraged assets may adversely affect us. Lenders may require us to post additional collateral to support the borrowing.
If we cannot post the additional collateral, we may have to rapidly liquidate assets, which we may be unable to do on favorable terms
or at all. Even after liquidating assets, we may still be unable to post the required collateral, further harming our liquidity and subjecting
us to liability to lenders for the declines in the fair values of the collateral. A reduction in credit availability may adversely affect our
business, financial condition and results of operations.
Certain of our and our subsidiaries’ assets are subject to credit risk, market risk, interest rate risk, credit spread risk, call
and redemption risk and/or tax risk, and any one of these risks may materially and adversely affect the value of our assets, our
results of operations and our financial condition.
Some of our assets, including our direct investments, are subject to credit risk, interest rate risk, market risk, credit spread
risk, selection risk, call and redemption risk and refinancing risk.
Credit risk is the risk that the obligor will be unable to pay scheduled principal and/or interest payments. Defaults by third
parties in the payment or performance of their obligations could reduce our income and realized gains or result in the recognition of
losses. The fair value of our assets may be materially and adversely affected by increases in interest rates, downgrades in our direct
investments and by other factors that may result in the recognition of other-than-temporary impairments. Each of these events may
cause us to reduce the fair value of our assets.
Interest rate risk is the risk that general interest rates will rise or that the risk spread used in our financings will increase.
Although interest rates have been at historically low levels for the last several years, the Federal Reserve recently raised rates and
has indicated an intention to continue raising rates in the coming months, and a period of sharply rising interest rates could have an
adverse impact on our business by negatively impacting demand for mortgages, corporate loans and value of our CLO
subordinated notes and increasing our cost of borrowing to finance operations as well as acquisitions in our real estate segment.
Market risk is the risk that one or more markets to which the assets relate will decline in value, including the possibility that
such markets will deteriorate sharply and unpredictably, which will likely impair the market value of the related instruments.
Credit spread risk is the risk that the market value of fixed income instruments will change in response to changes in perceived
or actual credit risk beyond changes that would be attributable to changes, if any, in interest rates.
Call and redemption risk is the risk that debt instruments will be called or redeemed prior to maturity at a time when yields
on other debt instruments in which the call or redemption proceeds could be invested are lower than the yield on the called or redeemed
instrument.
Refinancing risk is the risk that we will be unable to refinance some or all of our indebtedness or that any refinancing will
not be on terms as favorable as those of our existing indebtedness, which could increase our funding costs, limit our ability to borrow,
or result in a sale of the leveraged asset on disadvantageous terms. Any one of these risks may materially and adversely affect the
value of our assets, our results of operations and our financial condition.
Our risk mitigation or hedging strategies could result in our experiencing significant losses that may materially adversely
affect us.
We pursue risk mitigation and hedging strategies to seek to reduce our exposure to losses from adverse credit events, interest
rate changes and other risks. These strategies include short Treasury positions, interest rate swaps, credit derivative swaps, CDX
derivative index positions, buying and selling credit protection on different tranches of risk in differing CDX indexes and derivative
hedging instruments. Since we account for derivatives at fair market value, changes in fair market value are reflected in net income
other than derivative hedging instruments which are reflected in accumulated other comprehensive income in stockholders’ equity.
Some of these strategies could result in our experiencing significant losses that may materially adversely affect our business, financial
condition and results of operations.
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The values we record for certain investments and liabilities are based on estimates of fair value made by our management,
which may cause our operating results to fluctuate and may not be indicative of the value we can realize on a sale.
Some of our investments and liabilities, including CLO subordinated notes and NPLs, are not actively traded and the fair
value of such investments and liabilities are not readily determinable. Each of these carrying values is based on an estimate of fair
value by our management. Management reports the estimated fair value of these investments and liabilities quarterly, which may
cause our quarterly operating results to fluctuate. Therefore, our past quarterly results may not be indicative of our performance in
future quarters. In addition, because such valuations are inherently uncertain, and in some cases based on internal models and
unobservable inputs, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may
differ materially from the values that would have been used if a ready market for these investments and liabilities existed and we may
be unable to realize the carrying value upon a sale of these investments.
Risks Related to our Structure
Because we are a holding company, our ability to meet our obligations and pay dividends to stockholders will depend on
distributions from our subsidiaries that may be subject to restrictions.
We are a holding company and do not have any significant operations of our own, other than our principal investments. Our
ability to meet our obligations will depend on distributions from our subsidiaries. The amount of dividends and other distributions
that our subsidiaries may distribute to us may be subject to restrictions imposed by state law, restrictions that may be imposed by state
regulators and restrictions imposed by the terms of any current or future indebtedness that these subsidiaries may incur. Such restrictions
would also affect our ability to pay dividends to stockholders, if and when we choose to do so.
Our regulated insurance company subsidiaries are required to satisfy minimum capital and surplus requirements according
to the laws and regulations of the states in which they operate, which regulate the amount of dividends and distributions we receive
from them. In general, dividends in excess of prescribed limits are deemed “extraordinary” and require insurance regulatory approval.
Ordinary dividends, for which no regulatory approval is generally required, are limited to amounts determined by a formula, which
varies by state. Some states have an additional stipulation that dividends may only be paid out of earned surplus. States also regulate
transactions between our insurance company subsidiaries and us or our other subsidiaries, such as those relating to the shared services,
and in some instances, require prior approval of such transactions within the holding company structure. If insurance regulators
determine that payment of an ordinary dividend or any other payments by our insurance company subsidiaries to us or our other
subsidiaries (such as payments for employee or other services) would be adverse to policyholders or creditors, the regulators may
block or otherwise restrict such payments that would otherwise be permitted without prior approval. In addition, there could be future
regulatory actions restricting the ability of our insurance company subsidiaries to pay dividends or share services.
Some of our officers and directors currently or may in the future act as members, managers, officers, directors or employees
of entities with conflicting business strategies.
Some of our officers and directors currently or may in the future act as members, managers, officers, directors or employees
of entities with business strategies that may conflict with our business strategies. Michael Barnes, our Executive Chairman, is a
founding partner and Co-Chief Investment Officer of Tricadia. Tricadia’s subsidiaries include, and Mr. Barnes is Co-Chief Investment
officer of, companies that manage hedge funds, private equity funds and structured vehicles with business strategies that may compete
with ours. Jonathan Ilany, our Chief Executive Officer, is a limited partner of Mariner, which is a stockholder of Tiptree and provides
information technology services to Tiptree. Such positions may give rise to actual or potential conflicts of interest, which may not be
resolved in a manner that is in the best interests of the Company or the best interests of its stockholders.
We incur costs as a result of operating as a public company, and our management is required to devote substantial time
to these compliance activities.
As a public company, we incur significant legal, accounting and other costs. In addition, the Sarbanes-Oxley Act of 2002,
or the “Sarbanes-Oxley Act,” the Dodd-Frank Act and the rules of the SEC, and NASDAQ, impose various requirements on public
companies. Our management and other personnel devote a substantial amount of time to these compliance activities. Moreover, these
rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly.
Furthermore, if we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner,
the market price of our common stock could decline and we could be subject to potential delisting by NASDAQ and review by such
exchange, the SEC, or other regulatory authorities, which would require the expenditure by us of additional financial and management
resources. As a result, our stockholders could lose confidence in our financial reporting, which would harm our business and the
market price of our common stock.
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Some provisions of our charter may delay, deter or prevent takeovers and business combinations that stockholders consider
in their best interests.
Our charter restricts any person that owns 9.8% or more of our capital stock, other than TFP and its affiliates or another
stockholder approved by applicable state insurance regulators, from voting in excess of 9.8% of our voting securities. This provision
is intended to satisfy the requirements of applicable state regulators in connection with insurance laws and regulations that prohibit
any person from acquiring control of a regulated insurance company without the prior approval of the insurance regulators. In addition,
our charter provides for the classification of our board of directors into three classes, one of which is to be elected each year. Our
charter also generally only permits stockholders to act without a meeting by unanimous consent. These provisions may delay, deter
or prevent takeovers and business combinations that stockholders consider in their best interests.
Maryland takeover statutes may prevent a change of our control, which could depress our stock price.
Maryland law provides that “control shares” of a corporation acquired in a “control share acquisition” will have no voting
rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter under the Maryland Control
Share Acquisition Act. “Control shares” means voting shares of stock that, if aggregated with all other shares of stock owned by the
acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a
revocable proxy), would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting
power: one-tenth or more but less than one-third; one-third or more but less than a majority; or a majority or more of all voting power.
A “control share acquisition” means the acquisition of issued and outstanding control shares, subject to certain exceptions.
Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate
of an interested stockholder are prohibited for five years after the most recent date on which such stockholder became an interested
stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute,
an asset transfer or issuance or reclassification of equity securities.
Our bylaws contain a provision exempting from the control share statute any and all acquisitions by any person of our shares
of stock. Our board of directors has also adopted a resolution which provides that any business combination between us and any other
person is exempted from the provisions of the business combination statute, provided that the business combination is first approved
by the board of directors. However, our board of directors may amend or eliminate this provision in our bylaws regarding the control
share statute or amend or repeal this resolution regarding the business combination statute. If our board takes such action in the future,
the control share and business combination statutes may prevent or discourage others from trying to acquire control of us and increase
the difficulty of consummating any offer, including potential acquisitions that might involve a premium price for our common stock
or otherwise be in the best interest of our stockholders.
Our holding company structure with multiple lines of business, may adversely impact the market price of our Class A
common stock and our ability to raise equity and debt capital.
Tiptree holds and manages multiple lines of business. Analysts, investors and lenders may have difficulty analyzing and
valuing a company with multiple lines of business, which could adversely impact the market price of our Class A common stock and
our ability to raise equity and debt capital at a holding company level. Moreover, our management is required to make decisions
regarding the allocation of capital among the different lines of business, and such decisions could materially and adversely affect our
business or one or more of our lines of business.
The accounting rules applicable to certain of our transactions are highly complex and require the application of significant
judgment and assumptions by our management. In addition, changes in accounting interpretations or assumptions could impact
our financial statements.
Accounting rules for consolidations, income taxes, business acquisitions, transfers of financial assets, securitization
transactions and other aspects of our operations are highly complex and require the application of judgment and assumptions by our
management. In addition, changes in accounting rules, interpretations or assumptions could materially impact the presentation,
disclosure and usability of our financial statements. For more information see Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Critical Accounting Policies and Estimates”.
Risks Related to Regulatory and Legal Matters
Maintenance of our 1940 Act exemption imposes limits on our operations.
We conduct our operations so that we are not required to register as an investment company under the 1940 Act. Therefore,
we must limit the types and nature of businesses in which we engage and assets that we acquire. We monitor our compliance with the
1940 Act on an ongoing basis and may be compelled to take or refrain from taking actions, to acquire additional income or loss
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generating assets or to forgo opportunities that might otherwise be beneficial or advisable, including, but not limited to selling assets
that are considered to be investment securities or forgoing the sale of assets that are not investment securities, in order to ensure that
we (or a subsidiary) may continue to rely on the applicable exceptions or exemptions. These limitations on our freedom of action
could have a material adverse effect on our financial condition and results of operations.
If we fail to maintain an exemption, exception or other exclusion from registration as an investment company, we could,
among other things, be required to substantially change the manner in which we conduct our operations either to avoid being required
to register as an investment company or to register as an investment company. If we were required to register as an investment company
under the 1940 Act, we would become subject to substantial regulation with respect to, among other things, our capital structure
(including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the 1940 Act),
portfolio composition, including restrictions with respect to diversification and industry concentration, and our financial condition
and results of operations may be adversely affected. If we did not register despite being required to do so, criminal and civil actions
could be brought against us, our contracts would be unenforceable unless a court were to require enforcement, and a court could
appoint a receiver to take control of us and liquidate our business.
A change in law, regulation or regulatory enforcement applicable to insurance products could adversely affect our financial
condition and results of operations.
A change in state or U.S. federal tax laws could materially affect our insurance businesses. Currently, Fortegra does not
collect sales or other related taxes on its services. Whether sales of Fortegra’s services are subject to state sales and use taxes is
uncertain, due in part to the nature of its services and the relationships through which its services are offered, as well as changing
state laws and interpretations of those laws. One or more states may seek to impose sales or use tax or other tax collection obligations
on Fortegra, whether based on sales by Fortegra or its resellers or clients, including for past sales. A successful assertion that Fortegra
should be collecting sales or other related taxes on its services could result in substantial tax liabilities for past sales, discourage
customers from purchasing its services, discourage clients from offering or billing for its services, or otherwise cause material harm
to its business, financial condition and results of operations.
With regard to Fortegra’s payment protection products, there are federal and state laws and regulations that govern the
disclosures related to lenders’ sales of those products. Fortegra’s ability to offer and administer these products on behalf of financial
institutions is dependent upon their continued ability to sell such products. To the extent that federal or state laws or regulations change
to restrict or prohibit the sale of these products, Fortegra’s revenues would be adversely affected. For example, the CFPB’s enforcement
actions have resulted in large refunds and civil penalties against financial institutions in connection with their marketing of payment
protection and other products. Due to such regulatory actions, some lenders may reduce their sales and marketing of payment protection
and other ancillary products, which may adversely affect Fortegra’s revenues. The full impact of the CFPB’s oversight is unpredictable
and continues to evolve. With respect to the property and casualty insurance policies Fortegra underwrites, federal legislative proposals
regarding national catastrophe insurance, if adopted, could reduce the business need for some of the related products that Fortegra
provides.
Compliance with existing and new regulations affecting our business in regulated industries may increase costs and limit
our ability to pursue business opportunities.
We are subject to extensive laws and regulations administered and enforced by a number of different federal and state
governmental authorities in the industries in which we operate. Regulation of such industries may increase. In the past several years,
there has been significant legislation affecting financial services, insurance and health care, including the Dodd-Frank Act and the
Patient Protection and Affordable Care Act. In addition, the New York Department of Financial Services has adopted Cybersecurity
regulations applicable to our insurance and mortgage operations in New York. Accordingly, we cannot predict the impact that any
new laws and regulations will have on us. The costs to comply with these laws and regulations may be substantial and could have a
significant negative impact on us and limit our ability to pursue business opportunities. We can give no assurances that with changes
to laws and regulations, our businesses can continue to be conducted in each jurisdiction in the manner as we have in the past.
Our insurance subsidiaries are subject to regulation by state and, in some cases, foreign insurance authorities with respect
to statutory capital, reserve and other requirements. The laws of the various states in which our insurance businesses operate establish
insurance departments and other regulatory agencies with broad powers to preclude or temporarily suspend our insurance subsidiaries
from carrying on some or all of their activities or otherwise fine or penalize them in any jurisdiction in which they operate. Such
regulation or compliance could reduce our insurance businesses’ profitability or limit their growth by increasing the costs of compliance,
limiting or restricting the products or services they sell, or the methods by which they sell their services and products, or subjecting
their business to the possibility of regulatory actions or proceedings.
Due to the highly regulated nature of the residential mortgage industry, our mortgage subsidiaries are required to comply
with a wide array of federal, state and local laws and regulations that regulate licensing, allowable fees and loan terms, permissible
servicing and debt collection practices, limitations on forced-placed insurance, special consumer protections in connection with default
23
and foreclosure, and protection of confidential, nonpublic consumer information. In addition, mortgage servicers must comply with
U.S. federal, state and local laws and regulations that regulate, among other things, the manner in which they service our NPL mortgage
loans and manage our real property. These laws and regulations are constantly changing and the volume of new or modified laws and
regulations has increased in recent years as states and local cities and counties continue to enact laws that either restrict or impose
additional obligations in connection with certain loan origination, acquisition and servicing activities in those cities and counties.
These laws and regulations are complex and vary greatly among different states and localities, and in some cases, these laws are in
conflict with each other or with U.S. federal law. A failure by us or our servicers to comply with applicable laws or regulations could
subject our mortgage businesses and/or our mortgage servicers to lawsuits or governmental actions, which could result in the loss or
suspension of our licenses in the applicable jurisdictions where such violations occur and/or monetary fines or changes in our mortgage
operations. If we were to determine to change servicers, there is no assurance that we could find servicers that satisfy our requirements
or with whom we could enter into agreements on satisfactory terms. Any of these outcomes could materially and adversely affect our
mortgage businesses.
Changes to consumer protection laws or changes in their interpretation may impede collection efforts in connection with our
investments in NPLs, delaying and/or reducing our returns on these investments. The CFPB has specifically focused on servicing
and foreclosure practices, especially as it relates to the servicing of delinquent loans. Many of these laws and regulations are focused
on sub-prime borrowers and are intended to curtail or prohibit some industry standard practices. While we believe that our practices
are in compliance with these changes and enhanced regulations, certain of our collections methods could be prohibited in the future,
forcing us to revise our practices and implement more costly or less effective policies and procedures. Federal or state bankruptcy
or debtor relief laws could offer additional protection to borrowers seeking bankruptcy protection, providing a court greater leeway
to reduce or discharge amounts owed to us. As a result, some of these changes in laws and regulations could impact our expected
returns and/or ability to recover some of our investment.
TAMCO is an asset management holding company registered with the SEC as an investment advisor and is subject to various
federal and state laws and regulations and rules of various securities regulators and exchanges. These laws and regulations primarily
are intended to protect clients and generally grant supervisory agencies broad administrative powers, including the power to limit or
restrict the carrying on of business for failure to comply with such laws and regulations. Possible sanctions that may be imposed
include the suspension of individual employees, limitations on engaging in business for specific periods, the revocation of the
registration as an investment adviser, censures and fines.
The final rules implementing the credit risk retention requirements of the Dodd-Frank Act became effective beginning on
December 24, 2016 with respect to CLOs (the “Risk Retention Rules”). The Risk Retention Rules generally require sponsors of asset-
backed securities transactions or their affiliates to retain not less than 5% of the credit risk of the assets collateralizing asset-backed
securities for the life of the vehicle. The Risk Retention Rules also generally prohibit hedging the credit risk that is required to be
retained. The Risk Retention Rules may impact our returns in the business, and thus our ability or desire to manage CLOs in the future.
We are exploring multiple alternatives for compliance with the Risk Retention Rules.
While the CFPB does not have direct jurisdiction over insurance products, it is possible that regulatory actions taken by the
CFPB may affect the sales practices related to these products and thereby potentially affect Fortegra’s business or the clients that it
serves. In March 2015, the CFPB announced it is considering proposing rules under its unfair, deceptive and abusive acts and practices
rulemaking authority relating to consumer installment loans, among other things. If and when implemented CFPB rules regarding
consumer installment loans could adversely impact Fortegra’s volume of insurance products and services and cost structure. In addition,
the CFPB’s enforcement actions and examinations have resulted in large refunds and civil penalties against financial institutions in
connection with their marketing of payment protection and other products. Due to such regulatory actions, some lenders may reduce
their sales and marketing of payment protection and other ancillary products, which may adversely affect Fortegra’s revenues.
The properties held by our Care subsidiary are regulated by state and federal laws regarding healthcare facilities. Luxury is
subject to extensive regulation by federal, state and local governmental authorities, including the CFPB, the Federal Trade Commission
and various state agencies that license, audit and conduct examinations.
Our businesses are subject to risks related to litigation and regulatory actions.
Over the last several years, businesses in many areas of the financial services industry have been subject to increasing amounts
of regulatory scrutiny. In addition, there has been an increase in litigation involving firms in the financial services industry and public
companies generally, some of which have involved new types of legal claims, particularly in the insurance industry. We may be
materially and adversely affected by judgments, settlements, fines, penalties, unanticipated costs or other effects of legal and
administrative proceedings now pending or that may be instituted in the future, including from investigations by regulatory bodies or
administrative agencies. An adverse outcome of any investigation by, or other inquiries from, any such bodies or agencies also could
result in non-monetary penalties or sanctions, loss of licenses or approvals, changes in personnel, increased review and scrutiny of
us by our clients, counterparties, regulatory authorities, potential litigants, the media and others, any of which could have a material
adverse effect on us.
24
Failure to protect our clients’ confidential information and privacy could result in the loss of our reputation and customers,
reduction in our profitability and subject us to fines, penalties and litigation and adversely affect our results of operations and
financial condition.
We and our subsidiaries retain confidential information in our information systems, and we are subject to a variety of privacy
regulations and confidentiality obligations. For example, some of the Company’s subsidiaries are subject to the privacy regulations
of the Gramm-Leach-Bliley Act. We and certain of our subsidiaries also have contractual obligations to protect confidential information
we obtain from third parties. These obligations generally require us, in accordance with applicable laws, to protect such information
to the same extent that we protect our own confidential information. We have implemented physical, administrative and logical security
systems with the intent of maintaining the physical security of our facilities and systems and protecting our clients’ and their customers’
confidential information and personally-identifiable information against unauthorized access through our information systems or by
other electronic transmission or through misdirection, theft or loss of data. Despite such efforts, we may be subject to a breach of our
security systems that results in unauthorized access to our facilities and/or the information we are trying to protect. Anyone who is
able to circumvent our security measures and penetrate our information systems could access, view, misappropriate, alter or delete
any information in the systems, including personally identifiable customer information and proprietary business information. In
addition, most states require that customers be notified if a security breach results in the disclosure of personally-identifiable customer
information. Any compromise of the security of our or our subsidiaries’ information systems that results in inappropriate disclosure
of such information could result in, among other things, unfavorable publicity and damage to our and our subsidiaries’ reputation,
governmental inquiry and oversight, difficulty in marketing our services, loss of clients, significant civil and criminal liability, litigation
and the incurrence of significant technical, legal and other expenses, any of which may have a material adverse effect on our results
of operations and financial condition.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal executive office is located at 780 Third Avenue, 21st Floor, New York, New York 10017. We and our subsidiaries lease
properties throughout the United States, all of which are used as administrative offices. We believe that the terms of their leases at
each of our subsidiaries are sufficient to meet our present needs and we do not anticipate any difficulty in securing additional space,
as needed, on acceptable terms.
As of December 31, 2016, the Company’s owned real estate properties consisted of 29 properties in our senior living segment, which
are located across 11 states primarily in the Mid-Atlantic and Southern United States and 81 single family properties in our insurance
segment consisting of REO properties resulting from our investments in non-performing residential mortgage loans.
Item 3. Legal Proceedings
Litigation
Fortegra is a defendant in Mullins v. Southern Financial Life Insurance Co., which was filed in February 2006, in the Pike Circuit
Court, in the Commonwealth of Kentucky. A class was certified in June 2010. At issue is the duration or term of coverage under certain
policies. The action alleges violations of the Consumer Protection Act and certain insurance statutes, as well as common law fraud.
The action seeks compensatory and punitive damages, attorney fees and interest. Plaintiffs filed a Motion for Sanctions in April 2012
in connection with Fortegra's efforts to locate and gather certificates and other documents from Fortegra's producers. The court did
not award sanctions and Fortegra has retained a special master to facilitate the collection of certificates and other documents from
Fortegra's producers. In January 2015, the trial court issued an Order denying Fortegra’s motion to decertify the class, which was
upheld on appeal. Following a February 2017 hearing, the court denied Fortegra’s Motion for Summary Judgment as to certain disability
insurance policies. The court has not yet ruled on Fortegra’s Motion for Summary Judgment as to certain life insurance policies, and
a hearing is currently set for March 2017. No trial or additional hearings are currently scheduled.
Tiptree considers such litigation customary in the insurance industry. In management's opinion, based on information available at this
time, the ultimate resolution of such litigation, which it is vigorously defending, should not be materially adverse to the financial
position of Tiptree. It should be noted that large punitive damage awards, bearing little relation to actual damages sustained by plaintiffs,
have been awarded in certain states against other companies in the credit insurance business. At this time, the Company cannot estimate
a range of loss that is reasonably possible.
Tiptree and its subsidiaries are parties to other legal proceedings in the ordinary course of business. Although Tiptree’s legal and
financial liability with respect to such proceedings cannot be estimated with certainty, Tiptree does not believe that these proceedings,
either individually or in the aggregate, are likely to have a material adverse effect on Tiptree’s financial position.
25
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Tiptree’s Class A common stock has traded on the NASDAQ Capital Market under the ticker symbol “TIPT” since August 9, 2013.
Holders
As of December 31, 2016, there were 104 Class A common stockholders of record.
Stock Price and Dividends
The following table sets forth the high and low stock prices per share of our Class A common stock and the dividends declared and
paid per share on our Class A common stock for the periods indicated.
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High Price Low Price Dividends
0.025
$
0.025
$
0.025
$
0.025
$
6.78 $
6.82 $
6.16 $
7.15 $
5.33 $
4.74 $
5.03 $
5.53 $
High Price Low Price Dividends
0.025
$
0.025
$
0.025
$
0.025
$
8.01 $
8.19 $
7.47 $
7.50 $
6.10 $
6.17 $
5.17 $
5.48 $
Our Class B common stock is not listed nor traded on any stock exchange.
Our payment of dividends in the future will be determined by our Board of Directors and will depend on business conditions, our
earnings and other factors.
Item 6. Selected Financial Data
The following tables set forth our consolidated selected financial data for the periods and as of the dates indicated and are derived
from our audited Consolidated Financial Statements. The following consolidated financial data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") in ITEM 7 of this Form 10-K
and the consolidated financial statements and related notes included in Item 8 of this Form 10-K. All amounts pertaining to our results
of operations and financial condition are presented on a continuing operations basis. All acquisitions by Tiptree during the five years
ended December 31, 2016 are included in results of operations since their respective dates of acquisition.
(in thousands, except shares and per share amounts)
Total revenues
Total expenses
Net income (loss) attributable to consolidated CLOs
Income (loss) before taxes from continuing operations
Less: provision (benefit) for income taxes
Income (loss) from continuing operations
Discontinued operations, net
Net income (loss) before non-controlling interests
Less: net income (loss) attributable to non-controlling interests
Net income (loss) attributable to Tiptree Inc. Class A common
stockholders
Net income (loss) per Class A common share:
Basic, continuing operations, net
Basic, discontinued operations, net
Basic earnings per share
Diluted, continuing operations, net
Diluted, discontinued operations, net
Diluted earnings per share
Weighted average number of Class A common shares:
Basic
Diluted
Cash dividends paid per common share
2016
For the Years Ended December 31,
2013(3)
2014(1)(2)
2015(2)
2012(3)
$
567,154
544,092
20,254
43,316
10,978
32,338
—
32,338
7,018
$
438,459
444,009
(6,889)
(12,439)
1,377
(13,816)
22,618
8,802
3,023
$
80,313
99,050
19,525
788
4,141
(3,353)
7,937
4,584
6,294
$
23,743
36,341
28,865
16,267
560
15,707
25,022
40,729
30,336
22,299
22,726
35,365
34,938
56
34,882
6,607
41,489
31,281
25,320
$
5,779
$
(1,710) $
10,393
$
10,208
0.79
—
0.79
0.78
—
0.78
$
$
(0.26) $
0.43
0.17
(0.26)
0.43
0.17
$
(0.31) $
0.21
(0.10)
(0.31)
0.21
(0.10) $
0.41
0.60
1.01
0.41
0.60
1.01
$
$
0.35
0.16
0.51
0.35
0.16
0.51
31,721,449
31,766,674
33,202,681
33,202,681
16,771,980
16,771,980
10,250,438
10,250,438
10,286,412
10,286,412
0.10
$
0.10
$
— $
0.175
$
0.54
$
$
$
$
$
Consolidated Balance Sheet Data: (in thousands)
2016
2015
As of December 31,
2014
2013
2012
Total assets (4)
Debt, net
Total Tiptree Inc. stockholders’ equity
Total stockholders’ equity
$
2,890,050
$
2,494,970
$
8,202,447
$
6,872,271
$
5,533,802
793,009
293,431
390,144
$
666,952
312,840
397,694
$
360,792
284,462
401,621
$
269,594
98,979
396,896
$
195,648
86,374
342,318
$
(1) 2014 results reflects the impact of the acquisition of Fortegra in December 2014.
(2) PFG revenues of $40.5 million and $78.7 million and net income of $7.0 million and $7.9 million for the years ended December 31, 2015 and December 31, 2014, respectively, and
gain on sale of $15.6 million for the year ended December 31, 2015 are included in Discontinued operations, net.
(3) Reflects the combination of Tiptree Inc. and Care. Prior to July 1, 2013 Care was a public REIT and dividends reflect those paid by Care and Tiptree.
(4) Total assets on December 31, 2016, 2015, 2014, 2013 and 2012 include $989.5 million, $728.8 million, $1,978.1 million, $1,405.4 million and $851.7 million of assets held by
consolidated CLO entities, respectively.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Management’s Discussion and Analysis of Financial Conditions and Results of Operations is presented in this section as
follows:
• Overview
• Results of Operations
• Non-GAAP Reconciliations
• Liquidity and Capital Resources
• Critical Accounting Policies and Estimates
• Off-Balance Sheet Arrangements
27
OVERVIEW
Tiptree is a holding company focused on enhancing shareholder value by generating consistent and growing earnings at our
operating companies. Our consolidated subsidiaries are currently engaged in the following businesses - specialty insurance, asset
management, senior living and specialty finance. We selectively manage our specialty insurance segment investments across
multiple asset classes, sectors and geographies, which we believe distinguishes us from many other insurance companies. We
evaluate our performance primarily by the comparison of our shareholder’s long-term total return on capital, as measured by
Adjusted EBITDA and growth in book value per share plus dividends paid.
In furtherance of our strategy to grow sustainable earnings and Adjusted EBITDA, during 2016, we:
•
•
•
•
•
contributed $102.8 million of capital to our specialty insurance company to enhance their A.M. Best rating to an
“A-“ (Excellent) group rating and allow for product expansion opportunities,
redeployed capital from our non-core assets into our businesses,
enhanced the returns on our specialty insurance investment portfolio by managing assets across multiple asset classes,
sectors and geographies,
re-allocated our principal investments to the specialty insurance and asset management segments, and
returned $47.8 million to shareholders and limited partners through $43.8 million of share buy-backs and $4.0 million of
dividends paid.
We currently have four reporting segments: specialty insurance, asset management, senior living, and specialty finance. Corporate
and other primarily contains corporate expenses not allocated to the operating businesses. See Note-(5) Operating Segment Data, in
the notes to the accompanying consolidated financial statements for detailed information regarding our segments. Since different
factors affect the financial condition and results of operation of each segment, the following discussion is presented on both a
consolidated and segment basis.
Our results of operations are affected by a variety of factors including, but not limited to, general economic conditions and GDP
growth, market liquidity and volatility, consumer confidence, U.S. demographics, employment and wage growth, business confidence
and investment, inflation, interest rates and spreads, the impact of the regulatory environment, and the other factors set forth in Item
1A. “Risk Factors” of this Annual Report on Form 10-K. Generally, our businesses are positively affected by a healthy U.S. consumer,
stable to gradually rising interest rates, stable markets and business conditions and the aging U.S. population. Conversely, rising
unemployment, volatile markets, rapidly rising interest rates and slowing business conditions can have a material adverse effect on
our results of operations or financial condition.
Our specialty insurance results primarily depend on the appropriateness of our pricing, underwriting, risk retension and the accuracy
of our methodology for the establishment of reserves for future policyholder benefits and claims, the returns on and values of invested
assets, and our ability to estimate contract renewals and run-off. While our insurance operations have historically maintained a high
percentage of fees to total revenue and a relatively stable combined ratio which support steady earnings, changing business and
economic factors could generate different results than we have historically seen. In our senior living operations, the ability to raise
rents and charge for additional services along with the potential impact that inflation may have on the costs of operations could impact
margins and the value of the real estate. In our asset management segment, improving business conditions and growing corporate loan
demand, especially from small to medium sized businesses has generally supported growth in AUM. Slowing economic growth and/
or economic uncertainty could reduce business investment and loan demand, slowing the growth in AUM and associated fees. While
economic conditions are generally expected to continue on a positive trend, with interest rates gradually rising as inflation is expected
to pick up modestly, and unemployment remaining relatively low, any downward trend or increased volatility and uncertainty in these
economic factors could impact our results negatively.
Our profitability is affected by investment income and investment gains and losses. Our invested assets are invested principally in
fixed maturity securities, equity securities, loans, CLOs, credit investment funds, and senior living related assets. Many of our
investments are held at fair value. Changes in fair value of these assets are reported quarterly as unrealized gains or losses in revenues
and can be impacted by changes in both interest rates and credit risk. Credit risk can impact our financial results in a number of ways,
including the performance of our corporate loans, mortgage loans, holdings in CLO subordinated notes and other investments. When
credit markets are performing well, loans held in our CLOs and credit fund investments may prepay, subjecting those investments to
reinvestment risk. In deteriorating credit environments, default risk can impact the performance of our investments, as well as flowing
through income as unrealized losses. Disruption in the credit markets can also impact our ability to raise third party funds to invest
and grow our asset management fees.
Our business is also impacted in various ways by changes in interest rates. In addition to the impact interest rates can have on the fair
value of the assets, interest rates can also impact the volume and revenues in our specialty finance business. In addition, most of our
subsidiaries use debt financing to fund their business activities, much of which is floating rate debt, and the majority of which have
LIBOR floors, LIBOR floors can result in a reduction in net interest margins in a declining interest rate environment, if earnings on
our assets do not have similar floors or are based on different benchmarks than LIBOR, such as treasury rates or the prime rate. Certain
28
of our subsidiaries have also entered into interest rate swap agreements to fix all or a portion of their interest rate exposure which are
currently designated as hedging relationships for accounting purposes.
RESULTS OF OPERATIONS
The following is a summary of consolidated financial results for the years ended December 31, 2016, 2015 and 2014. Management
uses Adjusted EBITDA and book value per share, as exchanged, as measurements of operating performance which are non-GAAP
measures. Management believes the use of Adjusted EBITDA provides supplemental information useful to investors as it is frequently
used by the financial community to analyze financial performance, and to analyze a company’s ability to service its debt and to
facilitate comparison among companies. Adjusted EBITDA is also used in determining incentive compensation for the Company’s
executive officers. Adjusted EBITDA is not a measurement of financial performance or liquidity under GAAP and should not be
considered as an alternative or substitute for GAAP net income. Book value per share, as exchanged assumes full exchange of the
limited partners units of TFP for Tiptree Class A common stock. Management believes the use of this financial measure provides
supplemental information useful to investors as it is frequently used by the financial community to analyze company growth on a
relative per share basis.
Summary Consolidated Statements of Operations (1)(2)
($ in thousands)
GAAP:
Total revenues
Income (loss) from continuing operations
Net income (loss) attributable to Tiptree Inc. Class A common stockholders
Diluted earnings per share
Cash dividends paid per common share
Non-GAAP: (3)
Adjusted EBITDA
Book Value per share, as exchanged
$
$
$
Year Ended December 31,
2015
438,459
(13,816)
5,779
0.17
0.10
2016
567,154
32,338
25,320
0.78
0.10
$
2014
80,313
(3,353)
(1,710)
(0.10)
—
$
78,916
10.14
$
58,419
8.90
58,923
9.00
(1) Reflects the impact of the acquisition of Fortegra in December 2014.
(2) PFG revenues of $40.5 million and $78.7 million and net income of $7.0 million and $7.9 million for the years ended December 31, 2015 and December 31, 2014, respectively, and
gain on sale of $15.6 million for the year ended December 31, 2015 are included in Discontinued operations, net.
(3) For further information relating to the Company’s Adjusted EBITDA and book value per share, as exchanged, including a reconciliation to GAAP financials, see “—Non-GAAP
Reconciliations.”.
Consolidated Results of Operations - 2016 compared to 2015
Revenues
For the year ended December 31, 2016, the Company reported revenues of $567.2 million, an increase of $128.7 million or 29.4%
from the year ended December 31, 2015. The primary drivers of the increase in revenues were improvements in earned premiums,
service and administrative fees and investment income in our specialty insurance segment, increases in management incentive fees
and returns on associated investments in our asset management segment, improvement in rental income attributable to acquisitions
of senior housing properties and increased mortgage volume.
Income (loss) from continuing operations
For the year ended December 31, 2016, income from continuing operations was $32.3 million compared to a loss of $13.8 million in
2015. The key drivers of the $46.2 million increase were improved profitability in our specialty insurance segment driven by higher
revenues and investment income, increased profits from our asset management segment as a result of incentive fees and CLO
subordinated note returns, increased rental income in our senior living operations, and increases in mortgage volume and margins due
to improving market conditions. This increased income was partially offset by higher corporate expenses from increased performance
related incentive compensation and costs associated with our effort to improve our controls and financial reporting infrastructure.
Additionally, a tax benefit of $4.0 million was recognized in the first quarter of 2016, which was driven by the tax reorganization
effective January 1, 2016. A discussion of the changes in revenues, expenses and net income is presented below and in more detail in
our segment analysis.
29
Net Income (Loss) Available to Class A Common Stockholders
For the year ended December 31, 2016, net income available to Class A common stockholders was $25.3 million, an increase of $19.5
million, or 338.1%, from the prior year period. The key drivers of net income available to Class A common stockholders were the
same factors which impacted the positive year-over-year change in income from continuing operations, and which were partially
offset by the loss of the $22.6 million of earnings from discontinued operations recorded in the year ended December 31, 2015, which
included the one-time net gain on the sale of PFG of $15.6 million.
Adjusted EBITDA
Total Adjusted EBITDA for the year ended December 31, 2016 was $78.9 million compared to $58.4 million for 2015, an increase
of $20.5 million or 35.1%. The key drivers of the change in Adjusted EBITDA were the same as those which impacted our income
from continuing operations, and which were partially offset by the loss of $32.5 million of Adjusted EBITDA in the year ended
December 31, 2015 related to discontinued operations. See “— Non-GAAP Reconciliations” for a reconciliation to GAAP net income.
Consolidated Results of Operations - 2015 compared to 2014
Revenues
For the year ended December 31, 2015, the Company reported revenues of $438.5 million, an increase of $358.1 million from the
year ended December 31, 2014. The primary driver of the increase in revenues was the addition of Fortegra. Other key drivers were
the improvement in volume and margins at our specialty finance segment, including from the addition of Reliance, and increased
rental income from our real estate segment, offset in part by the elimination of the one-time gain of $7.9 million in 2014 from the
repayment of a loan in that segment, and the realized and unrealized losses on CLO subordinated note investments in 2015.
Income (loss) from continuing operations
For the year ended December 31, 2015, income from continuing operations was a loss of $13.8 million, compared to a loss of $3.4
million in 2014. The key drivers of income from continuing operations were higher depreciation and amortization from new investments
in our senior living operations, realized and unrealized losses on CLO subordinated note investments of $25.9 million, lower
distributions received on CLO subordinated notes due to sales of CLO subordinated notes in the second quarter of 2015, and higher
corporate expenses associated with our effort to improve our controls and financial reporting infrastructure, offset in part by improved
profitability from the addition of a full year of Fortegra results, growth in specialty finance volumes and margins, and increased rental
income in our senior living operations. In addition, in the year ended December 31, 2014, there was a one-time gain of $7.9 million
from the repayment of a loan in our senior living segment, which impacted the year over year comparison.
Net Income (Loss) Available to Class A Common Stockholders
For the year ended December 31, 2015, net income available to Class A common shareholders was $5.8 million compared to a loss
of $1.7 million in the 2014. The primary drivers of the year-over-year difference were the same factors which impacted income from
continuing operations, plus additional factors attributable to the decrease in the provision for income taxes and the positive impact of
the gain on sale and lower income from discontinued operations due to our sale of PFG at the end of the second quarter of 2015.
Adjusted EBITDA
For the year ended December 31, 2015, total Adjusted EBITDA was $58.4 million, a decrease of $0.5 million from 2014. The key
drivers of the change in Adjusted EBITDA were the factors impacting income from continuing operations, including unrealized and
realized losses on CLO subordinated notes, plus additional depreciation in our senior living segment, both of which were offset by
the sale of PFG, which contributed $32.5 million of Adjusted EBITDA, including the $15.6 million gain, in the year ended December
31, 2015 versus $34.8 million in the year ended December 31, 2014. See “—Non-GAAP Reconciliations” for a reconciliation to GAAP
net income.
Results by Segment
Effective December 31, 2016, Tiptree realigned the principal investments formerly reported in the corporate and other segment into
their new reportable segments to align with the Company’s operating strategy. The table below reflects the credit and equity investments
contributed to our insurance subsidiary in the specialty insurance segment and the CLO subordinated notes and related warehouse
income in the asset management segment for the years ended December 31, 2016, 2015 and 2014.
30
($ in thousands)
Specialty insurance
Asset management
Senior living
Specialty finance
Corporate and other
Total
2016
394,170
13,114
60,731
95,431
3,708
567,154
$
$
Adjusted EBITDA by Segment - Non-GAAP (1)
($ in thousands, unaudited)
Specialty insurance
Asset management
Senior living
Specialty finance
Corporate and other
Adjusted EBITDA from Continuing Operations
Discontinued Operations
Total Adjusted EBITDA
Revenues
2015
330,888
6,770
46,128
54,999
(326)
438,459
$
$
Year Ended December 31,
2014
26,175
7,118
29,281
15,223
2,516
80,313
$
$
$
$
$
$
$
Pre-tax income (loss)
2015
2016
2014
46,804
25,264
(5,824)
8,170
(31,098)
43,316
$
$
$
32,012
(6,753)
(9,535)
6,265
(34,428)
(12,439) $
(3,171)
18,191
3,171
(1,962)
(15,441)
788
Year Ended December 31,
2015
2014
2016
60,526
25,264
10,469
10,513
(27,856)
78,916
—
78,916
$
$
$
43,349
(6,753)
6,590
5,895
(23,164)
25,917
32,502
58,419
$
$
$
7,823
18,191
10,352
(1,463)
(10,773)
24,130
34,793
58,923
(1) For further information relating to the Company’s Adjusted EBITDA, including a reconciliation of the Company’s segments’ Adjusted EBITDA to GAAP pre-tax income, see “—Non-
GAAP Reconciliations.”
Specialty Insurance
Fortegra is a specialty insurance company that offers asset protection products through niche commercial and personal lines of
insurance. We also offer administration and fronting services for our self-insured clients who own captive producer owned reinsurance
companies (“PORCs”). Our specialty insurance business generates revenues primarily from net earned premiums, service and
administrative fees, ceding commissions and investment portfolio income.
Net earned premiums
Net earned premiums are the earned portion of net written premiums during a certain period. These consist of premiums directly
written by us and premiums assumed by us as a result of reinsurance agreements. Whether direct or assumed, the premium is earned
over the life of the respective policy using methods appropriate to the pattern of losses for the type of business. Our net earned premiums
are partially offset by commission expenses and policy and contract benefits. The principal factors affecting net earned premiums are:
the proportion of the risk assumed by our partners and reinsurers as defined in the applicable reinsurance treaty; increases and decreases
in written premiums; the pattern of losses by type of business; increases and decreases in policy cancellation rates; the average duration
of the policies written; and changes in regulation that would modify the earning patterns for the policies underwritten and administered.
We generally limit the underwriting risk we assume through the use of both reinsurance (e.g., quota share and excess of loss) and
retrospective commission agreements with our partners (e.g., commissions paid adjusted based on the actual underlying loss incurred),
which manage and mitigate our risk.
Service and administrative fees
We earn service and administrative fees for administering specialty insurance and asset protection programs on behalf of our clients.
Service fee revenue is recognized as the services are performed and the administrative fees are recognized consistent with the earnings
recognition pattern of the underlying policies. Our asset protection products are sold as complementary products to consumer retail
and credit transactions and are thus subject to the volatility of the volume of consumer purchase and credit activities.
Ceding commissions
We also earn ceding commissions on our debt protection products through risk sharing agreements. We elect to cede to reinsurers
under reinsurance arrangements a significant portion of the credit insurance that we distribute on behalf of our clients. Ceding
commissions earned under reinsurance agreements are based on contractual formulas that take into account, in part, underwriting
performance and investment returns experienced by the assuming companies. As experience changes, adjustments to the ceding
commissions are reflected in the period incurred and are based on the claim experience of the related policy.
31
Investment portfolio income
We generate net investment income and net realized and unrealized gains (losses) from our investment portfolio.
Discontinued Operations
The results of PFG, which was sold on June 30, 2015, are presented in discontinued operations for the years ended December 31,
2015 and 2014, and are not included in the specialty insurance segment results. The following tables present the specialty insurance
segment results for the fiscal year ended December 31, 2016, 2015 and 2014. The fiscal year ended December 31, 2014 represents
only one month of results for Fortegra, which was acquired in December 2014.
Operating Results
($ in thousands)
Revenues:
Net earned premiums
Service and administrative fees
Ceding commissions
Net investment income
Net realized and unrealized gains
Other income
Total revenues
Expenses:
Policy and contract benefits
Commission expense
Employee compensation and benefits
Interest expense
Depreciation and amortization expenses
Other expenses
Total expenses
Pre-tax income (loss)
Results
Year Ended December 31,
2015
2014
2016
$ 229,436
109,348
24,784
12,981
14,762
2,859
$ 394,170
106,784
147,253
37,937
9,244
13,184
32,964
$ 347,366
46,804
$
$ 166,265
106,525
43,217
5,455
1,065
8,361
$ 330,888
86,312
105,751
38,786
6,968
29,673
31,386
$ 298,876
32,012
$
$
$
$
$
12,827
8,657
3,737
279
5
670
26,175
5,829
4,287
3,483
637
4,265
10,845
29,346
(3,171)
Pre-tax income was $46.8 million for the year ended December 31, 2016, an increase of $14.8 million or 46.2% over the prior year
operating results. The primary drivers of the improvement in period-over-period results was an increase in investment income of $7.5
million, realized gains of $5.3 million and unrealized gains of $8.4 million, partially offset by increases in interest expense of $2.3
million and a reduction in underwriting related profits of $4.1 million.
Pre-tax income was $32.0 million in the year ended December 31, 2015, an increase over the 2014 operating results of $35.2 million.
The primary drivers of the improvement in year-over-year results was the addition of Fortegra’s full year results, versus one month
of results for 2014. In addition, approximately $6.1 million of acquisition related costs were included in the 2014 results.
Value of Business Acquired (“VOBA”)
The acquisition of Fortegra resulted in purchase price accounting adjustments in the segment giving effect to push-down accounting
treatment of the acquisition. These adjustments include setting deferred cost assets to a fair value of zero, modifying deferred revenue
liabilities to their respective fair values, and recording a substantial intangible asset representing the VOBA. The application of push-
down accounting creates a modest impact to net income, but significantly impacts individual assets, liabilities, revenues, and expenses.
Due to acquisition accounting, revenue and expenses related to acquired contracts are recognized differently from those related to
newly originated contracts.
32
VOBA impacts
($ in thousands)
Total revenues (1)
Commission expense (1)
Depreciation and amortization expense (2)
Other expenses (1)
Year Ended December 31,
2015
2016
Variance
$
(6,054) $
(10,745)
3,282
(363)
(22,928) $
(45,166)
19,320
(1,928)
16,874
34,421
(16,038)
1,565
(1) Represents service fee and ceding commission revenues, and additional commissions, premium tax and other expenses that would have been recognized had purchase accounting
effects not been recorded. Deferred service fee and ceding commission liabilities and deferred commission assets and deferred acquisitions costs at the acquisition date were
reduced to reflect the purchase accounting fair value.
(2) Represents net additional depreciation and amortization expense that would not have been recorded without purchase accounting; fixed assets and amortizing intangible assets
were adjusted in purchase accounting based on fair value analyses.
Revenues
Revenues are generated by the sale of the following insurance products: credit protection, warranty, programs, services and other.
Credit protection products include credit life, credit disability, credit property, involuntary unemployment, and accidental death and
dismemberment. Warranty products include mobile device protection, furniture and appliance service contracts and auto service
contracts. Programs are primarily personal and commercial lines and other property-casualty products. Services and other revenues
principally represent investment income, unrealized and realized gains and losses, fees for insurance sales and business process
outsourcing services, and interest for premium financing, and also include the impact to fee income, ceding commissions, and
commissions expense from the purchase accounting effect of VOBA related to the insurance contracts.
Total revenues were $394.2 million for the year ended December 31, 2016, up $63.3 million, or 19.1% over the prior year period.
The increase was primarily driven by an increase in earned premiums of $63.2 million, or 38.0%, an increase of $2.8 million, or 2.7%,
in service and administrative fees, which were partially offset by decreases in ceding commissions of $18.4 million and other income
of $5.5 million. The revenues on the investment portfolio, including net investment income and realized and unrealized gains, were
$27.7 million for the year ended December 31, 2016 compared to $6.5 million in the 2015 period, an increase of $21.2 million.
The increase in earned premiums was driven by growth in our credit protection, warranty and program products. The largest driver
was the result of a transaction, effective October 1, 2016, where our captive reinsurance subsidiary replaced a third party as reinsurer
of certain credit protection products, thus avoiding reinsurance costs and gaining additional investment flexibility. This transaction
was consistent with our strategy to grow underwriting and investment profits at our specialty insurance subsidiaries. As a result of
this transaction, several income statement line items increased for the year ended December 31, 2016 when compared to prior periods,
including earned premiums, commission expense and policy and contract benefits. The decrease in ceding commissions was primarily
a result of severe storms in Louisiana and the southeast United States and was largely offset by lower commissions paid to our partners
as much of the risk within those products was retained with our partners’ producer owned reinsurance companies or ceded to third
party reinsurers.
Total revenues, excluding the impact of VOBA, were up $46.4 million, driven by increases in earned premiums of $63.2 million, and
increases in net investment income and gains of $21.2 million, which were partially offset by reductions in service and administrative
fees of $11.1 million, reductions in ceding commissions of $21.4 million and a decrease in other income of $5.5 million. Further
details by product are provided below.
Expenses
Total expenses include policy and contract benefits, commissions expense and operating expenses. For the year ended December 31,
2016, total expenses were $347.4 million compared to $298.9 million in 2015. The primary drivers of the increase were policy and
contract benefits and commission expense as net written premiums increased over 2015.
There are two types of expenses for claims payments under insurance and warranty service contracts which are included in policy
and contract benefits: member benefit claims and net losses and loss adjustment expenses. Member benefit claims represent the costs
of services and replacement devices incurred in car club and warranty protection service contracts. Net losses and loss adjustment
expenses represent actual insurance claims paid, changes in unpaid claim reserves, net of amounts ceded, and the costs of administering
claims for credit life and other insurance lines, such as non-standard auto. Incurred claims are impacted by loss frequency, which is
a measure of the number of claims per unit of insured exposure, and loss severity, which is based on the average size of claims. Factors
affecting loss frequency and loss severity include changes in claims reporting patterns, claims settlement patterns, judicial decisions,
economic conditions, morbidity patterns and the attitudes of claimants towards settlements. For 2016, policy and contract benefits
33
were $106.8 million, up $20.5 million from the prior year primarily as a result of increased net written business in our credit protection
and program products.
Commission expense is incurred on most product lines, the majority of which are retrospective commissions paid to distributors and
retailers selling our products, including credit insurance policies, motor club memberships, mobile device protection and warranty
service contracts. Credit insurance commission rates are, in many cases, set by state regulators and are also impacted by market
conditions and retention levels. Total commission expense for year ended December 31, 2016 was $147.3 million compared to $105.8
million in 2015. The primary drivers of the increase were VOBA, as highlighted in the table above, along with the commission expense
associated with the credit business re-assumed in October.
Operating expenses are composed of employee compensation and benefits, interest expense, depreciation and amortization expenses
and other expenses. The primary driver of the period-over-period decrease in operating expenses was attributable to lower depreciation
and amortization expense as a result of the decline in VOBA purchase accounting impact from the amortization of the fair value
attributed to the insurance policies and contracts acquired, which was $3.3 million for the year ended December 31, 2016 versus $19.3
million in the comparable 2015 period. In addition, employee compensation and benefits were $37.9 million for 2016, down $0.8
million from 2015 as a result of actions taken throughout 2015 to reduce headcount. Interest expense of $9.2 million in 2016 increased
by $2.3 million versus the prior year, primarily from increased asset based borrowings on certain investments within the investment
portfolio. Other expenses for the year ended December 31, 2016 were $33.0 million, up $1.6 million from 2015 primarily as a result
of increased premium taxes as written and earned premiums grew.
Gross & Net Written Premiums
Gross written premiums represents total premiums from insurance policies that we write during a reporting period based on the
effective date of the individual policy. Net written premiums are gross written premiums less that portion of premiums that we cede
to third party reinsurers or the PORCs under reinsurance agreements. The amount ceded to each reinsurer is based on the contractual
formula contained in the individual reinsurance agreements. Net earned premiums are the earned portion of our net written premiums.
We earn insurance premiums on a pro-rata basis over the term of the policy. At the end of each reporting period, premiums written
that are not earned are classified as unearned premiums, which are earned in subsequent periods over the remaining term of the policy.
Written Premiums
($ in thousands, unaudited)
Credit Protection
Warranty
Programs
Services and Other
Insurance Total
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
Gross written premiums
Net written premiums
$ 488,183 $ 527,452
$ 62,433 $ 50,545
$ 157,649 $ 107,977
$
22 $
257,601
121,737
46,076
42,004
33,494
18,355
—
33
—
$ 708,287 $ 686,007
337,171
182,096
Year Ended December 31,
Total gross written premiums for the year ended December 31, 2016 were $708.3 million, which represented an increase of $22.3
million or 3.2% from the prior year period. The amount of business retained was 47.6%, up from 26.5% in the prior year period as
the Company retained more risk in 2016 than 2015. Total net premiums written for the year ended December 31, 2016 were $337.2
million, up $155.1 million or 85.2% from the same period year-over-year. The largest driver of the increase in retention and net written
premiums was related to the transaction mentioned earlier where the Company re-assumed contracts of $138.7 million which were
previously reinsured with a third party. Credit protection net premiums written for the year ended December 31, 2016 were $257.6
million, higher than the previous year period by $135.9 million primarily as a result of this assumed business. For 2016, warranty
product net written premiums were $46.1 million, up $4.1 million from 2015 and program products were $33.5 million, up $15.1
million from 2015. Warranty and programs premium growth is primarily driven by increased policies written for furniture, appliances
and non standard auto products. We believe there are additional opportunities to expand our warranty and programs insurance business
model to other niche products and markets.
Operating Results - Non-GAAP
Product Underwriting Margin
The following table presents product specific revenue and expenses within the specialty insurance segment for the fiscal years ended
December 31, 2016 and 2015. As mentioned above, we generally limit the underwriting risk we assume through the use of both
reinsurance (e.g., quota share and excess of loss) and retrospective commission agreements with our partners (e.g., commissions paid
adjust based on the actual underlying losses incurred), which manage and mitigate our risk. Period-over-period comparisons of revenues
are often impacted by the PORCs and clients’ choice as to whether to retain risk, specifically with respect to the relationship between
service and administration expenses and ceding commissions, both components of revenue, and the offsetting policy and contract
benefits and commissions paid to our partners and reinsurers. Generally, when losses are incurred, the risk which is retained by our
34
partners and reinsurers is reflected in a reduction in commissions paid. In order to better explain to investors the net financial impact
of the risk retained by the Company of the insurance contracts written and the impact on profitability, we use the Non-GAAP metric
- As Adjusted Underwriting Margin. For the same reasons that we adjust our combined ratio for the effects of purchase accounting,
VOBA impacts can also mask the actual relationship between revenues earned and the offsetting reductions in commissions paid, and
thus the period over period net financial impact of the risk retained by the Company. As such, we believe that presenting underwriting
margin provides useful information to investors and aligns more closely to how management measures the underwriting performance
of the business.
As Adjusted Underwriting Margin - Non-GAAP
($ in thousands, unaudited)
Credit Protection
Warranty
Programs
Services and Other
Insurance Total
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
Year Ended December 31,
As Adjusted Revenues:
Net earned premiums
Service and administrative fees
Ceding commissions
Other income
Less product specific expenses:
$ 161,480 $ 120,936
$ 36,848 $ 29,810
$ 31,108 $ 15,519
$
— $
— $ 229,436 $ 166,265
44,978
25,197
283
35,380
46,601
280
51,015
76,373
10,888
4,719
8,104
9,572
114,985
126,044
2
63
26
5,877
—
5
—
115
—
—
25,199
46,627
2,508
2,089
2,859
8,361
Policy and contract benefits
38,966
27,199
Commission expense
114,645
As Adjusted underwriting margin (1) $ 64,769 $ 61,353
128,203
40,339
23,776
46,373
33,868
27,470
12,581
5,436
2,233
8
583
159
170
106,783
86,312
157,998
150,916
$ 23,813 $ 31,845
$
9,095 $
5,539
$ 10,021 $ 11,332
$ 107,698 $ 110,069
(1) For further information relating to the Company’s adjusted underwriting margin, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”
As Adjusted Underwriting Margin
As adjusted underwriting margin for the year ended December 31, 2016 was $107.7 million, down from $110.1 million in 2015. Credit
protection as adjusted underwriting margin was $64.8 million, an increase from 2015 results by $3.4 million or 5.6%. Credit protection
products continue to provide opportunities for steady growth through a combination of expanded product offerings and new clients.
As adjusted underwriting margin for warranty products was $23.8 million for 2016, down $8.0 million or 25.2% from 2015. We
continue to experience dampening effects from our mobile protection products given competitive pressures. Programs as adjusted
underwriting margin for 2016 was $9.1 million, up 64.2% from 2015, due to increased earned premiums and service and administrative
fees. Our programs continue to provide opportunity for growth through expanded product offerings, new clients and geographic
expansion. Services and other contributed $10.0 million in 2016, down $1.3 million from 2015 as certain business processing services
are in run-off.
Policy and contract benefits, which include net losses, loss adjustments and member benefit claims, were $106.8 million for the year
ended December 31, 2016, up $20.5 million period-over-period. The increase in net losses over the prior year period was a function
of growth in earned premiums in credit and specialty products, partially offset by lower claims in mobile devices consistent with the
decline in written premiums.
Commission expense, excluding the impacts of VOBA, was $158.0 million for the year ended December 31, 2016, up $7.1 million,
driven by the increase in policies issued in the credit life and specialty auto warranty and insurance products. The increase was driven
by growth in earned premiums in credit and specialty products, slightly offset by reduced payments to our distributors and retailers
as a result of our partners’ absorption of losses from increased claims activity in the South and Southeast regions of the United States.
Additionally, warranty commissions were down $10.1 million as a result of declines in the mobile protection product.
Insurance Operating Ratios
We use the combined ratio as an insurance operating metric to evaluate our underwriting performance, both overall and relative to
peers. Expressed as a percentage, it represents the relationship of policy and contract benefits, commission expense (net of ceding
commissions), employee compensation and benefits, and other expenses to net earned premiums, service and administrative fees, and
other income. Investors use this ratio to evaluate our ability to profitably underwrite the risks we assume over time and manage our
operating costs. A combined ratio less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects
an underwriting loss. Since VOBA purchase accounting adjustments impact revenues and expenses related to acquired contracts
differently from newly originated, we also show the combined ratio on an as adjusted basis, eliminating the accounting effects of
VOBA. Management believes showing an as adjusted combined ratio provides useful information to investors to compare period over
period operating results. Following is a summary of these performance metrics for the years ended December 31, 2016 and 2015.
35
Fiscal year 2014 is not presented given the comparative ratios are less meaningful with only one month of results and the inclusion
of acquisition related expenses.
Operating Ratios
Insurance operating ratios:
Combined ratio
As adjusted Combined ratio - Non-GAAP (1)
Year Ended December 31,
2016
2015
87.9%
89.5%
77.9%
87.4%
(1) For further information relating to the Company’s as adjusted combined ratio, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”
The combined ratio for 2016 was 87.9% which was an increase from 77.9% in 2015. This increase was primarily driven by VOBA
purchase accounting impacts which are outlined by line item in the “VOBA Impacts” table above. These relative changes from 2015
to 2016 included a year-over-year increase in revenues of $16.9 million, which was more than offset by year-over-year increase in
commission expense of $34.4 million, both due to the impact of VOBA. The combined impact of these drivers caused the combined
ratio to deteriorate. The as adjusted combined ratio, which excludes these purchase accounting impacts, was 89.5% for 2016, compared
to 87.4% for 2015 with the increase driven primarily by the reduction in underwriting margins mentioned above.
Investment Portfolio
The investment portfolio consists of assets contributed by Tiptree, cash generated from operations, and from insurance premiums
written. The investment portfolio of our regulated insurance companies, captive reinsurance company and warranty business are
subject to different regulatory considerations, including with respect to types of assets, concentration limits, affiliate transactions and
the use of leverage. Our investment strategy is designed to achieve attractive risk-adjusted returns across select asset classes, sectors
and geographies while maintaining adequate liquidity to meet our claims payment obligations.
In managing our investment portfolio we analyze net investments and net portfolio income, which are non-GAAP measures. Our
presentation of net investments equals total investments plus cash and cash equivalents minus asset based financing of investments.
Our presentation of net portfolio income equals net investment income plus realized and unrealized gains and losses and minus interest
expense associated with asset based financing of investments. Net investments and net portfolio income are used to calculate average
annualized yield, which management uses to analyze the profitability of our investment portfolio. Management believes this
information is useful since it allows investors to evaluate the performance of our investment portfolio based on the capital at risk and
on a non-consolidated basis. Our calculation of net investments and net portfolio income may differ from similarly titled non-GAAP
financial measures used by other companies. Net investments and net portfolio income are not measures of financial performance or
liquidity under GAAP and should not be considered a substitute for total investments or net investment income. See “—Non-GAAP
Reconciliations” for a reconciliation to GAAP total investments and investment income.
Investment Portfolio - Non-GAAP
($ in thousands)
Cash and cash equivalents
Available for sale securities, at fair value
Equity securities, trading, at fair value
Loans, at fair value (1)
Real estate, net
Other investments
Net investments
Net investment income
Realized gains (losses)
Unrealized gains
Interest expense
Net portfolio income
Average Annualized Yield % (2)
2014
$
$
$
Year Ended December 31,
2015
13,909
184,703
3,786
60,078
2,196
4,191
$ 268,863
2016
26,020
146,171
48,612
103,937
23,579
3,957
$ 352,276
$
11,072
171,128
—
—
—
3,772
185,972
12,981
4,720
10,042
(3,155)
24,588
$
$
5,455
(568)
1,633
(832)
5,688
$
8.0%
2.5%
279
5
—
—
284
NM%
(1) Loans, at fair value, net of asset based debt, see “—Non-GAAP Reconciliations”, for a reconciliation to GAAP financials.
(2) Average Annualized Yield % represents the ratio of net investment income, realized and unrealized gains (losses) less investment portfolio interest expense to the average of the prior
five quarters total investments less investment portfolio debt plus cash. NM% represents “not meaningful” as the results in the table represent one month of Fortegra income.
36
Net investments have grown 31.0% from $268.9 million at year ended December 31, 2015 to $352.3 million at year ended December
31, 2016, through a combination of internal growth, increased retention of premiums written, and assets contributed by the Company
to further capitalize Fortegra.
Our net investment income includes interest and dividends earned on our invested assets. We report net realized gains and losses on
our investments separately from our net investment income. Net realized gains occur when we sell our investment securities for more
than their costs or amortized costs, as applicable. Net realized losses occur when we sell our investment securities for less than their
costs or amortized costs, as applicable, or we write down the investment securities as a result of other-than-temporary impairment.
We report net unrealized gains (losses) on securities classified as available-for-sale separately within accumulated other comprehensive
income on our balance sheet. For loans, at fair value, and equity securities classified as trading securities, we report unrealized gains
(losses) within net realized gains (losses) on investment on the consolidated statement of income.
2016 net investment portfolio income was $24.6 million compared to $5.7 million in 2015. The average annualized yield improvement
from 2.5% in 2015 to 8.0% in 2016 was primarily driven by increases in net investment income of $7.5 million, realized gains of $5.3
million, and unrealized gains of $8.4 million related to loans and equities.
Adjusted EBITDA
Adjusted EBITDA was $60.5 million and $43.3 million for the year ended December 31, 2016 and 2015 respectively. The key drivers
of growth were similar to those that impacted pre-tax results and include increased investment income and gains, in addition to
increased product revenues, which were offset in part by increased commission expense and policy and contract benefits as written
premium grew. See “—Non-GAAP Reconciliations” for a reconciliation to GAAP pre-tax income.
Asset Management
The Company’s asset management segment is comprised of TAMCO and its primary subsidiary, Telos, which earns revenues from
CLOs under management, including management fees, distributions and realized and unrealized gains on the Company’s holdings of
subordinated notes. Also included in the segment are the management fees, investment earnings and costs associated with our legacy
tax-exempt securities business, CLO warehouse facilities and our credit hedging strategies. As of December 31, 2016, total fee earning
AUM was $1.9 billion, which was flat to 2015 fee earning AUM. Total investment in CLO subordinated notes and management fee
participation rights, at fair market value, as of December 31, 2016 was $57.3 million, up $26.4 million from December 31, 2015. On
January 23, 2017 the Company sold its investment in Telos 5 for consideration of $15.9 million, reducing our investment in CLO
subordinated notes and management fee participation rights to $41.4 million subsequent to year end.
Operating Results
($ in thousands)
Revenues:
Net realized and unrealized gains (losses)
Management fee income
Other income
Total revenue
Expenses:
Employee compensation and benefits
Interest expense
Other expenses
Total expenses
Net income attributable to consolidated CLOs
Pre-tax income (loss)
Results
Year Ended December 31,
2015
2014
2016
$
$
$
$
66
9,400
3,648
13,114
6,781
746
577
8,104
20,254
25,264
$
$
$
$
(3,599) $
6,524
3,845
6,770
$
(2,143)
259
9,002
7,118
4,910
539
1,185
6,634
(6,889)
(6,753) $
$
5,782
1,595
1,075
8,452
19,525
18,191
Pre-tax income was $25.3 million compared with a loss of $6.8 million for the 2015 period, an increase of $32.0 million. Revenues,
comprised primarily of asset management fees, including incentive management fees on unconsolidated CLOs, and warehouse interest
income and realized gains, totaled $13.1 million in the year ended December 31, 2016, compared to $6.8 million for the prior year
period. The increase was driven by warehouse realized gains in 2016 against losses in 2015, an increase in incentive fees in the second
half of 2016 and the launch of Telos 7 in the second quarter of 2016. Expenses for 2016 were $8.1 million compared to $6.6 million
37
for 2015, primarily driven by increases in incentive compensation as a result of higher management and incentive fees. Net income
attributable to consolidated CLOs was up $27.1 million primarily as unrealized losses from 2015 were recovered through unrealized
gains in 2016, as discussed in further detail below.
Pre-tax income for 2015 was a loss of $6.8 million, compared to income of $19.5 million for 2014. Revenues totaled $6.8 million in
the year ended December 31, 2015, compared to $7.1 million for the prior year period, primarily driven by declines in the legacy tax
exempt portfolio offset by management fees from the deconsolidated CLOs. Expenses for 2015 were $6.6 million compared to $8.5
million for 2014, primarily driven by declines in legacy tax exempt security portfolios and lower incentive compensation given
reductions in management and incentive fees. Net income attributable to consolidated CLOs was down $26.4 million from 2014,
driven primarily by $17.9 million of higher realized and unrealized losses incurred on the Company’s holdings of CLO subordinated
notes and the reclassification to revenue of the management fees on Telos 1-4 as they were deconsolidated when the subordinated
notes related to these CLOs were sold.
Operating Results - Non-GAAP
As Adjusted Revenues
Asset management as adjusted revenues include revenues from CLOs, legacy tax-exempt securities business, CLO warehouse facilities
and our credit hedging strategies. The Company earns revenues from CLOs under management, whether consolidated or
deconsolidated, which include fees earned for managing the CLOs, distributions received from the Company’s holdings of subordinated
notes issued by the CLOs and realized and unrealized gains and losses from the Company’s holdings of subordinated notes. The
revenue associated with the management fees and distributions earned and gains and losses on the subordinated notes attributable to
the consolidated CLOs are reported as “net income (loss) attributable to the consolidated CLOs” in the Company’s financial statements.
The table below shows the Company’s share of the results attributable to the CLOs, which were consolidated, on a deconsolidated
basis. This presentation is a non-GAAP measure. Management believes this information is helpful for period-over-period comparative
purposes as certain of our CLOs were consolidated for only some of the periods presented below. In addition, the Non-GAAP
presentation allows investors the ability to calculate management fees as a percent of AUM, a common measure used by investors to
evaluate asset managers, and which is one of the performance measures upon which management is compensated. While consolidation
versus deconsolidation impacts the presentation of revenues, it does not impact expenses or pre-tax income. See “—Non-GAAP
Reconciliations” for a reconciliation to GAAP revenues.
As Adjusted Revenues (1)
($ in thousands)
Assets Under Management:
Fee earning AUM
Non fee earning AUM
As Adjusted Revenues:
Management fees
Distributions
Realized and unrealized gains (losses)
Other income
Total as adjusted revenues
Year Ended December 31,
2015
2014
2016
$ 1,911,236
178,955
$ 1,924,598
247,290
$ 2,081,179
945
$
$
12,152
15,725
2,576
2,915
33,368
$
$
$
10,655
14,676
(29,079)
3,629
(119) $
12,029
15,720
(10,108)
9,002
26,643
(1) For further information relating to the Asset Management as adjusted revenues, including a reconciliation to GAAP revenues, see “Non-GAAP Reconciliations” on page 45.
For the year ended December 31, 2016, as adjusted revenues were $33.4 million compared to a loss of $0.1 million in the same period
in 2015. The increases were driven primarily by increased management and incentive fees of $1.5 million, increased distributions of
$1.0 million, and a reduction in losses of $31.7 million. The increased management fees and distributions were primarily due to the
launch of Telos 7 combined with incentive fees from our older vintage CLOs. The reduction in the realized and unrealized losses were
due to a recovery of the marked-to-market position on our CLOs and CLO warehouse in the 2016 period of $2.6 million as compared
to the unrealized losses taken in 2015 of $29.1 million. Given the recovery in CLO values throughout 2016, and the volatility in
subordinated notes, management has reduced the Company’s exposure by selling its subordinated notes in Telos 5 on January 23,
2017 for total consideration of $15.9 million.
For 2015, as adjusted revenues were a loss of $0.1 million compared to revenue of $26.6 million in 2014. The lower management
fees were due to the runoff of Telos 1 and Telos 2, which were past their reinvestment period and lower fees on later CLOs. The
Company realized GAAP losses from the sale of its subordinated notes issued by Telos 2 and Telos 4 during 2015, which generated
38
net cash proceeds of $39.7 million and tax losses of approximately $12.5 million. The unrealized loss in 2015 was due to the mark-
to-market write-down in our retained CLO subordinated note holdings of $29.1 million. The lower distributions from the subordinated
notes in 2015 compared to the prior year is primarily due to our sales of CLO subordinated notes in 2015. The other income decline
was a result of lower interest income on CLO warehouses and run-off of legacy investments in tax exempt securities.
Adjusted EBITDA
Adjusted EBITDA was $25.3 million for the year ended December 31, 2016, compared to a loss of $6.8 million for the comparable
prior year period. The increase was driven by the same factors discussed above under “Results.” Adjusted EBITDA for 2015 declined
by $24.9 million from 2014 primarily as a result of the unrealized and realized marks on CLO subordinated notes, in addition to the
other factors mentioned above. See “—Non-GAAP Reconciliations” for a reconciliation to GAAP pre-tax income.
Senior Living
We operate our senior living segment through Care which is focused on investing in seniors housing properties including senior
apartments, independent living, assisted living, memory care and, to a lesser extent, skilled nursing facilities. As of December 31,
2016, Care’s portfolio consists of 29 properties across 11 states primarily in the Mid-Atlantic and Southern United States comprised
of 13 Triple Net Lease (“NNN”) Properties and 16 Managed Properties.
In Triple Net Lease Properties, we own the real estate and enter into a long term lease with an operator who is typically responsible
for bearing operating costs, including maintenance, utilities, taxes, insurance, repairs and capital improvements. The operations of
the Triple Net Lease Properties are not consolidated since we do not manage or own the underlying operations. For Triple Net Lease
Properties’ operations, we recognize primarily rental income from the lease since substantially all expenses are passed through to the
tenant. In Managed Properties, we generally own between 65-90% of the real estate and the operations with affiliates of the management
company owning the remainder. We therefore consolidate all of the assets, liabilities, income and expense of the Managed Properties
operations in segment reporting. For each of the years ended December 31, 2016, 2015 and 2014, operating results present revenues
and expenses, which include amounts attributable to non-controlling interests.
Operating Results
($ in thousands)
Revenues:
Net realized and unrealized gains (losses)
Rental and related revenue
Other income
Total revenue
Expenses:
Employee compensation and benefits
Interest expense
Depreciation and amortization expenses
Other expenses
Total expenses
Pre-tax income (loss)
Results
Year Ended December 31,
2015
2014
2016
—
59,636
1,095
60,731
$
(194)
45,372
950
46,128
$
7,006
20,242
2,033
29,281
24,000
8,691
14,166
19,698
66,555
$
(5,824) $
18,479
6,796
14,546
15,842
55,663
$
(9,535) $
8,056
4,111
7,181
6,762
26,110
3,171
$
$
$
For the year ended December 31, 2016, we had a pre-tax loss of $5.8 million compared with a pre-tax loss of $9.5 million for the
same period in 2015. The properties acquired in 2016 and 2015 have generated higher rental and related revenue in 2016 compared
to 2015. However the Company also incurred additional depreciation, amortization and interest expenses as a consequence of the
acquisition of these properties. As a result, the lower loss was driven by greater growth in rental income, due to both improvements
in the operating performance of the underlying properties and the addition of new properties, relative to the growth in operating
expenses, including the depreciation and amortization and interest expense related to the acquired properties.
For 2015, we had a pre-tax loss of $9.5 million, compared with pre-tax income of $3.2 million in 2014. In 2014, we recorded a gain
of approximately $7.9 million on the repayment in full to Care of a loan that was secured by real property (the “Westside Loan”).
There was no similar gain in 2015. Several properties acquired in 2015 required restructuring and capital expenditures to increase
occupancy and rental rates. As a result, we expected a delay in growth in revenue as the properties were in the turnaround phase. As
39
such, the increased number of properties generated higher rental and other income in 2015 compared with 2014, but on a lag relative
to the additional depreciation, amortization and interest expenses as a consequence of the growth and additional capital investment
in the newer properties.
Revenues
Revenues were $60.7 million for the year ended December 31, 2016, compared with $46.1 million for the comparable 2015 period,
an increase of $14.6 million or 31.7%. The increase in rental and related revenue was primarily due to the facilities acquired since
the first quarter of 2015, including five properties acquired in 2016 and eleven properties acquired in 2015.
Our total revenues were $46.1 million for 2015, compared with $29.3 million for 2014, an increase of $16.8 million or 57.3%. Excluding
the one-time $7.9 million gain from the repayment of the Westside Loan in 2014, total revenue increased $24.7 million or 115.4%
year over year. Rental and related income in 2015 was $45.4 million, compared with $20.2 million for 2014, an increase of $25.2
million or 124.1% from the prior year. The increase in rental and related revenue was primarily due to the addition of nine Managed
Properties, including five managed properties added in the first quarter of 2015 and four managed properties added in the fourth
quarter of 2014.
Expenses
Expenses are comprised of interest expenses on borrowings, payroll expenses (including employees of the managers at each of Care’s
Managed Properties), professional fees, depreciation and amortization of properties and leases acquired and other expenses.
Expenses for the year ended December 31, 2016 were $66.6 million, compared with $55.7 million for 2015, an increase of $10.9
million or 19.6%. The primary increases period-over-period include property operating expenses of $8.2 million (including employee
compensation and benefits and other expenses), interest expense of $1.9 million, payroll and other costs of $1.2 million, partially
offset by a reduction in depreciation and amortization expenses of $0.4 million, which also included a decrease in amortization of in-
place leases acquired. The increase in property operating expenses was primarily attributable to consolidation of the expenses of the
five Managed Properties acquired in the first quarter of 2015, and the three acquired in the first and third quarters of 2016. The
Company is party to interest rate swaps in order to hedge interest rate exposure associated with its real estate holdings. These instruments
swap fixed to floating rate cash streams in order to maintain the economics on the mortgage debt. As a result of movements in interest
rates over the year ended December 31, 2016, an unrealized loss was recorded in other expenses for $1.2 million for swaps that had
not been previously designated as hedging relationships.
Expenses for 2015 were $55.7 million, compared with $26.1 million for 2014, an increase of $29.6 million or 113.2%. Interest expense
was $6.8 million for 2015, compared with $4.1 million for 2014. Payroll expenses were $18.5 million for 2015 compared with $8.1
million for 2014. Depreciation and amortization expenses were $14.5 million in 2015, compared with $7.2 million in 2014. Other
expenses, which include property operating expenses, office expenses, property acquisition costs, professional fees and property taxes,
were $15.8 million for 2015, compared with $6.8 million for 2014. The increase in expenses was primarily attributable to consolidation
of the expenses of the nine Managed Properties added in the fourth quarter of 2014 and first quarter of 2015 and an increase in
amortization of in-place leases acquired.
Operating Results - Non-GAAP
Segment NOI
In addition to Adjusted EBITDA, we also evaluate performance of our senior living segment based on net operating income (“NOI”),
which is a non-GAAP measure. NOI is a common non-GAAP measure in the real estate industry used to evaluate property level
operations. We consider NOI an important supplemental measure to evaluate the operating performance of our senior living segment
because it allows investors, analysts and our management to assess our unlevered property-level operating results and to compare our
operating results between periods and to the operating results of other senior living companies on a consistent basis. Agreements with
our operators are structured such that they are incentivized to grow NOI, and it is a significant component in determining the
compensation paid to Care’s management team. We define NOI as rental and related revenue less property operating expense. Property
operating expenses and resident fees and services are not relevant to Triple Net Lease Properties since we do not manage the underlying
operations and substantially all expenses are passed through to the tenant. Our calculation of NOI may differ from similarly titled
non-GAAP financial measures used by other companies. NOI is not a measure of financial performance or liquidity under GAAP and
should not be considered a substitute for pre-tax income.
40
Product NOI - Non-GAAP (1)
($ in thousands)
Triple Net Leases
Managed Properties
Segment NOI
Year Ended December 31,
2015
2014
2016
$
7,663
14,471
$ 22,134
$
6,515
9,578
$ 16,093
$
$
3,892
5,779
9,671
Managed Property NOI Margin % (2)
27.8%
24.6%
35.3%
(1) For further information relating to the Senior Living NOI, including a reconciliation to GAAP pre-tax income, see “—Non-GAAP Reconciliations.”
(2) NOI Margin % is the relationship between Managed Property segment NOI and Rental and related revenue.
NOI was $22.1 million for the year ended December 31, 2016, compared with $16.1 million in the prior year period, an increase of
$6.0 million or 37.5%. The primary drivers of improvement in NOI in both periods was an increase in rental revenue partially offset
by increased property operating expenses. As mentioned earlier, several of our recent acquisitions included properties that the Company
and its operating partners are enhancing through renovation projects and other capital upgrades in an effort to grow revenue and to
allow them to operate more efficiently. As indicated in the table above, NOI margins on Managed Properties improved from 24.6%
in the year ended December 31, 2015 to 27.8% for year ended December 31, 2016. As the more recently acquired facilities ramp up
and stabilize, we expect our results to reflect additional NOI margin improvements.
NOI margin decreased from 35.3% in 2014 to 24.6% in 2015 as a result of the lag in revenue growth related to the property acquisitions
where the enhancements and capital upgrades were being performed and the increase in mix of Managed Properties.
Adjusted EBITDA
Adjusted EBITDA was $10.5 million for the year ended December 31, 2016, compared to $6.6 million in the year ended December
31, 2015, driven primarily increases in NOI partially offset by increased interest expense on new acquisitions.
Adjusted EBITDA was $6.6 million for 2015 compared to $10.4 million in 2014, a decline of $3.8 million primarily due to the inclusion
of the one-time repayment of the Westside Loan in 2014, partially offset by improved NOI due to property acquisitions. See “—Non-
GAAP Reconciliations” for a reconciliation to GAAP pre-tax income.
Specialty Finance
The specialty finance segment is comprised of our mortgage origination business, including, Reliance, which is 100% owned and
Luxury, which is 67.5% owned by us and the lending operations of Siena, a commercial finance company, which is 62% owned by
us. The results of Reliance are included in our specialty finance results from July 1, 2015, the date of acquisition.
Operating Results
($ in thousands)
Revenues:
Net realized and unrealized gains (losses)
Other income
Total revenue
Expenses:
Employee compensation and benefits
Interest expense
Depreciation and amortization expenses
Other expenses
Total expenses
Pre-tax income (loss)
Results
Year Ended December 31,
2015
2016
2014
68,920
26,511
95,431
57,494
6,290
870
22,607
87,261
8,170
$
$
$
34,563
20,436
54,999
31,633
3,558
760
12,783
48,734
6,265
$
$
$
7,818
7,405
15,223
10,690
1,530
499
4,466
17,185
(1,962)
$
$
$
For the year ended December 31, 2016, pre-tax income was $8.2 million compared with $6.3 million for 2015. Revenues were $95.4
million for 2016, compared with $55.0 million for 2015, an increase of $40.4 million or 73.5%. Expenses were $87.3 million in 2016,
41
compared with $48.7 million in 2015, an increase of $38.6 million or 79.3%. The increases are primarily driven by the acquisition of
Reliance and increased originations volume within our mortgage and commercial finance lending businesses.
Pre-tax income was $6.3 million for 2015, compared with a net loss of $2.0 million for 2014. The key drivers of the increase were
higher loan volume, including the impact from the acquisition of Reliance. Revenues were $55.0 million for 2015, compared with
$15.2 million for 2014, an increase of $39.8 million or 262%. Expenses were $48.7 million in 2015, compared with $17.2 million in
2014, an increase of $31.5 million or 183%. Higher revenues more than offset higher expenses resulting in improving operating
margins.
Revenues
Revenues are comprised of gain on sale of mortgages originated and sold to investors, gains and losses on the mortgage pipeline of
interest rate lock commitments and mortgage loans held for sale and their associated hedges, and net interest income and fees associated
with our commercial lending products and the mortgage origination business.
Revenues increased from $55.0 million in 2015 to $95.4 million in 2016, primarily driven by higher volume and the inclusion of
Reliance for the full year. Mortgage origination volume improved 49.1% from $1.2 billion for the year ended December 31, 2015 to
$1.9 billion for 2016 while realizing 100.3 basis points improvement in revenue margins year-over-year. This was primarily a result
of the inclusion of Reliance’s volume for a full year and the change in product mix towards higher margin government and agency
products. In addition, commercial lending grew with average earning assets of $80.8 million in 2016, compared with $56.0 million
in 2015, an increase of 44.3%. The improvement was driven by increased loan originations and higher utilization rates of facilities
by borrowers which increased interest income and loan fees, reported in other income.
For 2015, total revenues were $55.0 million compared to $15.2 million in 2014. The increase was primarily driven by a combination
of the acquisition of Reliance and increased loan volume at Luxury, which contributed to a year over year improvement in mortgage
origination volume of 131%, up from $0.5 billion in 2014 to $1.2 billion in 2015. Revenue margins improved by 81% year over year,
primarily as a result of the inclusion of higher margin FHA/VA and agency products. Commercial lending average earning assets were
$56.0 million in 2015, compared with $29.3 million in 2014, an increase of 91%. The improved revenues were primarily driven by
higher interest income on the loans and fees associated with the Company’s lending activities.
Expenses
Increased revenues were partially offset by higher expenses, which increased from $48.7 million for the year ended December 31,
2015 to $87.3 million for 2016. Expenses are composed of payroll and employee commissions, interest expense, professional fees
and other expenses. The primary driver of higher expenses for 2016 was a combination of the inclusion of Reliance for the full year,
higher payroll and other employee expenses as the Company increased the number of loan officers, plus higher marketing costs to
support the higher number of sales personnel. During 2016, the specialty finance headcount increased from 485 to 595, or by 22.7%.
In addition to the increase in headcount and marketing expenses, the change in the fair value of the contingent earn-out liability at
Reliance represented an increase in expense year-over-year of $2.6 million.
For 2015, total expenses were $48.7 million, compared to $17.2 million for 2014. The primary driver of higher expenses was a
combination of the inclusion of Reliance, higher commissions and loan origination expense as the result of increased volumes within
our mortgage and commercial lending products.
Operating Results - Non GAAP
Adjusted EBITDA
Adjusted EBITDA was $10.5 million for the year ended December 31, 2016 compared to $5.9 million in 2015. The increases were
driven by the same factors that impacted pre-tax income explained above. For 2015, Adjusted EBITDA increased by $7.4 million as
a result of the drivers that impacted pre-tax income above. See “—Non-GAAP Reconciliations” for a reconciliation to GAAP pre-tax
income.
Corporate and Other
Corporate and other incorporates revenues from non-core legacy principal investments and expenses including interest expense on
the holding company credit facility and employee compensation and benefits, professional fees and other expenses.
42
Operating Results
($ in thousands)
Revenues:
Net realized and unrealized gains (losses)
Other income
Total revenue
Expenses:
Employee compensation and benefits
Interest expense
Depreciation and amortization expenses
Other expenses
Total expenses
Pre-tax income (loss)
Results
Year Ended December 31,
2015
2014
2016
3,552
156
3,708
$
(560)
234
(326) $
1,823
693
2,516
13,400
4,730
248
16,428
34,806
$
(31,098) $
14,002
5,630
145
14,325
34,102
$
(34,428) $
4,529
4,668
—
8,760
17,957
(15,441)
$
$
$
For the year ended December 31, 2016, the Company recorded a loss of $31.1 million compared with a loss of $34.4 million for the
2015 period, an increase in pre-tax income of $3.3 million. The key drivers of year-over-year reduction in loss were $4.0 million
higher revenues from realized gains on the sale of certain legacy principal investments, which were partially offset by increases in
corporate expenses of $0.7 million primarily related to professional services.
For the year ended December 31, 2015, we recorded a loss of $34.4 million compared to $15.4 million in 2014, a decrease in pre-tax
income of $19.0 million. The key drivers of the year-over-year increase in loss were due to increased professional fees and other
expenses of $5.6 million, primarily as a result of our efforts to improve our reporting and controls infrastructure and increases in
employee compensation and benefits of $9.5 million, which was primarily driven by a one-time expense for a former executive of
$6.5 million.
Revenues
For the year ended December 31, 2016, revenues were $3.7 million compared to a loss of $0.3 million in the year ended December
31, 2015. The increase of $4.0 million was primarily the result of realized gains on legacy principal investments. From the 2014 to
2015 period revenues decreased from $2.5 million to a loss of $0.3 million as a result of sales of legacy principal investments and
unrealized marks incurred in 2015.
Expenses
Expenses include holding company interest expense, employee compensation and benefits, professional fees and other expenses.
Corporate employee compensation and benefits expense includes the expense of management, legal and accounting staff. Other
expenses primarily consisted of audit and professional fees, insurance, office rent and other expenses.
Employee compensation and benefits were $13.4 million in the year ended December 31, 2016, compared to $14.0 million in the year
ended December 31, 2015. Excluding the one-time charge for a former executive of $6.5 million in 2015, payroll expenses increased
by $5.9 million in the 2016 period, as the Company expanded its staff as a result of our efforts to improve our reporting and controls
infrastructure, as well as higher accrued incentive compensation expense for the year ended December 31, 2016 as compared to the
prior year as a result of higher total Adjusted EBITDA period-over-period. For 2016, 65% of employee compensation was related to
business performance.
Interest expense was $4.7 million in the year ended December 31, 2016, compared to $5.6 million in the year ended December 31,
2015. Other expenses were $16.4 million in the year ended December 31, 2016 as compared to $14.3 million in 2015. The increase
of $2.1 million was driven by increased corporate compliance costs associated with being an accelerated filer combined with incremental
consulting spend to remediate material weaknesses. Other corporate expenses, including audit and consulting fees, have expanded
primarily as a result of implementing enhanced infrastructure and controls, which we estimate was approximately $3.5 million of
incremental cost for the year ended December 31, 2016. For 2016, 58% of other expenses were associated with audit, Sarbanes-Oxley
compliance and tax professional fees.
43
From 2014 to 2015, expenses increased by $16.1 million driven by $9.5 million of employee compensation and benefits, $1.0 million
of interest expenses and $5.6 million of other expenses. Increases in employee compensation was a result of the separation expense
mentioned previously, in addition to increasing corporate headcount to improve the reporting and controls infrastructure. The increase
in other expenses was primarily driven by incremental consulting spend related to the evaluation and remediation of material
weaknesses.
Operating Results - Non-GAAP
Adjusted EBITDA
Adjusted EBITDA was a loss of $27.9 million for the year ended December 31, 2016 compared to a loss of $23.2 million in the prior
year period. The decrease in Adjusted EBITDA was driven by the same factors that impacted pre-tax income, combined with EBITDA
adjustments to reflect the timing of cash outflow for payments to a former executive. See “—Non-GAAP Reconciliations” for a
reconciliation to GAAP pre-tax income.
Provision for income taxes
The total income tax expense of $11.0 million for the year ended December 31, 2016, $1.4 million for the year ended December 31,
2015 and $4.1 million for the year ended December 31, 2014 is reflected as a component of income (loss) from continuing operations.
For the year ended December 31, 2016, the Company’s effective tax rate on income from continuing operations was equal to 25.3%,
which does not bear a customary relationship to statutory income tax rates. The effective tax rate for the year ended December 31,
2016 is lower than the U.S. federal statutory income tax rate of 35.0%, primarily due to $4.0 million of discrete tax benefits for the
period, primarily related to the tax restructuring that resulted in a consolidated corporate tax group effective January 1, 2016. See
Note-(1) Organization, in the accompanying consolidated financial statements. The Company’s effective tax rate before the restructure
benefit was equal to 34.7% for the full year 2016.
For the year ended December 31, 2015, the Company’s effective tax rate on income from continuing operations was equal to (11.1)%,
which does not bear a customary relationship to statutory income tax rates. The effective tax rate for the year ended December 31,
2015 is lower than the U.S. statutory income tax rate of 35.0%, primarily due to taxes incurred at certain corporate subsidiaries that
do not consolidate with the Company’s taxable income, tax losses generated at certain of our taxable subsidiaries which require a
valuation allowance and do not generate an income tax benefit, and state income taxes incurred on a separate legal entity basis.
For the year ended December 31, 2014, the Company’s effective tax rate on income from continuing operations was equal to 525.5%,
which does not bear a customary relationship to statutory income tax rates. Differences from the statutory income tax rate are primarily
due to state income taxes, non-deductible transaction costs incurred in connection with the Fortegra acquisition, and the effect of
changes in valuation allowance on net operating losses reported by Tiptree Inc., Siena Capital Finance Acquisition Corp., Luxury and
MFCA Funding, Inc.
Discontinued operations, net
The Company completed the sale of PFG during the second quarter of 2015. As such, there was no income from discontinued operations
in the year ended December 31, 2016 compared to $22.6 million and $7.9 million for the year ended December 31, 2015 and 2014,
respectively. For further information relating to the sale of PFG see Note—(4) Dispositions, Assets Held for Sale & Discontinued
Operations, in the accompanying consolidated financial statements.
Balance Sheet Information - as of December 31, 2016 compared to the year ended December 31, 2015
Tiptree’s total assets were $2.9 billion as of December 31, 2016, compared to $2.5 billion as of December 31, 2015. The $395.2 million
increase in assets is primarily attributable to increases in assets of consolidated CLOs, acquisitions in our senior living segment,
increases in loans at amortized cost, as well as increases in accounts receivable and deferred acquisition costs at Fortegra, offset
slightly by a reduction in loans at fair value, securities available for sale and reinsurance receivables.
Total stockholders’ equity of Tiptree was $293.4 million as of December 31, 2016 compared to $312.8 million as of December 31,
2015. The primary reason for the decrease in Tiptree’s stockholders’ equity was from the repurchase of approximately 16% of the
Company’s outstanding Class A shares, and decreases related to dividends paid and stock purchased under the stock purchase plans
described in “Part II—Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities. These reductions were partially offset by increases from shares issuance for compensation, changes in non-controlling
interests and retained earnings.
44
For the year ended December 31, 2016, the Company re-purchased 6.8 million shares for $43.8 million compared with 0.6 million
shares for $4.0 million for 2015. On June 23, 2016, the Company repurchased 5.6 million shares of Class A common stock of Tiptree
for aggregate consideration of $36.4 million. On September 14, 2016, the Company purchased 1.0 million shares of Class A common
stock for $6.1 million. Both transactions were accretive to both book value per share in the current quarter and are expected to be
accretive to earnings per share on a GAAP basis. The shares acquired are held as treasury shares and are not outstanding for accounting
or voting purposes. An additional 0.2 million shares of Class A common stock were repurchased for $1.3 million under the previously
approved stock repurchase plan. As of December 31, 2016 there are 34,983,616 shares of Tiptree Class A common stock outstanding.
NON-GAAP RECONCILIATIONS
EBITDA and Adjusted EBITDA
The Company defines EBITDA as GAAP net income of the Company adjusted to add consolidated interest expense, consolidated
income taxes and consolidated depreciation and amortization expense as presented in its financial statements and Adjusted EBITDA
as EBITDA adjusted to (i) subtract interest expense on asset-specific debt incurred in the ordinary course of its subsidiaries’ business
operations, (ii) adjust for the effect of purchase accounting, (iii) add back significant acquisition related costs, (iv) adjust for significant
relocation costs and (v) any significant one-time expenses.
Reconciliation from GAAP net income to Non-GAAP financial measures - EBITDA and Adjusted EBITDA
($ in thousands, unaudited)
Net income (loss) available to Class A common stockholders
Add: net (loss) income attributable to noncontrolling interests
Less: net income from discontinued operations
Income (loss) from Continuing Operations of the Company
Consolidated interest expense
Consolidated income taxes
Consolidated depreciation and amortization expense
EBITDA from Continuing Operations
Consolidated non-corporate and non-acquisition related interest expense(1)
Effects of Purchase Accounting (2)
Non-cash fair value adjustments (3)
Significant acquisition expenses (4)
Separation expense adjustments (5)
Adjusted EBITDA from Continuing Operations of the Company
Income from Discontinued Operations of the Company
Consolidated interest expense
Consolidated income taxes
Consolidated depreciation and amortization expense
EBITDA from Discontinued Operations
Significant relocation costs (6)
Adjusted EBITDA from Discontinued Operations of the Company
Adjusted EBITDA of the Company
Year Ended December 31,
2016
2015
2014
$
$
25,320
$
7,018
—
32,338
$
29,701
10,978
28,468
$
101,485
$
(19,183)
(5,054)
2,693
711
(1,736)
78,916
$
5,779
3,023
22,618
(13,816)
23,491
1,377
45,124
56,176
(11,861)
(24,166)
(1,300)
1,859
5,209
25,917
$
$
$
$
$
— $
22,618
—
—
—
5,226
3,796
862
— $
32,502
—
—
— $
32,502
78,916
$
58,419
$
$
$
$
$
$
$
$
$
$
(1,710)
6,294
7,937
(3,353)
12,541
4,141
11,945
25,274
(7,265)
—
—
6,121
—
24,130
7,937
11,475
5,525
4,379
29,316
5,477
34,793
58,923
(1)
(2)
(3)
(4)
(5)
(6)
The consolidated non-corporate and non-acquisition related interest expense is subtracted from EBITDA to arrive at Adjusted EBITDA. This includes interest expense
associated with asset-specific debt at subsidiaries in the specialty insurance, asset management, senior living and specialty finance segments.
Following the purchase accounting adjustments, current period expenses associated with deferred costs were more favorably stated and current period income associated with
deferred revenues were less favorably stated. Thus, the purchase accounting effect related to Fortegra increased EBITDA above what the historical basis of accounting would
have generated. The impact of this purchase accounting adjustments have been reversed to reflect an adjusted EBITDA without such purchase accounting effect.
For our senior living segment, Adjusted EBITDA excludes the impact of the change of fair value of interest rate swaps hedging the debt at the property level. For Reliance,
Adjusted EBITDA excludes the impact of changes in contingent earn-outs.
Acquisition costs include legal, taxes, banker fees and other costs associated with senior living acquisitions in 2016 and 2015 and the Fortegra acquisition in 2014.
Consists of payments pursuant to a separation agreement, dated as of November 10, 2015.
Significant relocation costs for discontinued operations included expenses incurred in connection with the move of one of our subsidiaries’ physical location from New Jersey to
Philadelphia for the year ended December 31, 2014.
45
Segment EBITDA and Adjusted EBITDA from continuing operations
($ in thousands)
Specialty insurance
Asset management
Senior living
Specialty finance
Corporate and other
Total
2016
2015
2014
2016
2015
2014
2016
2015
2014
2016
2015
2014
2016
2015
2014
2016
2015
2014
Pre-tax income/(loss)
46,804
32,012
(3,171)
25,264
(6,753)
18,191
(5,824)
(9,535)
3,171
8,170
6,265
(1,962)
(31,098)
(34,428)
(15,441)
43,316
(12,439)
788
Add back:
Interest expense
9,244
6,968
637
746
539
1,595
8,691
6,796
4,111
6,290
3,558
1,530
4,730
5,630
4,668
29,701
23,491
12,541
Depreciation and
amortization
expenses
13,184
29,673
4,265
—
—
—
14,166
14,546
7,181
870
760
499
248
145
—
28,468
45,124
11,945
Segment EBITDA
69,232
68,653
1,731
26,010
(6,214)
19,786
17,033
11,807
14,463
15,330
10,583
67
(26,120)
(28,653)
(10,773)
101,485
56,176
25,274
EBITDA adjustments:
Asset-specific debt
interest
Effects of purchase
accounting
Non-cash fair value
adjustments
Significant
acquisition expenses
Separation expenses
Segment Adjusted
EBITDA
(3,652)
(1,138)
(29)
(746)
(539)
(1,595)
(8,691)
(6,796)
(4,111)
(6,094)
(3,388)
(1,530)
(5,054)
(24,166)
—
—
—
— 6,121
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,416
—
—
711
—
1,579
—
—
—
—
—
—
—
1,277
(1,300)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
280
(1,736)
5,209
— (19,183)
(11,861)
(7,265)
—
—
—
—
(5,054)
(24,166)
2,693
(1,300)
—
—
711
1,859
6,121
(1,736)
5,209
—
60,526
43,349
7,823
25,264
(6,753)
18,191
10,469
6,590
10,352
10,513
5,895
(1,463)
(27,856)
(23,164)
(10,773)
78,916
25,917
24,130
Book Value per share, as exchanged - Non-GAAP
Book value per share, as exchanged assumes full exchange of the limited partners units of TFP for Tiptree Class A common stock.
Management believes the use of this financial measure provides supplemental information useful to investors as book value is
frequently used by the financial community to analyze company growth on a relative per share basis. The following table provides a
reconciliation between total stockholders’ equity and total shares outstanding, net of treasury shares, for the fiscal years ended December
31, 2016, 2015 and 2014.
($in thousands, unaudited, except per share information)
Total stockholders’ equity
Less non-controlling interest - other
Total stockholders’ equity, net of non-controlling interests - other
Total Class A shares outstanding (1)
Total Class B shares outstanding
Total shares outstanding
Book value per share, as exchanged (2)
For the year ended December 31,
2016
2015
2014
$
390,144
$ 397,694
20,636
15,576
$
369,508
$ 382,118
$
$
28,388
8,049
36,437
34,900
8,049
42,949
$
10.14
$
8.90
$
401,621
27,015
374,606
31,830
9,770
41,601
9.00
(1) As of December 31, 2016, excludes 6,596,000 shares of Class A common stock held by consolidated subsidiaries of the Company. See Note 24—Earnings per Share, for further
discussion of potential dilution from warrants
Specialty Insurance - As Adjusted Underwriting Margin - Non-GAAP
Underwriting margin is a measure of the underwriting profitability of our specialty insurance segment. It represents net earned
premiums, service and administrative fees, ceding commissions and other income less policy and contract benefits and commission
expense. We use the combined ratio as an insurance operating metric to evaluate our underwriting performance, both overall and
relative to peers. Expressed as a percentage, it represents the relationship of policy and contract benefits, commission expense (net
of ceding commissions), employee compensation and benefits, and other expenses to net earned premiums, service and administrative
fees, and other income. The following table provides a reconciliation between as adjusted underwriting margin and pre-tax income
for the fiscal years ended December 31, 2016 and 2015.
46
($ in thousands, unaudited)
Revenues:
Net earned premiums
Service and administrative fees
Ceding commissions
Other income
Less underwriting expenses:
Policy and contract benefits
Commission expense
Underwriting Margin - Non-GAAP
Less operating expenses:
Employee compensation and benefits
Other expenses
Combined Ratio
Plus investment revenues:
Net investment income
Net realized and unrealized gains
Less other expenses:
Interest expense
Depreciation and amortization expenses
Pre-tax income (loss)
Year Ended December 31,
GAAP
Non-GAAP adjustments
Non-GAAP - As Adjusted
2016
2015
2016
2015
2016
2015
$
229,436
$
166,265
$
— $
— $
229,436
$
166,265
109,348
24,784
2,859
106,784
147,253
106,525
43,217
8,361
86,312
105,751
5,638
416
—
—
10,745
19,518
3,410
—
—
45,166
114,986
25,200
2,859
106,784
157,998
126,043
46,627
8,361
86,312
150,917
$
112,390
$
132,305
$
(4,691)
$
(22,238)
$
107,699
$
110,067
37,937
32,964
38,786
31,386
87.9%
77.9%
12,981
14,762
9,244
13,184
46,804
$
5,455
1,065
6,968
29,673
32,012
$
—
363
—
—
—
—
—
1,928
37,937
33,327
38,786
33,314
—
—
—
—
89.5%
87.4%
12,981
14,762
9,244
9,902
45,032
5,455
1,065
6,968
10,353
27,166
(3,282)
$
(1,772)
$
(19,320)
(4,846)
Specialty Insurance Investment Portfolio - Non-GAAP
The following table provides a reconciliation between segment total investments and net investments for the fiscal years ended
December 31, 2016, 2015 and 2014.
($ in thousands, unaudited)
Total Investments
Investment portfolio debt (1)
Cash and cash equivalents
Net investments - Non-GAAP
Year Ended December 31,
2016
2015
2014
$
$
472,800
$
308,965
$
174,900
(146,544)
26,020
(54,011)
13,909
352,276
$
268,863
$
—
11,072
185,972
(1) Consists of asset-based financing on certain credit investments and NPLs, net of deferred financing costs, see Note 13 - Debt, net for further details.
Senior Living Product NOI - Non-GAAP
The following table provides a reconciliation between segment NOI and pre-tax income (loss) for the fiscal years ended December
31, 2016, 2015 and 2014.
($ in thousands, unaudited)
Year Ended December 31, 2016
Year Ended December 31, 2015
Year Ended December 31, 2014
NNN
Operations
Managed
Properties
Senior
Living Total
NNN
Operations
Managed
Properties
Senior
Living Total
NNN
Operations
Managed
Properties
Senior
Living Total
Rental and related revenue
Less: Property operating expenses
Segment NOI
Segment NOI Margin % (1)
$
$
7,663
7,663
$
$
51,973
37,502
14,471
27.8%
Other income
Less: Expenses
Interest expense
Payroll and employee commissions
Depreciation and amortization
Other expenses
Pre-tax income (loss)
$
$
$
$
$
$
59,636
37,502
22,134
$
$
6,515
6,515
$
$
38,857
29,279
9,578
24.6%
1,095
8,691
2,702
14,166
3,494
45,372
29,279
16,093
$
$
3,892
3,892
$
$
16,350
10,571
5,779
35.3%
757
6,796
2,181
14,546
2,862
$
(5,824)
$
(9,535)
$
$
$
$
20,242
10,571
9,671
9,039
4,111
2,185
7,182
2,061
3,171
(1) NOI Margin % is the relationship between segment NOI and rental and related revenue.
47
Asset Management As Adjusted Revenues
The following table provides a reconciliation between asset management segment revenues and non-GAAP, as adjusted revenues for
the fiscal years ended December 31, 2016, 2015 and 2014.
($ in thousands, unaudited)
Revenues:
Management fee income
Distributions
Net realized and unrealized gains (losses)
Other income
Total revenues
2016
GAAP
2015
Year Ended December 31,
Non-GAAP adjustments
Non-GAAP - As Adjusted
2014
2016
2015
2014
2016
2015
2014
$
9,400
$
6,524
$
259
$
2,752
$
4,131
$
11,770
$
12,152
$
10,655
$
12,029
—
66
3,648
$
13,114
$
—
—
(3,599)
(2,143)
3,845
6,770
$
9,002
7,118
15,725
2,510
(733)
14,676
(25,480)
(216)
15,720
(7,965)
—
15,725
2,576
2,915
14,676
(29,079)
3,629
15,720
(10,108)
9,002
$
20,254
$
(6,889)
$
19,525
$
33,368
$
(119)
$
26,643
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are our holdings of unrestricted cash, cash equivalents and other liquid investments and distributions
from operating subsidiaries, including subordinated notes of CLOs, income from our investment portfolio and sales of assets and
investments. We intend to use our cash resources to continue to grow our businesses. We may seek additional sources of cash to fund
acquisitions or investments. These additional sources of cash may take the form of debt or equity and may be at the parent, subsidiary
or asset level. We are a holding company and our liquidity needs are primarily for interest payments on the Fortress credit facility,
compensation, professional fees, office rent and insurance costs.
Our subsidiaries’ ability to generate sufficient net income and cash flows to make cash distributions will be subject to numerous
business and other factors, including restrictions contained in our subsidiaries’ financing agreements, regulatory restrictions,
availability of sufficient funds at such subsidiaries, general economic and business conditions, tax considerations, strategic plans,
financial results and other factors such as target capital ratios and ratio levels anticipated by rating agencies to maintain or improve
current ratings. We expect our cash and cash equivalents and distributions from operating subsidiaries and our subsidiaries’ access to
financing to be adequate to fund our operations for at least the next 12 months.
As of December 31, 2016, we had cash and cash equivalents, excluding restricted cash of $63.0 million, compared to $69.4 million
at December 31, 2015, a net decrease of $6.4 million, primarily driven by cash used to invest in our investment portfolio.
Our approach to debt is generally to use non-recourse (other than customary carveouts, including fraud and environmental liability),
asset specific debt where possible that is amortized by cash flows from the underlying business or assets financed. Our mortgage
businesses rely on short term uncommitted sources of financing as a part of their normal course of operations. To date, we have been
able to obtain and renew uncommitted warehouse credit facilities. If we were not able to obtain financing, then we may need to draw
on other sources of liquidity to fund our mortgage business. See Note—(13) Debt, net for additional information regarding our mortgage
warehouse borrowings.
Our intermediate holding company has a credit facility with Fortress to provide working capital. Loans under the Fortress credit
agreement bear interest at LIBOR (with a minimum LIBOR rate of 1.25%), plus a margin of 6.50% per annum. We are required to
make quarterly principal payments of $0.5 million, subject to adjustment based on the Net Leverage Ratio (as defined in the Fortress
credit agreement) at the end of each fiscal quarter. All remaining principal, and any unpaid interest, under the Fortress credit agreement
is payable on maturity at September 18, 2018. The outstanding debt under the Fortress credit agreement was $58.5 million as of
December 31, 2016 compared to $45.5 million as December 31, 2015. See Note—(13) Debt, net for additional information of our
debt and that of our subsidiaries.
48
Consolidated Comparison of Cash Flows
Summary Consolidated Statements of Cash Flows - Year Ended December 31, 2016, December 31, 2015 and December 31, 2014
($ in thousands)
Net cash (used in) provided by:
Operating activities
Operating activities - continuing operations (excluding VIEs)
Operating activities - VIEs
Operating activities - discontinued operations
Total cash provided by (used in) operating activities
Investing activities
Investing activities - continuing operations (excluding VIEs)
Investing activities - VIEs
Investing activities - discontinued operations
Total cash provided by (used in) investing activities
Financing activities
Financing activities - continuing operations (excluding VIEs)
Financing activities - VIEs
Financing activities - discontinued operations
Total cash provided by (used in) financing activities
Year ended December 31,
2015
2014
2016
$
$
45,274
(8,631)
—
36,643
(28,265) $
25,008
(6,198)
(9,455)
(14,382)
21,986
16,045
23,649
(244,491)
(75,494)
—
(319,985)
(263,274)
33,613
11,866
(217,795)
(15,196)
(551,526)
(2,967)
(569,689)
77,525
199,427
—
276,952
240,090
8,573
(5,000)
243,663
16,700
497,798
(7,667)
506,831
Net increase (decrease) in cash
$
(6,390) $
16,413
$
(39,209)
The amounts associated with operating, investing and financing activities for the year ended December 31, 2016, 2015 and 2014 from
discontinued operations are presented as a component of the Company’s Consolidated Statements of Cash Flows.
Year Ended December 31, 2016
Operating Activities
Cash provided by continuing operations (excluding VIEs) was $45.3 million for the year ended December 31, 2016. The primary
sources of cash from continuing operations included mortgage sales outpacing originations, an increase in unearned premiums and
policy liabilities in our specialty insurance segment as a result of credit protection and specialty products, and an increase in revenues
in our senior living segment as a result of increased investments in properties during the period. The primary uses of cash from
continuing operations included increases in notes and accounts receivable and reinsurance receivables in our specialty insurance
segment as written policies increased significantly, and a decrease in deferred revenue in our specialty insurance segment.
Cash used in operating activities - VIEs was $8.6 million for the year ended December 31, 2016. The primary uses of cash from
operating activities - VIEs were due to the increases in accrued interest receivable on the loans.
Investing Activities
Cash used in investing activities from continuing operations (excluding VIEs) was $244.5 million for the year ended December 31,
2016. The primary drivers included investments in NPLs and corporate loans, investments in senior living properties in our specialty
insurance and senior living segments, and increases in loans in the specialty finance segment.
Cash used in investing activities - VIEs was $75.5 million for the year ended December 31, 2016. The primary driver of the cash used
in investing activities - VIEs was purchases of loans in Telos 7 during the ramp up period as it converted from a warehouse to a CLO
during the second quarter.
Financing Activities
Cash used in financing activities for continuing operations (excluding VIEs) was $77.5 million for the year ended December 31, 2016.
The primary drivers of the cash used included paydown of the Telos 7 warehouse debt and repurchases of Class A common shares.
The sources of cash were from borrowings in our senior living segment to fund our investments in real estate, borrowings in our
specialty finance segment to fund loan growth, increase in debt in our specialty insurance segment for working capital, an increase
49
in borrowings at the Telos Credit Opportunities Fund to grow the loan portfolio, and a new borrowing to fund additional investment
in NPLs.
Cash provided by financing activities - VIEs was $199.4 million for the year ended December 31, 2016 driven primarily by the senior
notes issued upon the conversion of Telos 7 from a warehouse to a CLO.
Year Ended December 31, 2015
Operating Activities
Cash used in continuing operations (excluding VIEs) was $28.3 million for the year ended December 31, 2015. The primary uses of
cash from continuing operations included increased balances in mortgage loans held for sale as a result of higher volume in our
mortgage segment, and increases in deferred acquisition costs and reinsurance receivables at Fortegra. The primary sources of cash
from continuing operations (excluding VIEs) included operating cash generated at Care, increases in unearned premiums, deferred
revenue, reinsurance payables and policy liabilities at Fortegra.
Cash provided by operating activities - VIEs was $25.0 million for the year ended December 31, 2015. The primary source of cash
from operating activities - VIEs was the net gains on sale of loans in the CLOs.
Cash used in operating activities - discontinued operations was $6.2 million for the year ended December 31, 2015. The primary driver
of the cash used was a decrease in future policy benefits payable.
Investing Activities
Cash used in investing activities from continuing operations (excluding VIEs) was $263.3 million for the year ended December 31,
2015. The primary uses of cash from investing activities from continuing operations (excluding VIEs) included the acquisition of
senior living properties at Care, purchases of loans in the Telos Credit Opportunities Fund, acquisition of NPLs and increases in
outstanding loans at Siena. The cash provided by investing activities was primarily driven by the sale of PFG.
Cash provided by investing activities - VIEs was $33.6 million for the year ended December 31, 2015. The primary driver of the use
of cash in investing activities - VIEs was investments in new loans in the CLOs, more than offset by repayments and sales.
Cash used in investing activities - discontinued operations was $11.9 million for the year ended December 31, 2015. The primary
driver of cash provided from investing activities was the repayment of policy holder loans, partially offset by the purchases of available
for sale debt securities.
Financing Activities
Cash provided by financing activities (excluding VIEs) was $240.1 million for the year ended December 31, 2015. The primary
sources of cash included increased borrowings at Siena to fund loan growth, borrowings on mortgage warehouse lines and increases
in borrowings at Care to fund property acquisitions.
Cash provided by financing activities - VIEs was $8.6 million for the year ended December 31, 2015. The primary driver of the sources
of cash in financing activities - VIEs was a net increase in debt on the CLOs.
Cash used in financing activities - discontinued operations was $5.0 million for the year ended December 31, 2015. The primary driver
of the cash used was the repayment of debt outstanding.
Year Ended December 31, 2014
Operating Activities
Cash used in continuing operations (excluding VIEs) was $14.4 million for the year ended December 31, 2014. The primary sources
of cash from continuing operations (excluding VIEs) were: operating cash generated at Care, a $7.9 million gain on the repayment
of a loan, repayments of tax exempt securities, and net proceeds from the issuance of subordinated notes in Telos 5. The primary uses
of cash from continuing operations were: loan growth at Siena, increased balances in mortgage loans held for sale as a result of higher
volume in our mortgage segment, increase in cash payments for other liabilities and accrued expenses.
Cash provided by operating activities - VIEs was $22.0 million for the year ended December 31, 2014. The primary source of cash
from operating activities - VIEs was the net gains on sale of loans in the CLOs.
50
Cash provided by operating activities - discontinued operations was $16.0 million for the year ended December 31, 2014. The primary
driver of the cash provided was an increase in payables related to policy terminations and income from operations.
Investing Activities
Cash used in investing activities from continuing operations (excluding VIEs) was $15.2 million for the year ended December 31,
2014. The primary uses of cash from investing activities from continuing operations (excluding VIEs) were: the acquisition of Luxury
and Fortegra, offset by net sales and maturities of investments related to new CLO launches.
Cash used in investing activities - VIEs was $551.5 million for the year ended December 31, 2014. The primary driver of the use of
cash in investing activities - VIEs was investments in new loans in the CLOs, net of repayments and sales.
Cash used in investing activities - discontinued operations was $3.0 million for the year ended December 31, 2014. The primary driver
of cash provided from investing activities - discontinued operations was the repayment of policy holder loans, partially offset by the
purchase of property, plant and equipment.
Financing Activities
Cash provided by continuing operations (excluding VIEs) was $16.7 million for the year ended December 31, 2014. The primary
sources of cash were: increased borrowings at Siena to fund loan growth, borrowings on mortgage warehouse lines related to the
acquisition of Luxury, and repayment of the Telos 5 warehouse, net of new borrowings to fund the Telos 6 warehouse.
Cash provided by financing activities - VIEs was $497.8 million for the year ended December 31, 2014. The primary driver of the
sources of cash in financing activities - VIEs was an increase in CLO liabilities.
Cash used in financing activities - discontinued operations was $7.7 million for the year ended December 31, 2014. The primary driver
of the cash used was the repayment of debt outstanding.
Contractual Obligations
The table below summarizes Tiptree’s consolidated contractual obligations by period for payments that are due as of December 31,
2016:
($ in thousands)
Notes payable CLOs (1)
Credit agreement/Revolving line of credit
Mortgage notes payable and related interest (2)
Trust Preferred Securities
Operating lease obligations (3)
Total
$
$
Less than
1 year
1-3 years
3-5 years
More than
5 years
— $
— $
— $
63,480
12,854
—
5,140
81,474
$
237,677
59,071
—
7,827
304,575
$
223,302
98,508
—
4,425
326,235
924,534
—
101,306
35,000
509
$ 1,061,349
$
Total
924,534
524,459
271,739
35,000
17,901
$ 1,773,633
(1) Non-recourse CLO notes payable principal is payable at stated maturity, 2021 for Telos 1, 2022 for Telos 2, 2024 for Telos 3 and Telos 4, 2025 for Telos 5, 2027 for Telos 6 and 2025
for Telos 7.
(2) See Note —(13) Debt, net, in the accompanying consolidated financial statements for additional information.
(3) Minimum rental obligation for Tiptree, Care, MFCA, Siena, Reliance, Luxury and Fortegra office leases. The total rent expense for the Company for the year ended December 31,
2016, 2015 and 2014 was $6.4 million, $5.8 million and $1.5 million, respectively.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company’s significant accounting policies are described in Note—(2) Summary of Significant Accounting Policies. As
disclosed in Note 2, the preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”)
requires management to make estimates and assumptions about future events that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ significantly from those estimates. The Company believes that
the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to
the portrayal of the Company’s financial condition and results of operations and require management’s most difficult , subjective
and complex judgments. Further information can be found in the notes to the consolidated financial statements related to the
following: valuation of assets where quoted market prices are not available can be found under “Fair Value Measurement” in
Note—(2) Summary of Significant Accounting Policies; policies related to goodwill and intangible assets can be found in Note
—(2) Summary of Significant Accounting Policies—Goodwill and Identifiable Intangible Assets, Net; and additional information
on income taxes can be found under Note—(22) Income Taxes. The consolidated financial statements prepared under GAAP
for all periods presented include retroactive adjustments to comparative periods to reflect the combinations under common
control described in Note—(1) Organization, related to TAMCO and the Contribution Transactions. All intercompany items
51
have been eliminated for these periods.
Fair Value of Financial Instruments
Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures, defines fair value, describes
the framework for measuring fair value, and addresses fair value measurement disclosures. 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.
ASC Topic 820 establishes a three level valuation hierarchy for disclosure of fair value measurements. 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 Tiptree 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; and
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 Tiptree’s own data and
assumptions that are used in pricing the asset or liability.
The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of
factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active
exchange or in the secondary market, and the current market conditions. To the extent that valuation is based on models or inputs
that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the
degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized within Level 3
of the fair value hierarchy. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement
in its entirety is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Tiptree’s
assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and the
consideration of factors specific to the asset. From time to time, Tiptree’s assets and liabilities will transfer between one level
to another level. It is Tiptree’s policy to recognize transfers between different levels at the end of each reporting period.
Tiptree utilizes both observable and unobservable inputs into its valuation methodologies. Observable inputs include benchmark
yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. In addition,
specific issuer information and other market data is used. For broker quotes, quotes are obtained from sources recognized to be
market participants. Unobservable inputs may include expected cash flow streams, default rates, supply and demand
considerations and market volatility.
Reserves
Insurance Reserves
Unpaid claims are reserve estimates that are established in accordance with U.S. GAAP using generally accepted actuarial
methods. Credit life and AD&D unpaid claims reserves include claims in the course of settlement and incurred but not reported
(“IBNR”). Credit disability unpaid claims reserves also include continuing claim reserves for open disability claims. For all
other Fortegra product lines, unpaid claims reserves are bulk reserves and are entirely IBNR. The Company uses a number of
algorithms in establishing its unpaid claims reserves. These algorithms are used to calculate unpaid claims as a function of paid
losses, earned premium, target loss ratios, in-force amounts, unearned premium reserves, industry recognized morbidity tables
or a combination of these factors.
52
In arriving at the unpaid claims reserves, the Company conducts an actuarial analysis on a basis gross of reinsurance. The same
estimates used as a basis in calculating the gross unpaid claims reserves are then used as the basis for calculating the net unpaid
claims reserves, which take into account the impact of reinsurance. Anticipated future loss development patterns form a key
assumption underlying these analyses. Our claims are generally reported and settled quickly, resulting in consistent historical
loss development patterns. From the anticipated loss development patterns, a variety of actuarial loss projection techniques are
employed, such as the chain ladder method, the Bornhuetter-Ferguson method and expected loss ratio method.
The unpaid claims reserves represent the Company's best estimates, generally involving actuarial projections at a given time.
Actual claim costs are dependent upon a number of complex factors such as changes in doctrines of legal liabilities and damage
awards. These factors are not directly quantifiable, particularly on a prospective basis. The Company periodically reviews and
updates its methods of making such unpaid claims reserve estimates and establishing the related liabilities based on our actual
experience. The Company has not made any changes to its methodologies for determining unpaid claims reserves in the periods
presented.
Loan Reserves
Certain loans originated by the Company within its specialty finance segment are asset backed loans held for investment and
are carried at amortized cost. An allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan
losses are charged against the allowance when the Company believes the uncollectibility of a loan balance is confirmed.
Management reviews its methodology for its calculation of its loss provision as deemed necessary which is at least on an annual
basis.
Although we sell substantially all of the loans we originate in our mortgage business, we remain subject to claims for repurchases
or indemnities related to mortgage loans we originate in the event of early payment defaults or breaches of representations and
warranties regarding loan quality, compliance and certain other loan characteristics. A reserve estimated for probable claims are
based on historical experience and is calculated as a reduction to gain on sale on all of the loans we originate. Management
reviews its methodology annually or more often if representation and warranty claims patterns change.
Deferred Acquisition Costs
The Company defers certain costs of acquiring new and renewal insurance policies and other products within the Company’s
specialty insurance segment.
Insurance Policy Related
Insurance policy related deferred acquisition costs are limited to direct costs that resulted from successful contract transactions
and would not have been incurred by the Company's insurance company subsidiaries had the transactions not occurred. These
capitalized costs are amortized as the related premium is earned.
The Company evaluates whether insurance related deferred acquisition costs are recoverable at year-end, and considers
investment income in the recoverability analysis. As a result of the Company's evaluations, no write-offs for unrecoverable
insurance related deferred acquisition costs were recognized during the years ended December 31, 2016, 2015 and 2014,
respectively.
Non-insurance Policy Related
Other deferred acquisition costs are limited to prepaid direct costs, typically commissions and contract transaction fees, that
resulted from successful contract transactions and would not have been incurred by the Company had the transactions not
occurred. These capitalized costs are amortized as the related service and administrative fees are earned.
The Company evaluates whether deferred acquisition costs - non-insurance policy related are recoverable at year-end. As a result
of the Company's evaluations, no write-offs for unrecoverable deferred acquisition costs were recognized during the years ended
December 31, 2016, 2015 and 2014, respectively.
53
Revenue Recognition
The Company earns revenues from a variety of sources:
Earned Premiums, net
Net earned premium is from direct and assumed earned premium consisting of revenue generated from the direct sale of insurance
policies by the Company's distributors and premiums written for insurance policies by another carrier and assumed by the
Company. Whether direct or assumed, the premium is earned over the life of the respective policy using methods appropriate
to the pattern of losses for the type of business. Methods used include the Rule of 78's, pro rata, and other actuarial methods.
Management selects the appropriate method based on available information, and periodically reviews the selections as additional
information becomes available. Direct and assumed premiums are offset by premiums ceded to the Company's reinsurers,
including PORCs, earned in the same manner. The amount ceded is proportional to the amount of risk assumed by the reinsurer.
Service and Administrative Fees
The Company earns service and administrative fees from a variety of activities. Such fees are typically positively correlated
with transaction volume and are recognized as revenue as they become both realized and earned.
Service Fees. Service fee revenue is recognized as the services are performed. These services include fulfillment, software
development, and claims handling for our customers. Collateral tracking fee income is recognized when the service is
performed and billed. Management reviews the financial results under each significant contract on a monthly basis. Any
losses that may occur due to a specific contract would be recognized in the period in which the loss is determined probable.
During the years ended December 31, 2016, 2015 and 2014, respectively, the Company did not incur a loss with respect to
a specific significant service fee contract.
Administrative Fees. Administrative fee revenue includes the administration of premium associated with our producers and
their PORCs. In addition, we also earn fee revenue from debt cancellation programs, motor club programs, and warranty
programs. Related administrative fee revenue is recognized consistent with the earnings recognition pattern of the underlying
insurance policies, debt cancellation contracts and motor club memberships being administered, using Rule of 78's, modified
Rule of 78's, pro rata, or other methods as appropriate for the contract. Management selects the appropriate method based
on available information, and periodically reviews the selections as additional information becomes available.
Ceding Commissions
Ceding commissions earned under reinsurance agreements are based on contractual formulas that take into account, in part,
underwriting performance and investment returns experienced by the assuming companies. As experience changes, adjustments
to the ceding commissions are reflected in the period incurred and are based on the claim experience of the related policy. The
adjustment is calculated by adding the earned premium and investment income from the assets held in trust for the Company's
benefit less earned commissions, incurred claims and the reinsurer's fee for the coverage.
Rental Revenue
Rental revenue from residents in Managed Properties are recognized monthly as services are provided, as lease periods for
residents are short-term in nature. The Company recognizes rental revenue from NNN properties on a straight-line basis over
the non-cancelable term of the lease unless another systematic and rational basis is more representative of the time pattern in
which the use benefit is derived from the leased property. Renewal options in leases with rental terms that are higher than those
in the primary term are excluded from the calculation of straight-line rent if the renewals are not reasonably assured. The Company
commences rental revenue recognition when the tenant takes control of the leased space. The Company recognizes lease
termination payments as a component of rental revenue in the period received, provided that there are no further obligations
under the lease.
Commissions Payable and Expense
Commissions are paid to distributors and retailers selling credit insurance policies, motor club memberships, mobile device
protection, and warranty service contracts, and are generally deferred and expensed in proportion to the earning of related
revenue. Credit insurance commission rates, in many instances, are set by state regulators and are also impacted by market
conditions. In certain instances, credit insurance commissions are subject to retrospective adjustment based on the profitability
of the related policies. Under these retrospective commission arrangements, the producer of the credit insurance policies receives
54
a retrospective commission if the premium generated by that producer in the accounting period exceeds the costs associated
with those policies, which includes the Company's administrative fees, claims, reserves, and premium taxes. The Company
analyzes the retrospective commission calculation periodically for each producer and, based on the analysis associated with
each such producer, the Company records a liability for any positive net retrospective commission earned and due to the producer
or, conversely, records a receivable, net of allowance, for amounts due from such producer for instances where the net result of
the retrospective commission calculation is negative.
Share-Based Compensation
The Company measures compensation cost for share-based awards at fair value and recognizes compensation over the service
period for awards expected to vest. The fair value of restricted stock is based on the number of shares granted and the quoted
price of our common stock at the time of grant. In addition, the estimation of share-based awards that will ultimately vest requires
judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded
as a cumulative adjustment in the period that the estimates are revised. The Company considers many factors when estimating
expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in
estimates, may differ substantially from our current estimates.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which the temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in earnings in the period that includes
the enactment date. Additionally, taxing jurisdictions could retroactively disagree with our tax treatment of certain items, and
some historical transactions have income tax effects going forward. Accounting guidance requires these future effects to be
evaluated using current laws, rules and regulations, each of which can change at any time and in an unpredictable manner.
The Company establishes valuation allowances for deferred tax assets when, in its judgment, it concludes that it is more likely
than not that the deferred tax assets will not be realized. These judgments are based on projections of future income, including
tax-planning strategies, by individual tax jurisdiction. Changes in economic conditions and the competitive environment may
impact the accuracy of the Company’s projections. On a quarterly basis, the Company assesses the likelihood that its deferred
tax assets will be realized and determines if adjustments to the Company’s valuation allowance is appropriate. As a result of this
assessment, as of December 31, 2016, the consolidated valuation allowance for Tiptree was $0.8 million. The increase and/or
decrease in valuation allowance could have a significant negative or positive impact on our current and future earnings. In 2016,
the Company recorded a net decrease of valuation allowances of $0.2 million as compared to a decrease of $1.7 million in 2015.
Acquisition Accounting
In connection with our acquisitions, assets acquired and liabilities assumed are recorded at fair value as of the acquisition date.
The accounting for acquisitions requires the identification and measurement of all acquired tangible and intangible assets and
assumed liabilities at their respective fair values as of the acquisition date. In measuring the fair value of net tangible and identified
intangible assets acquired, management uses information obtained as a result of pre-acquisition due diligence, marketing, leasing
activities and independent appraisals. The determination of fair value involved the use of significant judgment and estimation.
Goodwill and Intangible Assets
The initial measurement of goodwill and intangibles requires judgment concerning estimates of the fair value of the acquired
assets and liabilities. Goodwill (and indefinite-lived intangible assets are not amortized but subject to tests for impairment
annually or if events or circumstances indicate it is more likely than not they may be impaired. Other intangible assets are
amortized over their estimated useful lives and are subject to impairment if events or circumstances indicate a possible inability
to realize the carrying amount.
GAAP also requires that an interim test be done whenever events or circumstances occur that may indicate that it is more likely
than not that the fair value of any reporting unit might be less than its carrying value. No such events or circumstances have
occurred during the years ended December 31, 2016 and December 31, 2014, respectively. 2015 had an impairment charge.
55
During the fourth quarter of 2016, the Company changed the date of its annual impairment test of goodwill from December 31
to October 1. The Company believes the change in goodwill impairment date does not result in a material change in the method
of applying the accounting principle. This change provides the Company additional time to complete the annual impairment
test of goodwill in advance of our year end reporting. The Company will continue to perform interim impairment testing should
circumstances or events require. This change does not result in a delay, acceleration, or avoidance of an impairment charge. This
change will be applied prospectively beginning in 2017 because it is impracticable to apply it retrospectively due to the difficulty
in making estimates and assumptions without using hindsight.
Key judgments in accounting for intangibles include useful life and classification between goodwill and indefinite-lived
intangibles or other intangibles requiring amortization. Indefinite-lived intangible assets are evaluated for impairment at least
annually by comparing their fair values, estimated using discounted cash flow analyses, to their carrying values. Other amortizing
intangible assets are evaluated for impairment if events and circumstances indicate a possible impairment. Such evaluation of
other intangible assets is initially based on undiscounted cash flow projections. See Note—(2) Summary of Significant Accounting
Policies, in the accompanying consolidated financial statements for further detail.
Recently Issued Accounting Standards
For a discussion of recently issued accounting standards see Note—(2) Summary of Significant Accounting Policies, in the
accompanying consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business, we enter into various off-balance sheet arrangements including entering into derivative financial
instruments and hedging transactions, operating leases and sponsoring and owning interests in consolidated and non-consolidated
variable interest entities.
Further disclosure on our off-balance sheet arrangements as of December 31, 2016 is presented in the “Notes to Consolidated Financial
Statements” in “Part II. Item 8. Financial Statements and Supplementary Data” of this filing as follows:
• Note —(11) Derivative Financial Instruments and Hedging
• Note —(12) Assets and Liabilities of Consolidated CLOs
• Note —(23) Commitments and Contingencies
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to interest rate risk related to borrowings in various businesses. These risks result primarily from changes in
LIBOR rates and the spread over LIBOR rates related to the credit risks of our businesses.
For fixed rate debt, interest rate fluctuations generally affect the fair value of our liabilities, but do not impact our earnings.
Therefore, interest rate risk does not have a significant impact on our fixed rate debt obligations until such obligations mature
or until we elect to prepay and refinance such obligations. If interest rates have risen at the time our fixed rate debt matures or
is refinanced, our future earnings could be adversely affected by additional borrowing costs. Conversely, lower interest rates at
the time of maturity or refinancing may lower our overall interest expense.
For general purpose floating rate debt, interest rate fluctuations primarily affect interest expense and cash flows. If market interest
rates rise, our earnings could be adversely affected by an increase in interest expense. In contrast, lower interest rates may reduce
our interest expense and improve our earnings, except to the extent that our borrowings are subject to interest rate floors. The
floating interest rate risk of asset-based financing is generally offset as the financing and the purchased financial asset are
generally subject to the same interest rate risk. For floating rate risk of other asset-based financing such as borrowings to finance
acquisitions of real estate, we generally hedge our exposure to the variability of the benchmark index with an interest rate swap.
As of December 31, 2016, we had $164 million of general purpose floating rate debt with a weighted average rate of 5.0%. A
100 basis point change in interest rates would increase interest expense by $1.4 million and decrease interest rate expense by
$0.8 million (including the effect of applicable floors) on an annualized basis.
56
Credit Risk
For the purposes of the analysis of credit and market risk related to investments in consolidated CLO entities, the Company
assesses its risk on its direct investment in such entities. We are exposed to credit risk related to the following investments:
Investments
Business
Subordinated notes and related participations in management fees Asset Management
Specialty Insurance
Levered loan fund
Specialty Insurance
Non-performing loans
December 31, 2016
57,317
$
175,558
74,923
307,798
$
An increase in the default rate by 1% of investments in such loans would result in estimated credit losses, net of anticipated
recoveries of approximately $4.7 million. Non-performing loans are collateralized by residential property values which are
subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and
local economic conditions and local real estate market conditions. Our specialty insurance business also has exposure to credit
risk in the form of fixed income securities which are primarily invested in high-grade government, municipal and corporate debt
securities.
We are also exposed to a certain amount of market risk in our asset management business through the purchase of index swaps
which are intended to reduce the risk of credit losses related to subordinated notes under certain market distress scenarios. A
100 basis point change in the credit index underlying such swaps would result in income or loss of approximately $0.4 million
as of December 31, 2016.
We are exposed to credit risk in the form of lease income in our senior living business.
In addition, our specialty finance business also underwrites mortgage loans for the purpose of selling them into the secondary
market. Due to the relatively short holding period, the credit risk associated with mortgage loans held for sale is not expected
to be significant.
See Note—(6) Investments to the consolidated financial statements for more information regarding our investments in loans by
type.
Market Risk
We are primarily exposed to market risk related to the following investments:
Investments
Business
Equity securities
Specialty Insurance
Subordinated notes and related participations in management fees Asset Management
Total
December 31, 2016
48,612
$
57,317
105,929
$
A 10% increase or decrease in the fair value of such investments would result in $10.6 million of unrealized gains and losses,
respectively.
Counterparty Risk
We are subject to counterparty risk to the extent that we engage in derivative activities for hedging or other purposes. As of
December 31, 2016, the total fair value of derivatives assets subject to counterparty risk, including the effect of any legal right
of offset, totaled $20.5 million. We generally manage our counterparty risk to derivative counterparties by entering into contracts
with counterparties of high credit quality.
Reinsurance receivables were $296 million as of December 31, 2016. Of those amounts, $165 million relates to contracts where
we hold collateral or receive letters of credit in excess of the receivables balance. The remainder is held with high quality
reinsurers, substantially all of which have a rating of A or better by A.M. Best. No counterparty constituted more than 10% of
any uncollateralized reinsurance receivable exposure as of December 31, 2016.
We were also exposed to counterparty risk of approximately $59 million as of December 31, 2016 related to our retrospective
commission arrangements; associated risks are offset by the Company’s contractual ability to withhold future commissions
against the retrospective balances. In addition, we are exposed to counterparty risk of approximately $24 million as of December
57
31, 2016 related to our premium financing business. The risk associated with such arrangements is mitigated by the fact that we
have the contractual ability to cancel the insurance policy and have premiums refunded to us by the insurer in the event of a
counterparty default.
58
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and
2014
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2016,
2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
Page
F- 2
F- 4
F- 5
F- 6
F- 7
F- 9
F- 11
F- 1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Tiptree Inc.:
We have audited the accompanying consolidated balance sheets of Tiptree Inc. and subsidiaries as of December 31,
2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), changes in
stockholders’ equity, and cash flows for each of the years in the
period ended December 31, 2016. In
connection with our audits of these consolidated financial statements, we also have audited financial statement
schedule II. These consolidated financial statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Tiptree Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations
and their cash flows for each of the years in the
period ended December 31, 2016, in conformity with
U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Tiptree Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established
in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 13, 2017 expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
New York, New York
March 13, 2017
F- 2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Tiptree Inc.:
We have audited Tiptree Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Tiptree Inc.’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit
also included performing such other procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Management excluded the two Care Managed Properties acquired during the quarter ended March 31, 2016 and the
one Care Managed Property acquired during the quarter ended September 30, 2016, with total assets of $83.4 million
and total revenues of $10.9 million, from its evaluation of internal control over financial reporting for the year ended
December 31, 2016. Our audit of internal control over financial reporting of Tiptree Inc. also excluded an evaluation
of the internal control over financial reporting of these three Care managed properties.
In our opinion, Tiptree Inc. maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Tiptree Inc. and subsidiaries as of December 31, 2016 and 2015, and the
related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows
for each of the years in the three-year period ended December 31, 2016 and our report dated March 13, 2017, expressed
an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
New York, New York
March 13, 2017
F- 3
TIPTREE INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
Assets
Investments:
Available for sale securities, at fair value
Loans, at fair value
Loans at amortized cost, net
Equity securities, trading, at fair value
Real estate, net
Other investments
Total investments
Cash and cash equivalents
Restricted cash
Notes and accounts receivable, net
Reinsurance receivables
Deferred acquisition costs
Goodwill and intangible assets, net
Other assets
Assets of consolidated CLOs
Total assets
Liabilities and Stockholders’ Equity
Liabilities
Debt, net
Unearned premiums
Policy liabilities and unpaid claims
Deferred revenue
Reinsurance payable
Other liabilities and accrued expenses
Liabilities of consolidated CLOs
Total liabilities
Commitments and contingencies (see Note 23)
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, 34,983,616
and 34,899,833 shares issued and outstanding, respectively
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
Additional paid-in capital
Accumulated other comprehensive income (loss), net of tax
Retained earnings
Class A common stock held by subsidiaries, 6,596,000 and 0 shares, respectively
Class B common stock held by subsidiaries, 8,049,029 and 0 shares, respectively
Total Tiptree Inc. stockholders’ equity
Non-controlling interests (including $76,077 and $69,278 attributable to Tiptree
Financial Partners, L.P., respectively)
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
F- 4
As of December 31,
2016
2015
146,171
373,089
113,838
48,612
309,423
25,467
1,016,600
63,010
24,472
157,500
296,234
126,608
178,245
37,886
989,495
2,890,050
793,009
414,960
103,391
52,254
70,588
133,735
931,969
2,499,906
$
$
$
$
184,703
394,395
52,531
12,727
206,158
31,524
882,038
69,400
18,778
136,808
352,926
57,858
186,107
62,243
728,812
2,494,970
666,952
389,699
80,663
63,081
65,840
132,725
698,316
2,097,276
— $
35
8
297,391
555
37,974
(42,524)
(8)
293,431
—
35
8
297,063
(111)
15,845
—
—
312,840
96,713
390,144
2,890,050
$
84,854
397,694
2,494,970
$
$
$
$
$
$
TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except share data)
Year Ended December 31,
2015
2014
2016
Revenues:
Earned premiums, net
Service and administrative fees
Ceding commissions
Net investment income
Net realized and unrealized gains (losses)
Rental and related revenue
Other income
Total revenues
Expenses:
Policy and contract benefits
Commission expense
Employee compensation and benefits
Interest expense
Depreciation and amortization
Other expenses
Total expenses
Results of consolidated CLOs:
Income attributable to consolidated CLOs
Expenses attributable to consolidated CLOs
Net income (loss) attributable to consolidated CLOs
Income (loss) before taxes from continuing operations
Less: provision (benefit) for income taxes
Income (loss) from continuing operations
Discontinued operations:
Income from discontinued operations, net
Gain on sale of discontinued operations, net
Discontinued operations, net
Net income (loss) before non-controlling interests
Less: net income (loss) attributable to non-controlling interests - Tiptree
Financial Partners, L.P.
Less: net income (loss) attributable to non-controlling interests - Other
Net income (loss) attributable to Tiptree Inc. Class A common
stockholders
Net income (loss) per Class A common share:
Basic, continuing operations, net
Basic, discontinued operations, net
Basic earnings per share
Diluted, continuing operations, net
Diluted, discontinued operations, net
Diluted earnings per share
$
$
$
$
$
229,436
109,348
24,784
12,981
87,300
59,636
43,669
567,154
106,784
147,253
139,612
29,701
28,468
92,274
544,092
53,577
33,323
20,254
43,316
10,978
32,338
—
—
—
32,338
6,432
586
$
166,265
106,525
43,217
5,455
31,275
45,372
40,350
438,459
86,312
105,751
107,810
23,491
45,124
75,521
444,009
23,613
30,502
(6,889)
(12,439)
1,377
(13,816)
6,999
15,619
22,618
8,802
2,630
393
12,827
8,657
3,737
279
14,509
20,242
20,062
80,313
5,829
4,287
32,540
12,541
11,945
31,908
99,050
64,681
45,156
19,525
788
4,141
(3,353)
7,937
—
7,937
4,584
6,790
(496)
25,320
$
5,779
$
(1,710)
0.79
—
0.79
0.78
—
0.78
$
$
(0.26) $
0.43
0.17
(0.26)
0.43
0.17
$
(0.31)
0.21
(0.10)
(0.31)
0.21
(0.10)
Weighted average number of Class A common shares:
Basic
Diluted
31,721,449
31,766,674
33,202,681
33,202,681
16,771,980
16,771,980
See accompanying notes to consolidated financial statements.
F- 5
TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Year Ended December 31,
2015
2014
2016
Net income (loss) before non-controlling interests
$
32,338
$
8,802
$
4,584
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during the period
Related tax (expense) benefit
Reclassification of (gains) losses included in net income
Related tax expense (benefit)
Unrealized gains (losses) on available-for-sale securities, net of tax
Interest rate swaps (cash flow hedges):
Unrealized gains (losses) on interest rate swaps
Related tax (expense) benefit
Reclassification of (gains) losses included in net income
Related tax expense (benefit)
Unrealized (losses) gains on interest rate swaps from cash flow hedges, net of
tax
289
(103)
(1,026)
362
(478)
2,210
(658)
121
(25)
1,648
(134)
43
99
(35)
(27)
(326)
112
274
(95)
(35)
(313)
116
(50)
19
(228)
128
(45)
97
(34)
146
Other comprehensive income (loss), net of tax
Comprehensive income (loss)
Less: Comprehensive income (loss) attributable to non-controlling interests -
Tiptree Financial Partners, L.P.
Less: Comprehensive income (loss) attributable to non-controlling interests -
Other
Comprehensive income (loss) attributable to Tiptree Inc. Class A common
stockholders
1,170
33,508
(62)
8,740
(82)
4,502
6,560
2,630
6,790
962
393
(496)
$
25,986
$
5,717
$
(1,792)
See accompanying notes to consolidated financial statements.
F- 6
TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except shares)
Number of Shares
Par Value
Common Stock held by subsidiaries
Class A
Class B
Class A
Class B
Additional
paid in
capital
Accumulated
other
comprehensive
income (loss)
Retained
earnings
Class A
Shares
Class A
Amount
Class B
Shares
Class B
Amount
Non-
controlling
interests -
Tiptree
Financial
Partners,
L.P.
Total
stockholders’
equity to
Tiptree Inc.
Non-
controlling
interests -
Other
Total
stockholders'
equity
10,556,390
30,968,877
$
11
$
31
$ 83,815
$
33
$ 15,089
$
— $
— $
— $
— $
98,979
$ 277,757
$ 20,160
$
396,896
80,512
—
—
—
21,198,510
(21,198,510)
—
—
—
(5,238)
—
—
—
—
—
—
—
—
—
—
21
—
—
—
—
—
—
—
—
(21)
—
—
—
—
—
—
748
—
—
—
—
—
(39)
186,566
—
—
—
—
(63)
—
—
—
(19)
—
—
—
—
—
—
—
—
—
(1,710)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
748
—
—
(63)
—
—
(39)
—
—
—
(19)
—
—
—
—
748
2,733
2,733
—
—
—
(82)
(294)
(294)
7,265
7,265
—
(39)
186,547
(194,384)
(2,353)
(10,190)
(1,710)
6,790
(496)
4,584
31,830,174
9,770,367
$
32
$
10
$ 271,090
$
(49) $ 13,379
$
— $
— $
— $
— $
284,462
$
90,144
$ 27,015
$
401,621
299,411
—
—
—
2,357
—
1,721,338
(1,721,338)
—
—
—
—
1,625,000
(576,090)
—
—
—
—
—
—
2
—
—
—
—
2
(1)
(2)
—
—
—
—
—
—
—
—
—
—
—
11,958
(3,981)
—
(50)
—
—
—
—
—
—
—
—
—
—
—
—
—
F- 7
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,357
—
—
—
—
302
2,357
—
(62)
302
—
(12)
—
(934)
(730)
(1,664)
(5,313)
—
(5,313)
—
(50)
—
—
—
11,960
(3,982)
—
—
1,861
13,821
—
(3,982)
Balance at December 31,
2013
Stock-based compensation
to directors, employees and
other persons for services
rendered
Non-controlling interest
contributions
Class A shares issued and
Class B shares redeemed
due to TFP unit
redemptions
Other comprehensive loss,
net of tax
Non-controlling interest
distributions
Non-controlling interest
resulting from acquisitions
Shares purchased under
stock purchase plan
Net changes in non-
controlling interest
Net income (loss)
Balance at December 31,
2014
Stock-based compensation
to directors, employees and
other persons for services
rendered
Class A shares issued and
Class B shares redeemed
due to TFP unit
redemptions
Other comprehensive loss,
net of tax
Non-controlling interest
contributions
Non-controlling interest
distributions
Non-controlling interest
tax distributions
Purchase of majority
ownership of subsidiary
Shares purchased under
stock purchase plan
TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except shares)
Number of Shares
Par Value
Common Stock held by subsidiaries
Class A
Class B
Class A
Class B
Additional
paid in
capital
Accumulated
other
comprehensive
income (loss)
Retained
earnings
Class A
Shares
Class A
Amount
Class B
Shares
Class B
Amount
Non-
controlling
interests -
Tiptree
Financial
Partners,
L.P.
Total
stockholders’
equity to
Tiptree Inc.
Non-
controlling
interests -
Other
Total
stockholders'
equity
Reduction in non-
controlling interest due to
PFG disposition
Net changes in non-
controlling interest
Dividends declared
Net income
Balance at December 31,
2015
Stock-based compensation
to directors and employees
Shares issued to settle
contingent consideration
Other comprehensive
income, net of tax
Non-controlling interest
contributions
Non-controlling interest
distributions
Shares purchased under
stock purchase plan
Shares acquired by
subsidiaries
Net changes in non-
controlling interest
Dividends declared
Net income
Balance at December 31,
2016
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
15,639
—
—
—
(12)
—
—
—
—
(3,313)
5,779
—
—
—
—
34,899,833
8,049,029
$
35
$
8
$ 297,063
$
(111) $ 15,845
— $
—
—
—
—
—
—
—
—
—
—
(7,765)
(7,765)
15,627
(3,313)
5,779
(17,237)
(5,500)
—
2,630
—
393
(7,110)
(3,313)
8,802
— $
— $
312,840
$
69,278
$ 15,576
$
397,694
197,296
101,845
—
—
—
(215,358)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,102
550
—
—
—
(1,230)
—
(1,094)
—
—
—
—
666
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,102
550
666
—
—
(1,230)
— (6,596,000)
(42,524)
(8,049,029)
(8)
(42,532)
—
(3,191)
25,320
—
—
—
—
—
—
—
—
—
—
—
—
(1,094)
(3,191)
25,320
—
—
128
—
—
—
376
6,452
2,102
550
1,170
6,452
(803)
(2,195)
(2,998)
—
—
1,042
—
6,432
—
—
(159)
—
586
(1,230)
(42,532)
(211)
(3,191)
32,338
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
—
—
—
—
—
—
—
—
—
—
—
See accompanying notes to consolidated financial statements.
F- 8
TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Operating Activities:
Net income (loss) available to common stockholders
Net income (loss) attributable to non-controlling interests - Tiptree Financial Partners, L.P.
Net income (loss) attributable to non-controlling interests - Other
Net income (loss)
Discontinued operations, net
Adjustments to reconcile net income to net cash provided by (used in) operating activities from continuing
operations:
Net realized and unrealized (gains) losses
Net unrealized loss (gain) on interest rate swaps
Realized (gain) on cash flow hedge
Change in fair value of contingent consideration
Impairment of goodwill
Non cash compensation expense
Amortization/accretion of premiums and discounts
Depreciation and amortization expense
Provision for doubtful accounts
Amortization of deferred financing costs
Deferred tax expense (benefit)
Changes in operating assets and liabilities:
Mortgage loans originated for sale
Proceeds from the sale of mortgage loans originated for sale
(Increase) decrease in notes and accounts receivable
(Increase) decrease in reinsurance receivables
(Increase) decrease in deferred acquisition costs
(Increase) decrease in other assets
Increase (decrease) in unearned premiums
Increase (decrease) in policy liabilities and unpaid claims
Increase (decrease) in deferred revenue
Increase (decrease) in reinsurance payable
Increase (decrease) in other liabilities and accrued expenses
Operating activities from consolidated CLOs
Net cash provided by (used in) operating activities - continuing operations
Net cash provided by (used in) operating activities - discontinued operations
Net cash provided by (used in) operating activities
Investing Activities:
Purchases of investments
Proceeds from sales and maturities of investments
(Increase) decrease in loans owned, at amortized cost, net
Purchases of real estate capital expenditures
Proceeds from the sale of real estate
Purchases of corporate fixed assets
Proceeds from the sale of subsidiaries
Proceeds from notes receivable
Issuance of notes receivable
Proceeds from loan repayments
(Increase) decrease in restricted cash
Deposits returned for future real estate acquisitions
Business and asset acquisitions, net of cash and deposits
Distributions from equity method investments
Investing activities from consolidated CLOs
Net cash provided by (used in) investing activities - continuing operations
Net cash provided by (used in) investing activities from discontinued operations
Net cash provided by (used in) investing activities
F- 9
Year ended December 31,
2015
2014
2016
$
25,320
$
6,432
586
32,338
—
5,779
2,630
393
8,802
(22,618)
$
(1,710)
6,790
(496)
4,584
(7,937)
(87,300)
(31,275)
(14,509)
22
—
(313)
—
2,584
1,386
28,543
1,719
2,037
6,447
—
(852)
(2,503)
699
423
2,596
45,124
933
1,441
(19,553)
—
—
—
—
748
345
11,945
459
702
(249)
(1,767,622)
(1,137,623)
1,833,273
1,139,333
(446,048)
446,802
(13,692)
(35,185)
(3,540)
(253)
25,261
22,728
(7,182)
4,748
(725)
(8,631)
36,643
—
36,643
(269,894)
205,141
(62,024)
(5,679)
5,376
(1,480)
—
36,891
(44,860)
—
(5,694)
—
(33,500)
(88,150)
(49,242)
(7,427)
89,873
17,298
17,099
46,123
(5,266)
25,008
(3,257)
(6,198)
(9,455)
(379,163)
82,952
(16,710)
(2,165)
92
(3,497)
142,837
31,979
(32,645)
—
(11,047)
(125)
3,708
(6,597)
(8,616)
4,384
9,797
(70)
6,261
(1,363)
(18,728)
21,986
7,604
16,045
23,649
(426,011)
594,870
(18,351)
(739)
—
(245)
—
2,986
(2,816)
30,040
5,041
(2,077)
(102,268)
(78,057)
(205,102)
—
(75,494)
(319,985)
—
(319,985)
2,275
33,613
(229,661)
11,866
(217,795)
7,208
(551,526)
(566,722)
(2,967)
(569,689)
TIPTREE INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(in thousands)
Year ended December 31,
2015
2014
2016
Financing Activities:
Dividends paid
Non-controlling interest contributions
Non-controlling interest distributions
Change in non-controlling interest
Payment of debt issuance costs
Proceeds from borrowings and mortgage notes payable
Principal paydowns of borrowings and mortgage notes payable
Repurchases of common stock
Financing activities from consolidated CLOs
Net cash provided by (used in) financing activities - continuing operations
Net cash provided by (used in) financing activities - discontinued operations
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents – beginning of period - continuing operations
Cash and cash equivalents – beginning of period - discontinued operations
Cash and cash equivalents – end of period
Less: Reclassification of cash to assets held for sale
Cash and cash equivalents of continuing operations – end of period
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest expense
Cash paid during the period for income taxes
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Fair value of debt assumed
Re-issuance of notes payable to third party upon deconsolidation of CLOs
Recognized contingent consideration at fair value
Issuance of Common Stock
Acquired real estate properties through, or in lieu of, foreclosure of the related loan
(3,191)
3,339
(2,998)
—
(3,830)
(3,313)
2,163
(6,977)
(2,953)
(1,865)
2,085,142
1,442,756
(1,957,183)
(1,185,739)
(43,754)
199,427
276,952
—
276,952
(6,390)
69,400
—
63,010
—
63,010
27,164
6,176
$
$
$
— $
— $
— $
— $
15,214
$
(3,982)
8,573
248,663
(5,000)
243,663
16,413
52,987
—
69,400
—
69,400
49,875
36,701
52,836
39,728
2,200
11,960
2,289
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
—
2,733
(294)
(5,499)
(775)
828,471
(807,897)
(39)
497,798
514,498
(7,667)
506,831
(39,209)
97,645
22,912
81,348
28,361
52,987
65,104
5,167
72,771
5,248
—
—
—
See accompanying notes to consolidated financial statements.
F- 10
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(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 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 consolidated financial statements 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.
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 interest.
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.
The Company’s Consolidated Statements of Cash Flows for the year ended December 31, 2015 has been revised for immaterial
corrections and errors related to the presentation of our activities from Discontinued Operations and business acquisitions. These
corrections resulted in an overall decrease in cash provided by operating activities of approximately $4,500, a net increase in
cash used by investing activities of approximately $1,400, which consists of an increase in cash used by of approximately $9,200
in continuing operations and an adjustment of approximately $7,800 to reflect cash of a disposed business, and an increase in
cash provided by financing activities of approximately $5,900. Such changes had no impact on the ending cash balance as of
December 31, 2015.
As a result of changes in presentation, certain prior year 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
Consolidated Financial Statements from the prior year is the aggregation of investments on the Consolidated Balance Sheets
and the summation of the net investment income of our specialty insurance business in the Consolidated Statements of Operations.
In addition certain immaterial balances have been combined.
F- 11
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
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
•
• 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 Acquisition 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.
Discontinued Operations
The results of operations of a business that has either been disposed of or are classified as held-for-sale are reported in discontinued
operations if the disposal of the business represents a strategic shift that has (or will have) a major effect on an entity’s operations
and financial results. For such businesses that have been disposed of prior to December 15, 2014, the Company presents the
operations of the business as discontinued operations, and retrospectively reclassifies operating results for all prior periods
presented. The Company carries assets and liabilities held for sale at the lower of carrying value on the date the asset is initially
classified as held for sale or fair value less costs to sell. At the time of reclassification to held for sale, the Company ceases the
recording of depreciation on assets transferred.
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.
F- 12
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
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; and
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 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.
Derivative Financial Instruments and Hedging
Derivative instruments are used in the overall strategy to manage exposure to market risks primarily related to fluctuations in
interest rates. As a matter of policy, derivatives are not used for speculative purposes. Derivative instruments are measured at
fair value on a recurring basis and are included in other investments or other liabilities and accrued expenses in the Consolidated
Balance Sheets.
Derivative Instruments Designated as Cash Flow Hedging Instruments
The Company uses cash flow hedges to reduce the exposure to variability of cash flows from floating rate borrowings. If a
derivative instrument meets certain cash flow hedge accounting criteria, it is recorded on the consolidated balance sheet at its
fair value, as either an asset or a liability, with offsetting changes in fair value recognized in accumulated other comprehensive
income (AOCI). The effective portion of the changes in fair value of derivatives are reported in AOCI and amounts previously
recorded in AOCI are recognized in earnings in the period in which the hedged transaction affects earnings. Any ineffective
portions of the change in fair value of the derivative are recognized in current earnings.
Stock Based Compensation
The Company accounts for
current fair value based methodology.
compensation issued to employees, directors, and affiliates of the Company using the
The Company initially measures the cost of restricted stock unit and restricted stock awards at fair value on the date of grant
and subsequently recognizes the cost of such awards over the vesting period using the straight-line method. The compensation
costs are charged to expense over the vesting period with a corresponding credit to additional paid-in capital.
F- 13
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
Compensation cost is recognized for stock options issued to employees, based on the fair value of these awards at the date of
grant. Compensation cost is recognized over the required service period, generally defined as the vesting period.
Grants of subsidiary RSUs exchangeable into Class A common Stock of the Company are accounted for as liabilities based upon
their expected settlement method. Changes in fair value of the awards are recognized in earnings for the relative amount of
cumulative compensation cost. The Company uses the straight-line method to recognize compensation expense for the time
vesting RSUs over the requisite service periods, beginning on the grant date. The Company uses the graded-vesting method to
recognize compensation expense for the performance vesting RSUs. Changes in fair value of shares underlying liability awards
are recognized in earnings to the extent of the accumulated amortization. Compensation expense will be recognized to the extent
that it is probable that the performance condition will be achieved. The Company reassesses the probability of satisfaction of
the performance condition for the performance vesting RSUs for each reporting period.
Income Taxes
Deferred tax assets and liabilities are determined using the asset and liability method. Under this method, deferred tax assets
and liabilities are established for future tax consequences of temporary differences between the financial statement carrying
amounts of assets and liabilities and their tax basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary differences are expected to reverse. A valuation
allowance is established when necessary to reduce a deferred tax asset to the amount expected to be realized. Several of the
Company’s subsidiaries, file both federal and state tax returns on a standalone basis. These U.S. federal and state income tax
returns, when filed, will be subject to examination by the Internal Revenue Service and state departments of revenue. See Note
—(22) Income Taxes.
The Company evaluates tax positions taken or expected to be taken in the course of preparing its tax returns to determine whether
the tax positions are “more likely than not” of being sustained by the applicable tax authority. The Company’s tax benefit or tax
expense is adjusted accordingly for tax positions not deemed to meet the more likely than not threshold. The Company’s policy
is to account for interest as a component of interest expense and penalties as a component of other expense.
Earnings Per Share
The Company presents both basic and diluted earnings per Class A common share in its consolidated financial statements and
footnotes thereto. Basic earnings per Class A common share (Basic EPS) excludes dilution and is computed by dividing net
income or loss available to common stock holders by the weighted average number of common shares outstanding, including
vested restricted share units, for the period. Diluted earnings per Class A common share (Diluted EPS) reflects the potential
dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares
where such exercise or conversion would result in a lower earnings per share amount.
The Company calculates EPS using the two-class method, which is an earnings allocation formula that determines EPS for
common shares and participating securities. Unvested restricted share units contain non-forfeitable rights to distributions or
distribution equivalents (whether paid or unpaid) and are participating securities that are included in the computation of EPS
using the two-class method. Accordingly, all earnings (distributed and undistributed) are allocated to common shares and
participating securities based on their respective rights to receive distributions. The participating securities do not have a
contractual obligation to absorb losses and are only allocated in periods where there is income from continuing operations.
See Note—(24) Earnings Per Share, for EPS computations.
Investments
The Company records all investment transactions on a
basis. Realized gains (losses) are determined using the specific-
identification method. The Company classifies its investments as trading, available-for-sale, or held-to-maturity based on the
Company’s intent to sell the security or, for a debt security, the Company’s intent and ability to hold the debt security to maturity.
The Company did not have any held-to-maturity securities at December 31, 2016 and 2015.
Available for Sale Securities, at Fair Value (AFS)
AFS are securities that are not classified as trading or held-to-maturity and are intended to be held for indefinite periods of time.
F- 14
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
AFS securities include those debt and equity securities that management may sell as part of its asset/liability management strategy
or in response to changes in interest rates, resultant prepayment risk or other factors. AFS securities are held at fair value on the
Consolidated Balance Sheet with changes in fair value, net of related tax effects, recorded in the accumulated other comprehensive
income (AOCI) component of stockholders’ equity in the period of change. Upon the disposition of an AFS security, the Company
reclassifies the gain or loss on the security from accumulated other comprehensive income (loss) to net realized and unrealized
gains (losses) on the Consolidated Statements of Operations.
The Company regularly reviews AFS securities, held-to-maturity and cost investments with unrealized losses in order to evaluate
whether the impairment is other-than-temporary. Under the guidance for debt securities, other-than-temporary impairment (OTTI)
is recognized in earnings in the Consolidated Statements of Operations for debt securities that the Company has an intent to sell
or that it believes it is more likely than not that it will be required to sell prior to recovery of the amortized cost basis. For those
securities that the Company does not intend to sell nor expect to be required to sell, credit-related impairment is recognized in
earnings, with the non-credit-related impairment recorded in accumulated other comprehensive income (AOCI). An unrealized
loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses that are
determined to be temporary in nature are recorded, net of tax, in AOCI for AFS securities.
Management’s estimate of OTTI includes, among other things: (i) the duration of time and the relative magnitude to which fair
prospects of the issuer of the investment;
value of the security has been below cost; (ii) the financial condition and
(iii) extraordinary events, including negative news releases and rating agency downgrades, with respect to the issuer of the
investment; (iv) the Company’s ability and intent to hold an equity security for a period of time sufficient to allow for any
anticipated recovery; (v) whether it is more likely than not that the Company will sell a security before recovery of its amortized
cost basis; (vi) whether a debt security exhibits cash flow deterioration; and (vii) whether the security’s decline is attributable
to specific conditions, such as conditions in an industry or in a geographic location.
Loans, at Fair Value
Loans, at fair value is substantially comprised of (i) non-performing residential loans (NPLs), (ii) middle market leveraged loans
held by the Company and (iii) loans originated by the Company’s mortgage finance business. Changes in their fair value are
reported within net realized and unrealized gains (losses) in our Consolidated Statements of Operations. In addition, substantially
all investments within assets of consolidated CLOs consist of loans at fair value.
Corporate Loans
Corporate loans are comprised of diversified portfolio of middle market leveraged loans which are carried at fair value. In
general, the fair value of leveraged loans are obtained from an independent pricing service which provides coverage of secondary
market participants. The values represent a composite of mark-to-market bid/offer prices. In certain circumstances the Company
will make its own determination of fair value of leveraged loans based on internal models and other unobservable inputs.
Mortgage Loans Held for Sale
Mortgage loans held for sale represent loans originated and held until sold to secondary market investors. Such loans are typically
warehoused for a period after origination or purchase before sale into the secondary market. Servicing rights are generally
released upon sale of mortgage loans in the secondary market. The Company has elected to measure all mortgage loans held
for sale at fair value. These loans are considered sold when the Company surrenders control to the purchaser. The gains or losses
on sales of such loans, net of any accrual for standard representations and warranties, are reported in operating results as a
component of net realized and unrealized gains (losses) in the Consolidated Statement of Operations in the period when the sale
occurs.
Non-Performing Loans (NPLs)
The Company has purchased portfolios of NPLs which consist of residential mortgage loans. Such loans are carried at fair value,
which is measured on an individual loan basis. We seek to either (i) convert such loans into real estate owned property (REO)
through foreclosure or another resolution process that can then be sold, or (ii) modify and resell them at higher prices if
circumstances warrant.
F- 15
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
The Company has elected the fair value option for NPLs as we have concluded that fair value timely reflects the results of our
investment performance. As substantially all of our loans were non-performing when acquired, we generally look to the estimated
fair value of the underlying property collateral to assess the recoverability of our investments. We primarily utilize the local
broker price opinion (BPO) but also consider any other comparable home sales or other market data, as considered necessary,
in estimating a property’s fair value. For further discussion on the observable and unobservable inputs to the model and
determination of fair value of NPLs, see Note—(7) Fair Value of Financial Instruments.
Certain non-performing loans are loans that are delinquent on obligated payments of principal and interest. Certain other non-
performing loans are making some payments, generally as a result of a modification or a workout plan.
The fair value of NPLs are determined using a discounted cash flow model. As such, both the changes in fair value and the net
periodic cash flows related to NPLs are recorded in net realized and unrealized gains (losses) in the consolidated statement of
operations.
Loans, at Amortized Cost, Net
Certain loans originated by the Company’s commercial lending business within its specialty finance business are asset backed
loans held for investment and are carried at amortized cost. The Company periodically reviews these loans for impairment.
Impairment losses are taken for impaired loans based on the fair value of collateral on an individual loan basis. When it is
probable that the Company will be unable to collect all amounts contractually due, the loan would be considered impaired.
An allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the
allowance when the Company believes the uncollectibility of a loan balance is confirmed. Management reviews its methodology
for its calculation of its loss provision as deemed necessary which is at least on an annual basis.
Interest income related to loans at amortized cost is generally recognized using the effective interest method or on a basis
approximating a level rate of return over the term of the loan. Nonaccrual loans are those on which the accrual of interest has
been suspended. Loans are placed on nonaccrual status and considered nonperforming when full payment of principal and interest
is in doubt, or when principal or interest is 90 days or more past due and collateral, if any, is insufficient to cover principal and
interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against interest income.
In addition, the amortization of net deferred loan fees is suspended. Interest income on nonaccrual loans may be recognized
only to the extent it is received in cash. However, where there is doubt regarding the ultimate collectability of loan principal,
cash receipts on such nonaccrual loans are applied to reduce the carrying value of such loans. Nonaccrual loans may be returned
to accrual status when repayment is reasonably assured and there has been demonstrated performance under the terms of the
loan or, if applicable, the restructured terms of such loan.
The Company defers nonrefundable loan origination and commitment fees collected on originated loans and amortizes the net
amount as an adjustment of the interest income over the contractual life of the loan. If a loan is prepaid, the net deferred amount
is recognized in loan fee income within the Consolidated Statements of Operations in the period. Loan fee income includes
prepayment fees and late charges collected.
Equity Securities, Trading, at Fair Value
Equity securities, trading, at fair value are investments consisting of equity securities that are purchased principally for the
purpose of selling them in the near term. Changes in fair value are recorded in net realized and unrealized gains (losses) on
investments on the Consolidated Statements of Operations in the period of change.
Real Estate, Net
Investments in real estate, net are carried at cost less accumulated depreciation. Depreciation is calculated on a straight-line
basis using estimated useful lives not to exceed 40 years for buildings and 9 years for building improvements and other fixed
assets.
Real estate properties are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. If such reviews indicate that the asset is impaired, the asset’s carrying amount is
F- 16
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
written down to its fair value. There were no material impairments on the Company’s real estate investments for the years ended
December 31, 2016, 2015 and 2014, respectively.
Foreclosed Residential Real Estate Property (REO)
NPLs are reclassified to REO once the Company has obtained legal title to the property upon completion of a foreclosure sale
or the borrower has conveyed all interest in the property to satisfy that loan through completion of a deed in lieu of foreclosure.
Because the company elected the fair value option for NPLs, upon recognition as REO the property fair value is estimated using
market values and, if the property meets held-for-sale criteria, it is initially recorded at fair value less costs to sell as its new cost
basis. Subsequently, the property is carried at (i) the fair value of the asset minus the estimated costs to sell the asset or (ii) the
initial REO value, whichever is lower. Adjustments to the carrying value of REOs are recorded in net realized and unrealized
gains (losses).
Cash and Cash Equivalents
The Company considers all highly liquid investments of sufficient credit quality purchased with an initial maturity of three months
or less to be cash equivalents. Cash and cash equivalents consist of U.S. denominated cash on hand, cash held in banks and
investments in money market funds.
Restricted Cash
The Company’s restricted cash primarily consists of cash for unremitted premiums received from agents and insurers, fiduciary
cash for reinsurers and pledged assets for the protection of policy holders in various state jurisdictions.
Notes and Accounts Receivable, Net
Notes Receivable, Net
The Company’s notes receivable, net includes receivables from its senior living partners and receivables related to the specialty
insurance business for its premium financing programs.
The Company accrues interest income on its notes receivable based on the contractual terms of the respective note. The Company
monitors all notes receivable for delinquency and provides for estimated losses for specific receivables that are not likely to be
collected. In addition to allowances for bad debt for specific notes receivable, a general provision for bad debt is estimated for
the Company’s notes receivable based on history. Account balances are generally charged against the allowance when the
Company believes it is probable that the note receivable will not be recovered, and has exhausted its contractual and legal
remedies.
Generally, receivables overdue more than 120 days are written off when the Company determines it has exhausted reasonable
collection efforts and remedies, see Note—(8) Notes and Accounts Receivable, net.
Accounts and Premiums Receivable, Net
Accounts and premiums receivable, net are primarily trade receivables from the specialty insurance business that are carried at
their approximate fair value. Accounts and premiums receivable from the Company’s specialty insurance business consist
primarily of advance commissions and agents' balances in course of collection and billed but not collected policy premiums,
presented net of the allowance for doubtful accounts. For policy premiums that have been billed but not collected, the Company
records a receivable on its balance sheet for the full amount of the premium billed, with a corresponding liability, net of its
commission, to insurance carriers. The Company earns interest on the premium cash during the period of time between receipt
of the funds and payment of these funds to insurance carriers. The Company maintains an allowance for doubtful accounts based
on an estimate of uncollectible accounts.
Other Receivables
Other receivables primarily represent amounts due to the Company from its business partners for retrospective commissions,
net of allowance and for motor club membership fees.
F- 17
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
Reinsurance Receivables
Through the specialty insurance business, the Company has various reinsurance agreements in place whereby the amount of
risk in excess of its retention goals is reinsured by unrelated domestic and foreign insurance companies. The Company is required
to pay losses even if a reinsurer fails to meet its obligations under the applicable reinsurance agreement. Reinsurance receivables
include amounts related to paid benefits, unpaid benefits and prepaid reinsurance premiums. Reinsurance receivables are based
upon estimates and are reported on the Consolidated Balance Sheets separately as assets, as reinsurance does not relieve the
Company of its legal liability to policyholders. Management continually monitors the financial condition and agency ratings of
the Company’s reinsurers and believes that the reinsurance receivables accrued are collectible. Balances recoverable from
reinsurers and amounts ceded to reinsurers relating to the unexpired portion of reinsured policies are presented as assets.
Experience refunds from reinsurers are recognized based on the underwriting experience of the underlying contracts.
Deferred Acquisition Costs
The Company defers certain costs of acquiring new and renewal insurance policies and other products within the Company’s
specialty insurance business. Amortization of deferred acquisition costs was $142,337, $81,537 and $1,376 for the years ended
December 31, 2016, 2015 and 2014, respectively.
Insurance Policy Related
Insurance policy related deferred acquisition costs are limited to direct costs that resulted from successful contract transactions
and would not have been incurred by the Company's insurance company subsidiaries had the transactions not occurred. These
capitalized costs are amortized as the related premium is earned.
The Company evaluates whether insurance related deferred acquisition costs are recoverable at year-end, and considers
investment income in the recoverability analysis. As a result of the Company's evaluations, no write-offs for unrecoverable
insurance related deferred acquisition costs were recognized during the years ended December 31, 2016, 2015 and 2014,
respectively.
Non-insurance Policy Related
Other deferred acquisition costs are limited to prepaid direct costs, typically commissions and contract transaction fees, that
resulted from successful contract transactions and would not have been incurred by the Company had the transactions not
occurred. These capitalized costs are amortized as the related service and administrative fees are earned.
The Company evaluates whether deferred acquisition costs - non-insurance policy related are recoverable at year-end. As a result
of the Company's evaluations, no write-offs for unrecoverable deferred acquisition costs were recognized during the years ended
December 31, 2016, 2015 and 2014, respectively.
Goodwill and Intangible Assets, Net
The initial measurement of goodwill and intangibles requires judgment concerning estimates of the fair value of the acquired
assets and liabilities. Goodwill and indefinite-lived intangible assets are not amortized but subject to tests for impairment annually
or if events or circumstances indicate it is more likely than not they may be impaired. Other intangible assets are amortized over
their estimated useful lives and are subject to impairment if events or circumstances indicate a possible inability to realize the
carrying amount. The Company carries intangible assets, which represent customer and agent relationships, trade names,
insurance licenses (certificates of authority granted by individual state departments of insurance), the value of in-force insurance
policies acquired, software acquired or internally developed, and leases in-place. Management has deemed the insurance licenses
to have indefinite useful life. Costs incurred to renew or maintain insurance licenses are recorded as operating costs in the period
in which they arise. See Note —(10) Goodwill and Intangible Assets, net.
Other Assets
Other assets consists of prepaid expenses, deposits for future acquisitions, inventory, and furniture, fixtures and equipment, net.
See Note—(15) Other Assets.
F- 18
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
Unearned Premiums
Premiums written are earned over the life of the respective policy using the Rule of 78's, pro rata, or other actuarial methods as
appropriate for the type of business. Unearned premiums represent the portion of premiums that will be earned in the future. A
premium deficiency reserve is recorded if anticipated losses, loss adjustment expenses, deferred acquisition costs and policy
maintenance costs exceed the recorded unearned premium reserve and anticipated investment income. As of December 31, 2016
and December 31, 2015, no deficiency reserves were recorded.
Policy Liabilities and Unpaid Claims
Policyholder account balances relate to investment-type individual annuity contracts in the accumulation phase. Policyholder
account balances are carried at accumulated account values, which consist of deposits received, plus interest credited, less
withdrawals and assessments. Minimum guaranteed interest credited to these contracts ranges from 3.0% to 4.0%.
The Company’s claims are generally reported and settled quickly, resulting in consistent historical loss development patterns. The
Company’s actuaries apply a variety of generally accepted actuarial methods to the historical loss development patterns, to derive
cumulative development factors. These cumulative development factors are applied to reported losses for each accident quarter
to compute ultimate losses. The indicated required reserve is the difference between the ultimate losses and the reported losses.
The actuarial methods used include but are not limited to the chain ladder method, the Bornhuetter-Ferguson method, and the
expected loss ratio method. The actuarial analyses are performed on a basis gross of ceded reinsurance, and the resulting factors
and estimates are then used in calculating the net loss reserves which take into account the impact of reinsurance. The Company
has not made any changes to its methodologies for determining claim reserves in the periods presented.
Credit life and accidental death and dismemberment (AD&D) unpaid claims reserves include claims in the course of settlement
and incurred but not reported (IBNR). Credit disability unpaid claims reserves also include continuing claim reserves for open
disability claims. For all other product lines, unpaid claims reserves include case reserves for reported claims and bulk reserves
for IBNR claims. The Company uses a number of algorithms in establishing its unpaid claims reserves. These algorithms are
used to calculate unpaid claims as a function of paid losses, earned premium, reported incurred losses, target loss ratios, and in-
force amounts or a combination of these factors.
Anticipated future loss development patterns form a key assumption underlying these analyses. Generally, unpaid claims reserves,
and associated incurred losses, are impacted by loss frequency, which is the measure of the number of claims per unit of insured
exposure, and loss severity, which is based on the average size of claims. Factors affecting loss frequency and loss severity may
include changes in claims reporting patterns, claims settlement patterns, judicial decisions, legislation, economic conditions,
morbidity patterns and the attitudes of claimants towards settlements.
The unpaid claims reserves represent the Company's best estimates at a given time, based on the projections and analyses
discussed above. Actual claim costs are dependent upon a number of complex factors such as changes in doctrines of legal
liabilities and damage awards. These factors are not directly quantifiable, particularly on a prospective basis. The Company
periodically reviews and updates its methods of making such unpaid claims reserve estimates and establishing the related
liabilities based on our actual experience. The Company has not made any changes to its methodologies for determining unpaid
claims reserves in the periods presented.
In accordance with applicable statutory insurance company regulations, the Company’s recorded unpaid claims reserves are
evaluated by appointed independent third-party actuaries, who perform this function in compliance with the Standards of Practice
and Codes of Conduct of the American Academy of Actuaries. The independent actuaries perform their actuarial analyses annually
and prepare opinions, statements, and reports documenting their determinations. In addition, this documentation and the
Company’s actuarial work products are made available to the Company’s independent auditors for their separate review of
reserves. For December 31, 2016 and 2015, both parties found the Company’s reserves to be adequate.
Deferred Revenue
Deferred revenues represent the portion of income that will be earned in the future attributable to motor club memberships,
mobile device protection plans, and other non-insurance service contracts that are earned over the respective contract periods
using Rule of 78's, modified Rule of 78's, pro rata, or other methods as appropriate for the contract. A deficiency reserve would
F- 19
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
be recorded if anticipated contract benefits, deferred acquisition costs and contract service costs exceed the recorded deferred
revenues and anticipated investment income. As of December 31, 2016 and 2015, respectively, no deficiency reserves were
recorded.
Liabilities of Consolidated CLOs
The Company measures both the financial assets and the financial liabilities of its CLOs in its consolidated financial statements
using the more observable of the fair value of the financial assets or the fair value of the financial liabilities. The liabilities of
consolidated CLOs primarily consist of notes payable which are measured using the fair value of the financial assets. As a result,
the notes were measured as (i) the sum of the fair value of the financial assets and the carrying value of any nonfinancial assets
held temporarily, less (ii) the sum of the fair value of any beneficial interests retained by the Company (other than those that
represent compensation for services) and the Company’s carrying value of any beneficial interests that represent compensation
for services.
Revenue Recognition
The Company earns revenues from a variety of sources:
Earned Premiums, Net
Net earned premium is from direct and assumed earned premium consisting of revenue generated from the direct sale of insurance
policies by the Company's distributors and premiums written for insurance policies by another carrier and assumed by the
Company. Whether direct or assumed, the premium is earned over the life of the respective policy using methods appropriate
to the pattern of losses for the type of business. Methods used include the Rule of 78's, pro rata, and other actuarial methods.
Management selects the appropriate method based on available information, and periodically reviews the selections as additional
information becomes available. Direct and assumed premiums are offset by premiums ceded to the Company's reinsurers,
including producer owned reinsurance companies (PORCs), earned in the same manner. The amount ceded is proportional to
the amount of risk assumed by the reinsurer.
Service and Administrative Fees
The Company earns service and administrative fees from a variety of activities. Such fees are typically positively correlated
with transaction volume and are recognized as revenue as they become both realized and earned.
Service Fees. Service fee revenue is recognized as the services are performed. These services include fulfillment, software
development, and claims handling for our customers. Collateral tracking fee income is recognized when the service is
performed and billed. Management reviews the financial results under each significant contract on a monthly basis. Any
losses that may occur due to a specific contract would be recognized in the period in which the loss is determined probable.
During the years ended December 31, 2016, 2015 and 2014, respectively, the Company did not incur a loss with respect to
a specific significant service fee contract.
Administrative Fees. Administrative fee revenue includes the administration of premium associated with our producers and
their PORCs. In addition, we also earn fee revenue from debt cancellation programs, motor club programs, and warranty
programs. Related administrative fee revenue is recognized consistent with the earnings recognition pattern of the underlying
insurance policies, debt cancellation contracts and motor club memberships being administered, using Rule of 78's, modified
Rule of 78's, pro rata, or other methods as appropriate for the contract. Management selects the appropriate method based
on available information, and periodically reviews the selections as additional information becomes available.
Ceding Commissions
Ceding commissions earned under reinsurance agreements are based on contractual formulas that take into account, in part,
underwriting performance and investment returns experienced by the assuming companies. As experience changes, adjustments
to the ceding commissions are reflected in the period incurred and are based on the claim experience of the related policy. The
adjustment is calculated by adding the earned premium and investment income from the assets held in trust for the Company's
benefit less earned commissions, incurred claims and the reinsurer's fee for the coverage.
F- 20
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
Rental and Related Revenue
Rental revenue from residents in properties owned by Care but managed by a management company pursuant to a management
agreement (Managed Properties) are recognized monthly as services are provided, as lease periods for residents are short-term
in nature. The Company recognizes rental revenue from triple net leases on a straight-line basis over the non-cancelable term
of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is
derived from the leased property. Renewal options in leases with rental terms that are higher than those in the primary term are
excluded from the calculation of straight-line rent if the renewals are not reasonably assured. The Company commences rental
revenue recognition when the tenant takes control of the leased space. The Company recognizes lease termination payments as
a component of rental revenue in the period received, provided that there are no further obligations under the lease. Revenue
related to rental revenue is primarily attributable to services provided to the occupants of our senior living properties.
Management Fee Income
The Company earns management and incentive fees from the funds it manages. These management fees are paid periodically
in accordance with the terms of the individual management agreements for as long as the Company manages the funds.
Management fees typically consist of fees based on the amount of assets held in the Funds. Management fees are recognized as
revenue when earned. The Company does not recognize incentive fees until all contractual contingencies have been removed.
Management fee income is recorded in other income.
Policy and Contract Benefits
Member Benefit Claims
Member benefit claims represent claims paid on behalf of contract holders directly to third party providers for roadside assistance
and for the repair or replacement of covered products. Claims can also be paid directly to contract holders as a reimbursement
payment, provided supporting documentation of loss is submitted to the Company. Claims are recognized as expense when
incurred.
Net Losses and Loss Adjustment Expenses
Net losses and loss adjustment expenses represent losses and related claim adjudication and processing costs on insurance
contract claims, net of amounts ceded. Net losses include actual claims paid and the change in unpaid claim reserves.
Commissions Payable and Expense
Commissions are paid to distributors and retailers selling credit insurance policies, motor club memberships, mobile device
protection, and warranty service contracts, and are generally deferred and expensed in proportion to the earning of related
revenue. Credit insurance commission rates, in many instances, are set by state regulators and are also impacted by market
conditions. In certain instances, credit insurance commissions are subject to retrospective adjustment based on the profitability
of the related policies. Under these retrospective commission arrangements, the producer of the credit insurance policies receives
a retrospective commission if the premium generated by that producer in the accounting period exceeds the costs associated
with those policies, which includes the Company's administrative fees, claims, reserves, and premium taxes. The Company
analyzes the retrospective commission calculation periodically for each producer and, based on the analysis associated with
each such producer, the Company records a liability for any positive net retrospective commission earned and due to the producer
or, conversely, records a receivable, net of allowance, for amounts due from such producer for instances where the net result of
the retrospective commission calculation is negative. Commissions payable are included in other liabilities and accrued expenses.
Recent Accounting Standards
Recently Adopted Accounting Pronouncements
In January 2014, the FASB issued ASU 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40),
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure. This amendment
clarifies when an in substance repossession or foreclosure has occurred. Additionally, this amendment requires disclosure of the
amount of foreclosed residential real estate property held and the recorded investment in consumer mortgage loans collateralized
F- 21
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
by residential real estate that are in the process of foreclosure. The adoption of ASU 2014-04 did not have a material impact on
the Company's consolidated financial statements.
In April 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-08, Presentation of Financial Statements
(Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals
of Components of an Entity. These amendments change the criteria for reporting discontinued operations while enhancing
disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented
as discontinued operations. In addition, ASU 2014-08 requires expanded disclosures about discontinued operations that will
provide financial statement users with more information. ASU 2014-08 is effective for the first quarter of 2015 for the Company.
The effects of applying the revised guidance will vary based upon the nature and size of future disposal transactions. It is expected
that fewer disposal transactions will meet the new criteria to be reported as discontinued operations. The adoption of ASU
2014-08 did not have a material impact on the Company's consolidated financial statements.
In June 2014, the FASB issued ASU 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based
Payments when the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.
The amendments require that a performance target that affects vesting and that could be achieved after the requisite service
period shall be treated as a performance condition. The adoption of this standard did not have a material impact on the Company's
consolidated financial statements.
In August 2014, the FASB issued ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial
Liabilities of a Consolidated Collateralized Financing Entity. This pronouncement was effective for annual and interim periods
beginning after December 15, 2015, with early adoption permitted. ASU 2014-13 provides for a measurement alternative whereby
a company can measure both the financial assets and financial liabilities of its CLOs using the more observable of the fair value
of the financial assets and the fair value of the financial liabilities. The Company elected to early adopt ASU 2014-13 for the
year ended December 31, 2014 as it pertains to the CLOs it consolidates and elected to apply it retrospectively to all relevant
prior periods. The application of this new guidance resulted in adjustments to certain balances in the previously issued consolidated
financial statements for the year ended December 31, 2014, as well as for the interim periods ended March 31, 2014, June 30,
2014, and September 30, 2014.
In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20):
Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. The pronouncement eliminates
the concept of extraordinary items from GAAP. However, the presentation and disclosure guidance for items that are unusual
in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and
infrequently occurring. ASU 2015-01 was effective for the annual and interim periods beginning after December 15, 2015 with
early adoption permitted. The adoption of this standard did not have a material impact on the Company’s consolidated financial
statements.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which
amends the consolidation requirements in the FASB Accounting Standards Codification 810, Consolidation. ASU 2015-02 makes
targeted amendments to the current consolidation guidance for VIEs, which could change consolidation conclusions. This
pronouncement was effective on January 1, 2016, with early adoption is permitted. The Company elected to early adopt ASU
2015-02 for the year ended December 31, 2015 as it pertains to the CLOs it consolidates and elected to apply it effective January
1, 2015. The application of this amended guidance resulted in adjustments to certain balances in the previously issued consolidated
financial statements for the interim periods ended March 31, 2015, June 30, 2015 and September 30, 2015. See Note (12) Assets
and Liabilities of Consolidated CLOs.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that debt
issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying
amount of that debt liability and consistent with debt discounts. ASU 2015-03 requires retrospective adoption and was effective
for the Company on January 1, 2016. Accordingly, “Debt, net” is reported net of deferred financing costs as of December 31,
2016 and December 31, 2015, respectively, in the consolidated balance sheets. See Note—(13) Debt, net.
In April 2015, the FASB issued ASU 2015-05, Intangibles -Goodwill and Other -Internal-Use Software (Subtopic 350-40),
which will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement by providing
guidance as to whether an arrangement includes the sale or license of software. The adoption of this standard did not have a
material impact on the consolidated financial statements.
F- 22
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value
per Share (or Its Equivalent), which eliminates the requirement for entities to categorize within the fair value hierarchy
investments for which fair values are measured at net asset value (NAV) per share (FASB ASC Subtopic 820-10). ASU 2015-07
also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using
the NAV per share practical expedient, instead limiting disclosures to investments for which the entity has elected the expedient.
ASU 2015-07 was effective for the Company on January 1, 2016 and retrospective adoption is required. The adoption of this
standard did not have a material impact on the Company’s consolidated financial statements.
In May 2015, the FASB issued ASU 2015-08, Business Combinations (Topic 805): Pushdown Accounting—Amendments to SEC
Paragraphs Pursuant to Staff Accounting Bulletin No. 115 (SEC Update). ASU 2015-08 removes references to the SEC’s SAB
Topic 5.J on pushdown accounting from ASC 805-50. The Commission’s Staff Accounting Bulletin, "SAB" 115 had superseded
the guidance in SAB Topic 5.J in connection with the FASB’s November 2014 release of ASU 2014-17. The amendments in
ASU 2015-08 therefore conform to the FASB’s guidance on pushdown accounting with the SEC’s. The amendments were
effective upon issuance (May 12, 2015). The adoption of this standard did not have a material impact on the Company's
consolidated financial statements.
In May 2015, the FASB issued ASU 2015-09, Financial Services—Insurance (Topic 944): Disclosures about Short-Duration
Contracts, which expands the disclosure requirements for insurance companies that issue short-duration contracts (typically one
year or less) to provide users with additional disclosures about the liability for unpaid claims and claim adjustment expenses
and to increase the transparency of the significant estimates management makes in measuring those liabilities. In addition, the
disclosures will serve to increase insight into an insurance entity’s ability to underwrite and anticipate costs associated with
claims as well as provide users of the financial statements a better understanding of the amount and uncertainty of cash flows
arising from insurance liabilities, the nature and extent of risks on short-duration contracts and the timing of cash flows arising
from insurance liabilities. ASU 2015-09 was effective for the Company for the annual period beginning after December 15,
2015, and for interim periods within annual periods beginning after December 15, 2016. The adoption of this standard did not
have a material impact on the Company's consolidated financial statements.
In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements, which covers a wide range of Topics
in the Codification. The amendments in ASU 2015-10 represent changes to clarify the Codification, correct unintended application
of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current
accounting practice or create a significant administrative cost on most entities. Amendments with transition guidance were
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. All other amendments
are effective upon the ASU’s issuance (June 12, 2015). The adoption of this standard did not have a material impact on the
Company’s consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805):Simplifying the Accounting for
Measurement-Period Adjustments, which eliminates the requirement to restate prior period financial statements for measurement
period adjustments following a business combination. ASU 2015-16 requires that the cumulative impact of a measurement
period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is
identified. The prior period impact of the adjustment should be either presented separately on the face of the income statement
or disclosed in the notes. ASU 2015-16 became effective for fiscal years and interim reporting periods beginning after December
15, 2015, with early adoption permitted for financial statements that have not been issued. The Company elected to early adopt
ASU 2015-16 for the year ended December 31, 2015 as it pertains acquisitions in the year ended December 31, 2015. The
application of this new guidance did not have a material impact on the Company’s consolidated financial statements for any
periods previously reported, though it will impact the recording of measurement period adjustments prospectively.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) - Intra- Entity Transfers of Assets Other Than
Inventory (ASU 2016-16), which requires that an entity should recognize the income tax consequences of an intra-entity transfer
of an asset other than inventory when the transfer occurs. Consequently, the amendments in this standard eliminate the exception
for an intra-entity transfer of an asset other than inventory. The amendments in this standard do not include new disclosure
requirements; however, existing disclosure requirements might be applicable. ASU 2016-16 is effective for public companies
for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting
periods. The Company elected to early adopt this standard during the quarter ended December 31, 2016. The adoption of this
standard did not have a material impact on the Company’s consolidated financial statements.
F- 23
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business,
which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether
transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects
many areas of accounting including the treatment of acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 is
effective for public business entities in annual periods beginning after December 15, 2017, including interim periods therein
and must be applied prospectively on or after the effective date. There are no disclosures required for a change in accounting
principle at transition. Early adoption is permitted for transactions (i.e., acquisitions or dispositions) that occurred before the
issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued
or made available for issuance. The Company elected to early adopt this standard, effective for transactions on or after October
1, 2016. See note (6) Investments, for a summary of acquisitions entered into by the Company which were accounted for as
acquisitions of assets. 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. This standard was originally effective for the Company
on January 1, 2017. 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 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 2016-05, 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
F- 24
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company is currently
evaluating the effect on its 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. Early adoption is
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 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. Early adoption is permitted. 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
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.
F- 25
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
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 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. Early adoption is permitted. 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 December 2016, the FASB issued ASU 2016-19, Technical Corrections and Improvements. ASU 2016-19 clarifies guidance,
corrects errors and makes minor improvements affecting a variety of topics in the ASC. Most of the amendments are not expected
to have a significant effect on practice, but some of them could change practice for some entities. 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 2016-04 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.
F- 26
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
(3) Acquisitions
Acquisitions during the year ended December 31, 2016
Senior Living
Managed Properties
During the year ended December 31, 2016, subsidiaries in our senior living business and their partners entered into agreements
to acquire and operate three senior housing 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. 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 December 31, 2016, revenue and the net loss in the aggregate for the three managed properties
acquired were $10,878 and $2,416, respectively.
On June 30, 2016 and December 31, 2016, the Company finalized the determination of the fair value of the assets acquired and
the liabilities assumed for acquisitions completed in the first and third quarter of 2016, respectively. The adjustments to the
amounts recorded in prior periods was an increase of $132 to real estate, net with an offsetting decrease of $132 to intangible
assets, net related to in-place leases. Additionally, the change to the provisional amounts resulted in a decrease in depreciation
and amortization of $67.
The following table summarizes the consideration paid and the amounts of the final determination, as described above, for
transactions completed in the year ended December 31, 2016.
Consideration:
Cash
Non-cash non-controlling interests contributions
Fair value of total consideration
Acquisition costs
Recognized amounts of identifiable assets acquired
and liabilities assumed:
Assets:
Cash and cash equivalents
Real estate, net
Intangible assets, net
Other assets
Liabilities:
Deferred revenue
Other liabilities and accrued expenses
Total identifiable net assets assumed
$
$
$
$
$
2016
Acquisitions
Senior Living
81,492
3,113
84,605
622
184
77,787
6,838
248
(290)
(162)
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
In-place lease
Weighted Average
Amortization
Period (in Years)
Senior
Living
1.61
$
6,838
F- 27
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
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.
Acquisitions during the year ended December 31, 2015
Specialty Finance
On July 1, 2015, the Company completed the acquisition of Reliance First Capital, LLC (Reliance) for total consideration of
$24,441, which was comprised of cash of $10,281, a total of 1,625,000 shares of its Class A common stock (market value of
$11,960 at the time of issuance), and an earn-out to issue additional shares valued at $2,200 in exchange for 100% ownership.
The primary reason for the Company’s acquisition of Reliance is to expand its mortgage origination operations. The results of
Reliance, from its closing date, are included in the Company’s specialty finance segment and was considered an acquisition of
a business in accordance with ASC 805.
For the period from acquisition until December 31, 2015, revenue and net income were $22,934 and $2,019, respectively.
Senior Living
Managed Properties
During the year ended December 31, 2015, the Company and a partner of a subsidiary in our senior living business entered into
agreements to acquire and operate five senior housing communities for total consideration of $29,251 (which includes deposits
of $587 paid in the fourth quarter of 2014), of which $19,943 was financed through mortgage debt issued in connection with
the acquisitions, $1,861 was financed by a contribution of cash from the partner, and the remainder was paid with cash on hand.
Affiliates of the partner provide management services to the communities under a management contract.
Triple Net Lease Properties
During the year ended December 31, 2015, the Company acquired the assets of six senior living communities for total
consideration of $54,536 (which includes deposits of $1,490 paid in the fourth quarter of 2014), of which $39,500 was financed
through mortgage debt issued in connection with the acquisitions, and the remainder was paid with cash on hand.
The primary reason for the Company’s acquisition of the senior living communities was to expand its real estate operations. For
the period from acquisition until December 31, 2015, revenue and the net loss in aggregate for the properties acquired were
$11,802 and $2,496, respectively.
F- 28
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
The following table summarizes the consideration paid and the final determination of amounts of fair value of the assets acquired
and the liabilities assumed for the acquisitions completed during the year ended December 31, 2015:
Total consideration:
Cash
Common stock
Contingent consideration
Fair value of total consideration
Acquisition costs
Recognized amounts of identifiable assets acquired and
liabilities assumed:
Assets:
Cash and cash equivalents
Restricted cash
Mortgage loans held for sale, at fair value
Accounts and premiums receivable, net
Real estate, net
Goodwill
Intangible assets, net
Deferred tax assets
Other assets
Liabilities:
Fair value of debt assumed
Deferred revenue
Other liabilities and accrued expenses
Total identifiable net assets assumed
2015 Acquisitions
Specialty
Finance
Senior Living
Total
$
$
$
$
$
$
$
$
$
10,281
11,960
2,200
24,441
223
13,934
919
59,308
2,369
—
1,708
1,440
150
3,712
(52,836)
—
(6,263)
24,441
$
83,787
—
—
83,787
1,567
$
$
$
94,068
11,960
2,200
108,228
1,790
— $
—
—
—
76,003
—
8,800
—
92
—
(589)
(519)
83,787
$
13,934
919
59,308
2,369
76,003
1,708
10,240
150
3,804
(52,836)
(589)
(6,782)
108,228
Supplemental pro forma results of operations have not been presented for the above 2015 business acquisitions as they were not
material in relation to the Company’s reported results.
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
Trade names
Software
In-place Lease
Total acquired finite-lived other intangible assets
Specialty Insurance - Purchase of Non-controlling Interests
Weighted
Average
Amortization
Period (in
Years)
10.0
7.0
8.7
8.7
Specialty
Finance
Senior
Living
$
$
800
640
—
1,440
$
$
— $
—
8,800
8,800
$
Total
800
640
8,800
10,240
On January 1, 2015, Fortegra Financial Corporation (Fortegra) exercised an option to purchase the remaining 37.6% ownership
interest in ProtectCELL. Upon exercising the option, Fortegra made an initial payment of $3,000 and made an additional payment
of $4,100 in 2016 which was previously accrued.
F- 29
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
Acquisitions during the year ended December 31, 2014
Insurance and Insurance Services
On December 4, 2014, the Company completed the acquisition of Fortegra for total consideration of $211,740 comprised of
cash of $91,740 and borrowings of $120,000 in exchange for 100% ownership. Fortegra’s products include payment protection
products, motor club memberships, service contracts, device and warranty services, as well as administration services to business
partners, including insurance companies, retailers, dealers, insurance brokers and agents and financial services companies. The
primary reason for the Company’s acquisition of Fortegra is to expand its insurance and insurance services operations.
For the year ended December 31, 2014, revenue and net income were $26,174 and $1,461, respectively.
The following unaudited supplemental pro forma information as of December 31, 2014 in the table below presents the Company's
consolidated financial information as if Fortegra had been acquired on January 1, 2014:
Total revenue
Net income from continuing operations
Diluted earnings per share from continuing operations
For the Year Ended
December 31, 2014
463,143
12,723
0.76
$
$
$
The unaudited supplemental pro forma results were prepared for comparative purposes only and do not purport to be indicative
of the results of operations had the acquisition of Fortegra occurred at January 1, 2014, nor is it indicative of any future operating
results of the Company.
(4) Dispositions, Assets Held for Sale and Discontinued Operations
The Company classified its Philadelphia Financial Group (PFG) subsidiary as held for sale as of December 31, 2014. At the
time of such classification, the pending sale of PFG also met the requirements to be classified as a discontinued operation. The
sale of PFG was completed on June 30, 2015.
The Company received total cash of $142,837 at the time of sale and two future payments on the first and second anniversary
of closing totaling approximately $7,341. The gain on the sale net of tax, was approximately $15,619, which is classified as a
gain on sale from discontinued operations. As a result, the Company has reclassified the income and expenses attributable to
PFG to income from discontinued operations, net for the years ended December 31, 2015 and 2014.
F- 30
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
The following table represents detail of revenues and expenses of discontinued operations in the Consolidated Statements of
Operations for the year ended December 31, 2015 and 2014:
Year Ended December 31,
2015
2014
$
Revenues:
Net realized gain
Interest income
Separate account fees
Service and administrative fees
Other income
Total revenues
Expenses:
Interest expense
Payroll expense
Professional fees
Change in future policy benefits
Mortality expenses
Commission expense
Depreciation and amortization
Other expenses
Total expenses
Less: provision for income taxes
Income from discontinued operations, net
$
151
2,215
12,706
25,385
2
40,459
5,226
9,086
770
2,077
5,688
1,723
862
4,232
29,664
3,796
6,999
$
$
45
4,649
23,390
50,600
2
78,686
11,475
19,697
1,800
4,363
10,710
2,825
4,379
9,975
65,224
5,525
7,937
The following table presents the cash flows from discontinued operations for the periods indicated:
Net cash provided by (used in):
Operating activities
Investing activities (1)
Financing activities
Net cash flows provided by discontinued operations
Year Ended December 31,
2015
2014
$
$
(6,198) $
11,866
(5,000)
668
$
16,045
(2,967)
(7,667)
5,411
(1) Amount excludes $7,765 of non-controlling interests sold in connection with the sale of PFG.
(5) 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 year ended December 31, 2015, $(9,914) of pretax income
(loss) previously reported in corporate and other was allocated $2,234 and $(12,148) to the specialty insurance and asset
management operating segments, respectively. For the year ended December 31, 2014, $10,715 of pretax income previously
reported in corporate and other was allocated to the asset management operating segment. For the years ended December 31,
2015 and 2014, inclusive of what was allocated to the asset management operating segment was $(11,020) and $7,755 of net
income (loss) attributable to consolidated CLOs. The Company has reclassified prior period amounts to provide visibility and
F- 31
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
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:
Total revenue
Total expense
Net income (loss) attributable to consolidated
CLOs
Income (loss) before taxes from continuing
operations
Less: provision for income taxes
Net income before non-controlling interests
Less: net income attributable to non-controlling
interests from continuing operations and
discontinued operations
Net income (loss) attributable to Tiptree Inc.
Class A common stockholders
Year Ended December 31, 2016
Specialty
insurance
Asset
management
Senior
living
Specialty
finance
Corporate
and other
$
394,170
347,366
$
$
13,114
8,104
$
60,731
66,555
95,431
87,261
$
3,708
34,806
Total
$ 567,154
544,092
—
20,254
—
—
—
20,254
$
46,804
$
25,264
$
(5,824) $
8,170
$
(31,098) $
$
43,316
10,978
32,338
7,018
$
25,320
F- 32
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
Year Ended December 31, 2015
Total revenue
Total expense
Net income (loss) attributable to consolidated
CLOs
Income (loss) before taxes from continuing
operations
Less: (benefit) for income taxes
Discontinued operations
Net income before non-controlling interests
Less: net income attributable to non-controlling
interests from continuing operations and
discontinued operations
Net income (loss) attributable to Tiptree Inc.
Class A common stockholders
(1) Reclassified to conform to current year presentation
Total revenue
Total expense
Net income (loss) attributable to consolidated
CLOs
Income (loss) before taxes from continuing
operations
Less: (benefit) for income taxes
Discontinued operations
Net income before non-controlling interests
Less: net income attributable to non-controlling
interests from continuing operations and
discontinued operations
Net income (loss) attributable to Tiptree Inc.
Class A common stockholders
(1) Reclassified to conform to current year presentation
Specialty
insurance(1)
330,888
$
Asset
management(1)
6,770
$
Senior
living
Specialty
finance
$
46,128
$
54,999
Corporate
and other(1)
$
Total
(326) $ 438,459
298,876
6,634
55,663
48,734
34,102
444,009
—
(6,889)
—
—
—
(6,889)
$
32,012
$
(6,753) $
(9,535) $
6,265
$
(34,428) $ (12,439)
1,377
22,618
8,802
$
3,023
$
5,779
Year Ended December 31, 2014
Specialty
insurance
26,175
$
29,346
Asset
management(1)
7,118
$
8,452
Senior
living
Specialty
finance
$
$
29,281
26,110
15,223
17,185
Corporate
and other(1)
2,516
$
17,957
$
Total
80,313
99,050
—
19,525
—
—
—
19,525
$
(3,171) $
18,191
$
3,171
$
(1,962) $
(15,441) $
$
788
4,141
7,937
4,584
6,294
$
(1,710)
The following table presents the segment assets for the following periods:
Segment Assets as of December 31, 2016
Segment assets
Assets of consolidated CLOs
Total assets
Segment Assets as of December 31, 2015(1)
Segment assets
Assets of consolidated CLOs
Total assets
(1) Reclassified to conform to current year presentation
Specialty
insurance
Asset
management
Senior
living
Specialty
finance
Corporate
and other
Total
$ 1,268,152
—
$ 1,055,524
—
$
$
17,427
989,495
197,290
728,812
$
$
323,169
—
230,546
—
$
$
271,795
—
208,201
—
$
$
20,012
—
74,597
—
$
$
$
$
1,900,555
989,495
2,890,050
1,766,158
728,812
2,494,970
F- 33
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
(6) Investments
Available for Sale Securities, at fair value
All of the Company’s investments in available for sale securities as of December 31, 2016 and December 31, 2015 are held by
a subsidiary in the specialty insurance business. The following tables present the Company's investments in available for sale
securities:
U.S. Treasury securities and obligations of U.S.
government authorities and agencies
Obligations of state and political subdivisions
Corporate securities
Asset backed securities
Certificates of deposit
Equity securities
Obligations of foreign governments
Total
U.S. Treasury securities and obligations of U.S.
government authorities and agencies
Obligations of state and political subdivisions
Corporate securities
Asset backed securities
Certificates of deposit
Equity securities
Obligations of foreign governments
Total
Amortized
cost
As of December 31, 2016
Gross
Gross
unrealized losses
unrealized gains
Fair value
27,149
57,425
58,769
1,459
895
818
733
147,248
$
$
27
107
204
1
—
3
3
345
$
$
(377) $
(598)
(402)
—
—
(37)
(8)
(1,422) $
26,799
56,934
58,571
1,460
895
784
728
146,171
Amortized
cost
As of December 31, 2015
Gross
Gross
unrealized losses
unrealized gains
Fair value
53,274
51,942
68,400
1,525
893
6,081
2,931
185,046
$
$
83
466
89
4
—
106
—
748
$
$
(221) $
(73)
(651)
—
—
(79)
(67)
(1,091) $
53,136
52,335
67,838
1,529
893
6,108
2,864
184,703
$
$
$
$
F- 34
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(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 December 31, 2016
Less Than or Equal to One Year
Gross
unrealized
losses
# of
Securities
Fair value
More Than One Year
Gross
unrealized
losses
Fair
value
# of
Securities
U.S. Treasury securities and obligations of
U.S. government authorities and agencies $
20,979
$
(376)
115
$
16
$
Obligations of state and political
subdivisions
Corporate securities
Asset-backed securities
Equity securities
Obligations of foreign governments
Total
41,639
29,856
706
736
338
94,254
$
$
(597)
(400)
—
(35)
(8)
(1,416)
170
279
1
5
4
574
$
1,334
253
—
19
—
1,622
$
As of December 31, 2015
(1)
(1)
(2)
—
(2)
—
(6)
5
3
3
—
2
—
13
Less Than or Equal to One Year
Gross
unrealized
losses
# of
Securities
Fair value
More Than One Year
Gross
unrealized
losses
Fair
value
# of
Securities
U.S. Treasury securities and obligations of
U.S. government authorities and agencies $
35,588
$
(221)
146
$
— $
Obligations of state and political
subdivisions
Corporate securities
Equity securities
Obligations of foreign governments
Total
18,500
56,373
1,998
2,863
$ 115,322
$
(59)
(634)
(79)
(67)
(1,060)
45
302
8
18
519
$
400
267
—
—
667
$
—
(14)
(17)
—
—
(31)
—
2
6
—
—
8
The Company does not intend to sell the investments that were in an unrealized loss position at December 31, 2016, 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 December 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. There have been no other-than-temporary impairments recorded by
the Company for the three year period ended December 31, 2016.
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.
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Asset backed securities
Total
As of
December 31, 2016
December 31, 2015
Amortized
Cost
$
$
22,846
66,063
49,036
7,026
1,459
146,430
Fair Value
22,833
65,841
48,381
6,872
1,460
145,387
$
$
Amortized
Cost
$
$
20,347
76,967
56,133
23,993
1,525
178,965
Fair Value
20,319
76,578
56,240
23,929
1,529
178,595
$
$
F- 35
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(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:
Fair value of restricted investments for special deposits required by state insurance
departments
Fair value of restricted investments in trust pursuant to reinsurance agreements
Total fair value of restricted investments
$
$
10,111
7,573
17,684
$
$
10,250
7,821
18,071
The following table presents additional information on the Company’s available for sale securities:
As of December 31,
2015
2016
Year Ended December 31,
2015
2014
2016
Purchases of available for sale securities
Proceeds from maturities, calls and prepayments of available for sale securities
Gains (losses) realized on maturities, calls and prepayments of available for sale
securities
Gross proceeds from sales of available for sale securities
Gains (losses) realized on sales of available for sale securities
$
$
$
$
$
24,652
27,859
87
66,891
938
$
$
$
$
$
75,275
39,062
$
$
7,026
1,192
(62) $
20,353
4
$
$
4
783
—
Investment in Loans
The following table presents the Company’s investments in loans, measured at fair value and amortized cost:
Loans, at fair value
Corporate loans
Mortgage loans held for sale
Non-performing loans
Other loans receivable
Total loans, at fair value
Loans at amortized cost, net
Asset backed loans and other loans, net
Less: Allowance for loan losses
Total loans at amortized cost, net
Net deferred loan origination fees included in asset backed loans
Loans, at fair value
Corporate Loans
As of December 31,
2015
2016
$
$
$
$
175,558
121,439
74,923
1,169
373,089
115,033
1,195
113,838
5,244
$
$
$
$
233,861
120,836
38,289
1,409
394,395
52,994
463
52,531
3,520
Corporate loans that have been pledged as collateral totaled $175,365 at December 31, 2016 and $240,441 at December 31,
2015. Corporate loans primarily include syndicated leveraged loans held by the Company, which consist of $175,558 and
$233,861 in loans as of December 31, 2016 and December 31, 2015, respectively. As of December 31, 2016 and December 31,
2015, the unpaid principal balance on these loans was $176,808 and $242,693, respectively.
F- 36
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
As of December 31, 2016 and December 31, 2015, the difference between fair value of the Corporate loans and the unpaid
principal balance was $1,250 and $8,832, respectively.
Mortgage Loans Held for Sale
Mortgage loans held for sale that have been pledged as collateral totaled $117,734 at December 31, 2016 and $112,743 at
December 31, 2015. As of December 31, 2016, the fair value of mortgage loans exceeded the unpaid principal balance of $118,162
by $3,277. 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 unpaid principal balance and fair value of mortgage loans held for
sale that are 90 days or more past due were $142 and $82, respectively, as of December 31, 2015. 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 $60,409 at December 31, 2016. As of December 31, 2016
and December 31, 2015, the Company’s investments included $74,923 and $38,289, respectively, of non-performing loans
collateralized by real estate of which the unpaid principal balance was $113,892 and $61,676, respectively. As of December 31,
2016 and December 31, 2015, the difference between the fair value of the NPLs and the unpaid principal balance was $(38,969)
and $(23,387), respectively. Included in real estate, net as of December 31, 2016 and December 31, 2015 are $13,366 and $2,197,
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 $119,558 at December 31, 2016 and $55,814 at December 31,
2015. As of December 31, 2016 and December 31, 2015, the Company held $113,138 and $51,831, 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 December 31,
2016 and December 31, 2015, 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 December 31, 2016. As of December 31, 2016, 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 December 31, 2016
Managed properties
Triple net lease properties
Foreclosed residential real estate property
Total
Managed properties
Triple net lease properties
Foreclosed residential real estate property
Other real estate
Total
$
$
$
$
Land
Buildings and
equipment
16,347
13,778
—
30,125
$
$
189,463
94,291
13,366
297,120
Accumulated
depreciation
$
(11,212) $
(6,610)
—
(17,822) $
As of December 31, 2015
Total
194,598
101,459
13,366
309,423
Total
117,459
85,216
2,197
1,286
206,158
$
$
Accumulated
depreciation
$
(5,842) $
(4,118)
—
(389)
(10,349) $
Land
Buildings and
equipment
9,905
12,173
—
—
22,078
$
$
113,396
77,161
2,197
1,675
194,429
F- 37
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
For the year ended December 31, 2016, the Company acquired two senior living facilities accounted for as asset acquisitions,
with $17,777 of real estate acquired, and $3,308 of identifiable intangible assets related to in-place leases which will be amortized
over approximately 12 years. These two properties are in addition to the three acquisitions disclosed in Note—(3) Acquisitions,
which were accounted for as business combinations.
Depreciation expense related to the Company’s real estate investments was $7,851, $5,509 and $2,768 for the years ended
December 31, 2016, 2015 and 2014, respectively.
Future Minimum Rental Revenue
The following table presents the future minimum rental revenue under the noncancelable terms of all operating leases as of:
2017
2018
2019
2020
2021
Thereafter
Total
December 31,
2016
$
$
7,232
7,335
7,441
7,550
7,662
31,042
68,262
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 $47,147, $36,551 and $15,803 for the years ended December 31, 2016, 2015
and 2014, 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
• 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:
Net investment income
Available for sale securities, at fair value
Loans, at fair value
Equity securities, trading, at fair value
Real estate, net
Other investments
Total investment income
Less: investment expenses
Net investment income
Year Ended December 31,
2015
2014
2016
$
$
3,075
7,999
2,981
166
302
14,523
1,542
12,981
$
$
3,166
2,426
369
—
286
6,247
792
5,455
$
$
212
—
76
—
30
318
39
279
F- 38
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
The following table presents the components of net realized and unrealized gains (losses) recorded on the Consolidated Statements
of Operations:
Net realized and unrealized gains (losses)
Net realized gains (losses)
Net unrealized gains (losses)
Net realized and unrealized gains (losses)
Year Ended December 31,
2015
2014
2016
70,811
16,489
87,300
$
32,088
(813)
31,275
$
13,665
844
14,509
$
Included in net realized gains (losses) is gain on sale of loans held for sale, net of $68,181, $33,849 and $7,154 for the years
ended December 31, 2016, 2015 and 2014, respectively.
Net unrealized gains recognized during the years ended December 31, 2016, 2015 and 2014 on equity securities, trading, at fair
value still held at December 31, 2016, 2015 and 2014 was $6,032, $256 and $0, respectively.
(7) Fair Value of Financial Instruments
The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs to the extent possible to
measure a financial instrument’s fair value. Observable inputs reflect the assumptions market participants would use in pricing
an asset or liability, and are affected by the type of product, whether the product is traded on an active exchange or in the
secondary market, as well as current market conditions. To the extent that valuation is based on models or inputs that are less
observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs
used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the
level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest
level input that is significant to the fair value measurement in its entirety. Fair value is estimated by applying the hierarchy
discussed in Note—(2) Summary of Significant Accounting Policies, which prioritizes the inputs used to measure fair value into
three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to
the fair value measurement. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest
for instruments categorized within Level 3 of the fair value hierarchy.
The Company’s fair value measurement is based primarily on a market approach, which utilizes prices and other relevant
information generated by market transactions involving identical or comparable financial instruments. Sources of inputs to the
market approach include third-party pricing services, independent broker quotations and pricing matrices. Management analyzes
the third party valuation methodologies and its related inputs to perform assessments to determine the appropriate level within
the fair value hierarchy and to assess reliability of values. Further, management has a process in place to review all changes in
fair value that occurred during each measurement period. Any discrepancies or unusual observations are followed through to
resolution through the source of the pricing as well as utilizing comparisons, if applicable, to alternate pricing sources. In addition,
the Company utilizes an income approach to measure the fair value of NPLs, as discussed below.
The Company utilizes observable and unobservable inputs within its valuation methodologies. Observable inputs may include:
benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data.
In addition, specific issuer information and other market data is used. Broker quotes are obtained from sources recognized to
be market participants. Unobservable inputs may include: expected cash flow streams, default rates, supply and demand
considerations and market volatility.
Available for Sale Securities
Available for sale securities are generally classified within either Level 1 or Level 2 of the fair value hierarchy and are based
on prices provided by an independent pricing service and a third party investment manager who provide a single price or quote
per security.
The following details the methods and assumptions used to estimate the fair value of each class of available for sale securities
and the applicable level each security falls within the fair value hierarchy:
U.S Treasury Securities, Obligations of U.S. Government Authorities and Agencies, Obligations of State and Political
Subdivisions, Corporate Securities, Asset-Backed Securities, and Obligations of Foreign Governments: Fair values were
obtained from an independent pricing service and a third party investment manager. The prices provided by the independent
F- 39
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
pricing service are based on quoted market prices, when available, non-binding broker quotes, or matrix pricing and fall
under Level 2 of the fair value hierarchy.
Certificates of Deposit: The estimated fair value of certificates of deposit approximate carrying value and fall under Level
1 of the fair value hierarchy.
Equity Securities: The fair values of publicly traded common and preferred stocks were obtained from market value
quotations provided by an independent pricing service and fall under Level 1 of the fair value hierarchy. The fair values of
non-publicly traded common and preferred stocks were based on prices obtained from an independent pricing service using
unobservable inputs and fall under Level 3 of the fair value hierarchy.
Derivative Assets and Liabilities: Derivatives are comprised of credit default swaps (CDS), index credit default swaps (CDX),
interest rate lock commitments (IRLC), to be announced mortgage backed securities (TBA) and interest rate swaps (IRS). The
fair value of these instruments is based upon valuation pricing models, which represent the amount the Company would expect
to receive or pay at the balance sheet date to exit the position. In general, the fair value of CDSs and CDXs are based on dealer
quotes. Because significant inputs, other than unadjusted quoted prices in active markets are used to determine the dealer quotes,
such as price volatility, the Company classifies them as Level 2 in the fair value hierarchy. The fair value of IRS is based upon
either valuation pricing models, which represent the amount the Company would expect to pay at the balance sheet date if the
contracts were exited, or by obtaining broker or counterparty quotes. Because there are observable inputs used to arrive at these
prices, the Company has classified IRS within Level 2 of the fair value hierarchy. Our mortgage origination subsidiaries issue
IRLCs to its customers, which are carried at estimated fair value on the Company’s Consolidated Balance Sheet. The estimated
fair values of these commitments are generally calculated by reference to the value of the underlying loan associated with the
IRLC net of costs to produce and an expected fall out assumption. The fair values of these commitments generally result in a
Level 3 classification. Our mortgage origination subsidiaries manage their exposure by entering into forward delivery
commitments with loan investors. For loans not locked with investors under a forward delivery commitment, the Company
enters into hedge instruments, primarily TBAs, to protect against movements in interest rates. The fair values of TBA mortgage
backed securities generally result in a Level 2 classification.
Trading Assets and Liabilities: Trading assets and liabilities consist primarily of privately held equity securities, exchange-
traded equity securities, CLOs, collateralized debt obligations (CDOs), derivative assets and liabilities, tax exempt securities,
and U.S. Treasury short positions. The fair value of privately held equity securities are based on quotes obtained from dealers
or internally developed valuation models. Because significant inputs used to determine the dealer quotes or model values are
not observable, such as projected future earnings and price volatility, the Company has classified them within Level 3 of the
fair value hierarchy. The Company’s U.S. Treasury short position is priced through dealer indicative quotes and as such is
classified as Level 2. Trading assets are presented in the consolidated balance sheets within equity securities, trading, at fair
value and other investments. Trading liabilities are included within other liabilities and accrued expenses.
Positions in securitized products such as CLOs and CDOs are based on quotes obtained from dealers and valuation models.
When these quotes are based directly or indirectly on observable inputs such as quoted prices for similar assets exchanged in
an active or inactive market, the Company has classified them within Level 2 of the fair value hierarchy. If these quotes are
based on valuation models using unobservable inputs such as expected future cash flows, default rates, supply and demand
considerations, and market volatility, the Company has classified them within Level 3 of the fair value hierarchy.
The fair value of tax exempt securities is determined by obtaining quotes from independent pricing services. In most cases,
quotes are obtained from two pricing services and the average of both quotes is used. The independent pricing services determine
their quotes using observable inputs such as current interest rates, specific issuer information and other market data for such
securities. Therefore, the estimate of fair value is subject to a high degree of variability based upon market conditions, the
availability of issuer information and the assumptions made. The valuation inputs used to arrive at fair value for such debt
obligations are generally classified within Level 2 or Level 3 of the fair value hierarchy.
Nonperforming loans and REO: The Company determines the purchase price for NPLs at the time of acquisition and for each
subsequent valuation by using a discounted cash flow valuation model and considering alternate loan resolution probabilities,
including modification, liquidation, or conversion to REO. The significant unobservable inputs used in the fair value measurement
of our NPLs are discount rates, loan resolution timeline, and the value of underlying properties. The fair values of NPLs which
are making payments (generally based on a modification or a workout plan) are primarily based upon secondary market transaction
prices, which are expressed as a percentage of unpaid principal balance (UPB). Observable inputs to the model include loan
amounts, payment history, and property types. Our NPLs are on nonaccrual status at the time of purchase as it is probable that
F- 40
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
principal or interest is not fully collectible. NPLs are included in loans, at fair value and fall under Level 3 of the fair value
hierarchy.
NPLs that have become REOs were measured at fair value on a non-recurring basis during the year ended December 31, 2016
(the Company did not have investments in REO status in prior year period). The carrying value of REOs at December 31, 2016
was $13,366. Upon conversion to REO, the fair value is estimated using broker price opinion (BPO). BPOs are subject to
judgments of a particular broker formed by visiting a property, assessing general home values in an area, reviewing comparable
listings, and reviewing comparable completed sales. These judgments may vary among brokers and may fluctuate over time
based on housing market activities and the influx of additional comparable listings and sales. REO is included in real estate,
net.
The following tables present the Company’s fair value hierarchies for financial assets and liabilities, including the balances
associated with the consolidated CLOs, measured on a recurring basis:
Assets:
Available for sale securities, at fair value:
Equity securities
U.S. Treasury securities and U.S. government agencies
Obligations of state and political subdivisions
Obligations of foreign governments
Certificates of deposit
Asset backed securities
Corporate bonds
Total available for sale securities
Loans, at fair value:
Corporate loans
Mortgage loans held for sale
Non-performing loans
Other loans receivable
Total loans, at fair value
As of December 31, 2016
Quoted prices
in
active markets
Level 1
Other significant
observable
inputs
Level 2
Significant
unobservable
inputs
Level 3
Fair value
$
736
$
— $
—
—
—
895
—
—
1,631
—
—
—
—
—
26,799
56,934
728
—
1,460
58,571
144,492
46,352
121,439
—
—
167,791
$
48
—
—
—
—
—
—
48
129,206
—
74,923
1,169
205,298
784
26,799
56,934
728
895
1,460
58,571
146,171
175,558
121,439
74,923
1,169
373,089
Equity securities, trading, at fair value
48,612
—
—
48,612
Other investments:
Derivative assets:
Interest rate swaps
Interest rate lock commitments
TBA – mortgage backed securities
Credit derivatives
Total derivative assets
CLOs
Debentures
Total other investments
—
—
—
—
—
—
—
—
1,388
—
1,678
12,598
15,664
—
3,957
19,621
—
4,872
—
—
4,872
974
—
5,846
1,388
4,872
1,678
12,598
20,536
974
3,957
25,467
Total financial instruments attributable to non-CLOs included in
consolidated assets
50,243
331,904
211,192
593,339
Financial instruments included in assets of consolidated CLOs:
Loans, at fair value
Total financial instruments included in assets of consolidated CLOs
—
—
342,370
342,370
585,870
585,870
928,240
928,240
Total
$
50,243
$
674,274
$
797,062
$
1,521,579
F- 41
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
Liabilities:
Trading liabilities:
Derivative liabilities:
Interest rate swaps
Forward delivery contracts
TBA-mortgage backed securities
Foreign currency forward contracts
Total derivative liabilities
Total trading liabilities (included in other liabilities and accrued
expenses)
Contingent consideration payable
Preferred notes payable
Total financial instruments attributable to Non-CLOs included in
consolidated liabilities
Financial instruments included in liabilities of consolidated CLOs:
Notes payable of CLOs
Total financial instruments included in liabilities of consolidated
CLOs
As of December 31, 2016
Quoted prices
in
active markets
Level 1
Other significant
observable
inputs
Level 2
Significant
unobservable
inputs
Level 3
Fair value
$
— $
1,042
$
— $
1,042
—
—
—
—
—
—
—
—
—
—
84
269
3
1,398
1,398
—
—
1,398
—
—
—
—
—
—
—
1,852
1,232
3,084
84
269
3
1,398
1,398
1,852
1,232
4,482
912,034
912,034
912,034
912,034
Total
$
— $
1,398
$
915,118
$
916,516
Assets:
Available for sale securities, at fair value:
Equity securities
U.S. Treasury securities and U.S. government agencies
Obligations of state and political subdivisions
Obligations of foreign governments
Certificates of deposit
Asset backed securities
Corporate bonds
Total available for sale securities, at fair value
Loans, at fair value
Corporate loans
Mortgage loans held for sale
Non-performing loans
Other loans receivable
Total loans, at fair value
As of December 31, 2015
Quoted prices
in
active markets
Level 1
Other significant
observable
inputs
Level 2
Significant
unobservable
inputs
Level 3
Fair value
$
6,060
$
— $
—
—
—
893
—
—
6,953
—
—
—
—
—
53,136
52,335
2,864
—
1,529
67,838
177,702
55,956
120,836
—
125
176,917
$
48
—
—
—
—
—
—
48
177,905
—
38,289
1,284
217,478
6,108
53,136
52,335
2,864
893
1,529
67,838
184,703
233,861
120,836
38,289
1,409
394,395
Equity securities, trading, at fair value
3,786
—
8,941
12,727
Other investments:
Derivative assets:
Interest rate lock commitments
TBA - mortgage backed securities
Forward delivery contracts
Credit derivatives
Total derivative assets
Tax exempt securities
—
—
—
—
—
—
—
179
—
11,945
12,124
1,732
3,384
—
11
—
3,395
8,314
3,384
179
11
11,945
15,519
10,046
F- 42
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
CLOs
Debentures
Total other investments
As of December 31, 2015
Quoted prices
in
active markets
Level 1
Other significant
observable
inputs
Level 2
Significant
unobservable
inputs
Level 3
—
—
—
—
4,191
18,047
1,768
—
13,477
Fair value
1,768
4,191
31,524
Total financial instruments attributable to non-CLOs included in
consolidated assets
10,739
372,666
239,944
623,349
Financial instruments included in assets of consolidated CLOs:
Loans, at fair value
Total financial instruments included in assets of consolidated
CLOs
Total
Liabilities:
Trading liabilities:
U.S. Treasury securities
Total trading liabilities
Derivative liabilities:
Interest rate swaps
Forward delivery contracts
TBA-mortgage backed securities
Foreign currency forward contracts
Total derivative liabilities
Total trading liabilities (included in other liabilities and accrued
expenses)
Contingent consideration payable
Preferred notes payable
Total financial instruments attributable to Non-CLOs included in
consolidated liabilities
Financial instruments included in liabilities of consolidated CLOs:
Notes payable of CLOs
Total financial instruments included in liabilities of consolidated
CLOs
$
$
—
—
159,892
159,892
520,892
520,892
680,784
680,784
10,739
$
532,558
$
760,836
$
1,304,133
— $
—
19,679
$
19,679
— $
—
19,679
19,679
—
—
—
—
—
—
—
—
—
—
—
2,310
8
150
5
2,473
22,152
—
—
22,152
—
—
—
—
—
—
936
1,562
2,498
2,310
8
150
5
2,473
22,152
936
1,562
24,650
—
—
683,827
683,827
683,827
683,827
Total
$
— $
22,152
$
686,325
$
708,477
F- 43
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
The following table represents additional information about assets that are measured at fair value on a recurring basis for which
the Company has utilized Level 3 inputs to determine fair value for the following periods:
Balance at January 1,
Net realized gains (losses)
Net unrealized gains (losses)
Origination of IRLC
Purchases (2)
Sales
Issuances
Transfer into Level 3 (1) (2)
Transfer adjustments (out of) Level 3 (1)
Adoption of ASU 2015-02
Attributable to policyowner
Conversion to real estate owned
Conversion to mortgage held for sale
Warehouse transfer to CLO
Other
Balance at December 31,
Changes in unrealized gains (losses) included in earnings
related to assets still held at period end
$
$
$
Year Ended December 31,
2016
Non-CLO
assets
CLO assets
Non-CLO
assets
2015
CLO assets
$
239,944
5,440
5,334
53,083
147,920
(76,196)
2,179
23,184
(18,872)
—
—
(15,132)
(51,594)
(104,098)
$
520,892
159
25,994
—
222,218
(154,524)
2,074
7,619
(142,660)
—
—
—
—
104,098
—
211,192
$
—
585,870
$
11,666
98
661
28,876
44,458
(2,040)
3
184,409
(862)
1,539
—
(2,289)
(26,358)
—
(217)
239,944
$
576,811
841
(15,247)
—
191,173
(85,973)
787
241,520
(60,609)
(328,411)
—
—
—
—
—
520,892
$
$
Assets held
for sale
$ 3,771,503
—
—
—
141,247
(3,967,798)
—
—
—
—
55,048
—
—
—
—
—
—
3,597
$
16,276
$
(3,282) $
(28,631) $
(1) All transfers are deemed to occur at end of period. Transfers between Level 2 and 3 were a result of subjecting third-party pricing on both CLO and Non-
CLO assets to various liquidity, depth, bid-ask spread and benchmarking criteria as well as assessing the availability of observable inputs affecting their
fair valuation.
(2) Purchases and transfers into Level 3 for 2015 have been restated to reflect assets purchased during a period as purchased rather than transfered. This
change had no impact on the total amount of Level 3 assets.
The following table represents additional information about liabilities that are measured at fair value on a recurring basis for
which the Company has utilized Level 3 inputs to determine fair value for the following periods:
Balance at January 1,
Net unrealized gains (losses)
Purchases
Issuances
Dispositions
FV adjustment
Adoption of ASU 2015-02
Balance at December 31,
Changes in unrealized (losses) gains included in earnings related to
liabilities still held at period end
Year Ended December 31,
2016
2015
Non-CLO
Liabilities
CLO
Liabilities
Non-CLO
Liabilities
CLO
Liabilities
$
2,498
$
683,827
$
2,802
$
1,785,207
(314)
—
(377)
—
1,277
—
25,823
—
225,000
(22,616)
—
—
(2,504)
2,200
—
—
—
2,063
—
(41,272)
(30,805)
—
—
(1,031,366)
3,084
$
912,034
$
2,498
$
683,827
(314) $
53,880
$
(2,504) $
(8,472)
$
$
F- 44
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
The following is quantitative information about Level 3 significant unobservable inputs used in fair valuation. Disclosure of
this information is not required in circumstances where a valuation (unadjusted) is obtained from a third-party pricing service
and the information regarding the unobservable inputs is not readily available to the Company.
Fair Value as of
Assets (1)
December 31,
2016
December 31,
2015
Valuation
Technique
Tax exempt security
$
— $
121
Tax exempt security
—
8,193
Discounted cash
flow
Market yield
analysis
Unobservable
input(s)
Short term cash
flows
Yield to maturity
Actual or Range
(Weighted average)
December 31,
2016
December 31,
2015
N/A
N/A
0.0%
6.50%
Interest rate lock
commitments
Forward delivery
contracts
NPLs
Total
4,872
—
74,923
$
79,795
$
3,384
Internal model
Pull through rate
45% - 95%
55% - 95%
11
Internal model
Pull through rate
N/A
80% - 100%
Discounted cash
flow
See table below (2)
See table
below
See table
below
38,289
49,998
(1) Financial assets classified as Level 3 and fair valued using significant unobservable inputs classified as Level 3 have not been provided as these are not
readily available to the Company (including servicing release premium for interest rate lock commitments and forward delivery contracts).
(2) Significant changes in any of these inputs in isolation could result in a significant change to the fair value measurement. A decline in the discount rate in
isolation would increase the fair value. A decrease in the housing pricing index in isolation would decrease the fair value. Individual loan characteristics,
such as location and value of underlying collateral, affect the loan resolution timeline. An increase in the loan resolution timeline in isolation would
decrease the fair value. A decrease in the value of underlying properties in isolation would decrease the fair value.
The following table sets forth quantitative information about the significant unobservable inputs used to measure the fair value
of our NPLs. For NPLs that are not making payments, discount rate, loan resolution time-line, value of underlying properties,
holdings costs and liquidation costs are the primary inputs used to measure fair value. For NPLs that are making payments, note
rate and secondary market transaction prices/UPB are the primary inputs used to measure fair value.
As of December 31, 2015
Low
15.1%
0.6
$40
5.5%
7.5%
3.0%
72.0%
Average(1)
22.0%
1.2
$220
9.6%
10.5%
4.4%
73.3%
High
30.0%
2.7
$1,375
24.6%
21.8%
6.0%
88.5%
Unobservable inputs
Discount rate
Loan resolution time-line (Years)
Value of underlying properties
Holding costs
Liquidation costs
Note rate
Secondary market transaction prices/UPB
(1) Weighted based on value of underlying properties.
As of December 31, 2016
Low
16.0%
0.5
$32
5.4%
8.5%
3.0%
75.5%
Average(1)
22.9%
1.2
$234
8.3%
9.6%
4.8%
83.7%
High
30.0%
2.3
$1,800
24.1%
25.0%
6.0%
88.5%
F- 45
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
Fair Value as of
Actual or Range (Weighted
average)
Liabilities (1)
December 31,
2016
December 31,
2015
Valuation
Technique
Unobservable
input(s)
December 31,
2016
December 31,
2015
Contingent
consideration
payable - Reliance
Contingent
consideration
payable - Luxury
Preferred notes
payable
$
1,800
$
900
External
model
Book value growth
rate
5.0%
5.0%
Forecast EBITDA
$951 - $6,005
$1,326 - $3,517
52
1,232
Asset volatility
1.4% - 23.7%
2.4% - 20.1%
Projected cash
available for
distribution
$1,059 - $1,316
$828 - $1,281
Discount rate
12.0%
12.0%
Internal
model
Internal
model
36
1,562
2,498
Total
$
3,084
$
(1) Not included in this table are the debt obligations of consolidated CLOs, measured and leveled on the basis of the fair value of the (more observable)
financial assets of the consolidated CLOs. See Note—(12) Assets and Liabilities of Consolidated CLOs.
The following table presents the carrying amounts and estimated fair values of financial assets and liabilities that are not recorded
at fair value and their respective levels within the fair value hierarchy:
As of December 31, 2016
As of December 31, 2015
Level within
Fair Value
Hierarchy
Fair Value
Carrying
Value
Level within
Fair Value
Hierarchy
Fair Value
Carrying
Value
2
3
$
$
$
$
28,293
28,293
798,806
798,806
$
$
$
$
28,732
28,732
799,828
799,828
2
3
$
$
$
$
20,250
20,250
672,096
672,096
$
$
$
$
21,696
21,696
671,648
671,648
Assets:
Notes and accounts
receivable, net
Total Assets
Liabilities:
Debt, net
Total Liabilities
Notes and accounts receivable: To the extent that carrying amounts differ from fair value, fair value is determined based
on contractual cash flows discounted at market rates for similar credits. Categorized as Level 2 of the fair value hierarchy.
Debt: The fair value of notes payable is determined based on contractual cash flows discounted at market rates for mortgage
notes payable and either dealer quotes or contractual cash flows discounted at market rates for other notes payable.
Categorized as Level 3 of the fair value hierarchy.
Additionally, the following financial assets and liabilities on the Consolidated Balance Sheets are not carried at fair value, but
whose carrying amounts approximate their fair value:
Loans Owned, at Amortized Cost: The fair value of loans owned, at amortized cost approximates its carrying value because
the interest rates on the loans are based on a variable market interest rate. Categorized as Level 3 of the fair value hierarchy.
Cash and Cash Equivalents: The carrying amounts of cash and cash equivalents are carried at cost which approximates fair
value. Categorized as Level 1 of the fair value hierarchy.
Accounts and premiums receivable, net, retrospective commissions receivable and other receivables: The carrying amounts
approximate fair value since no interest rate is charged on these short duration assets. Categorized as Level 2 of the fair
value hierarchy. See Note—(8) Notes and Accounts Receivable, net.
Due from Brokers, Dealers, and Trustees and Due to Brokers, Dealers and Trustees: The carrying amounts are included in
nature.
other assets and other liabilities and accrued expenses and approximate their fair value due to their
Categorized as Level 2 of the fair value hierarchy.
F- 46
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
(8) Notes and Accounts Receivable, net
The following table summarizes the total Notes and Accounts receivable, net:
Notes receivable, net
Accounts and premiums receivable, net
Retrospective commissions receivable
Other receivables
Total
As of December 31,
2015
2016
$
$
24,775
45,041
59,175
28,509
157,500
$
$
17,505
57,056
39,586
22,661
136,808
Notes Receivable, net
Specialty insurance
As of December 31, 2016 and December 31, 2015, the Company’s specialty insurance business held $20,913 and $13,698 in
notes receivable, net, respectively. The majority of these notes totaling $20,615 and $12,216 at December 31, 2016 and
December 31, 2015, respectively, consist of receivables from specialty insurance business’s premium financing program. At
December 31, 2016 and December 31, 2015, respectively, a total of $298 and $1,482 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 $1,444 and $768 as of December 31, 2016 and December 31, 2015, respectively. As of December 31, 2016 and December 31,
2015, there were $2,188 and $1,553 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 December 31, 2016 and
December 31, 2015 was approximately $3,862 and $3,807, respectively. As of December 31, 2016, 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 $225 and $165 as of December 31, 2016 and December 31,
2015, respectively.
F- 47
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
(9) 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 Year ended December 31, 2016
Premiums written:
Life insurance
Accident and health insurance
Property and liability insurance
Total premiums written
Premiums earned:
Life insurance
Accident and health insurance
Property and liability insurance
Total premiums earned
For the Year ended December 31, 2015
Premiums written:
Life insurance
Accident and health insurance
Property and liability insurance
Total premiums written
Premiums earned:
Life insurance
Accident and health insurance
Property and liability insurance
Total premiums earned
For the Year ended December 31, 2014
Premiums written:
Life insurance
Accident and health insurance
Property and liability insurance
Total premiums written
Premiums earned:
Life insurance
Accident and health insurance
Property and liability insurance
Total premiums earned
$
$
$
$
$
$
2,522
3,335
15,270
21,127
2,543
3,262
6,034
11,839
3,000
3,095
7,102
13,197
3,011
3,051
3,409
9,471
299
554
214
1,067
266
497
201
964
$
$
$
$
$
$
33,630
40,800
262,740
337,170
34,449
36,355
158,632
229,436
33,590
39,615
108,891
182,096
34,475
36,571
95,219
166,265
3,491
3,715
6,723
13,929
2,956
3,305
6,566
12,827
7.5%
8.2%
5.8%
6.3%
7.4%
9.0%
3.8%
5.2%
8.9%
7.8%
6.5%
7.2%
8.7%
8.3%
3.6%
5.7%
8.6%
14.9%
3.2%
7.7%
9.0%
15.0%
3.1%
7.5%
65,152
116,861
505,147
687,160
61,921
112,847
496,418
671,186
67,416
124,862
480,533
672,811
57,203
112,474
416,986
586,663
6,034
11,649
37,173
54,856
4,625
9,003
31,535
45,163
$
$
$
$
$
34,044
79,396
257,677
371,117
30,015
79,754
343,820
453,589
36,826
88,342
378,744
503,912
25,739
78,954
325,176
429,869
2,842
8,488
30,664
41,994
1,935
6,195
25,170
33,300
$
$
$
$
$
$
F- 48
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
The following table presents the components of policy and contract benefits, including the effect of reinsurance on losses and
loss adjustment expenses ("LAE") incurred:
Direct
Amount
Ceded to
Other
Companies
Assumed
from Other
Companies Net Amount
Percentage of
Amount -
Assumed to
Net
For the Year ended December 31, 2016
Losses Incurred
Life insurance
Accident and health insurance
Property and liability insurance
Total losses incurred
For the Year ended December 31, 2015
Losses Incurred
Life insurance
Accident and health insurance
Property and liability insurance
Total losses incurred
For the Year ended December 31, 2014
Losses Incurred
Life insurance
Accident and health insurance
Property and liability insurance
Total losses incurred
$
$
32,574
19,250
219,538
271,362
$
16,945
16,339
158,520
191,804
1,184
871
3,337
5,392
Member benefit claims (1)
Total policy and contract benefits
$
$
27,583
16,613
132,775
176,971
$
12,468
13,555
98,700
124,723
1,163
860
2,297
4,320
Member benefit claims (1)
Total policy and contract benefits
$
$
2,125
729
7,419
10,273
$
1,138
472
5,924
7,534
246
55
113
414
Member benefit claims (1)
Total policy and contract benefits
$
$
$
$
$
$
16,813
3,782
64,355
84,950
21,834
106,784
16,278
3,918
36,372
56,568
29,744
86,312
1,233
312
1,608
3,153
2,676
5,829
7.0%
23.0%
5.2%
6.3%
7.1%
21.9%
6.3%
7.6%
20.0%
17.6%
7.0%
13.1%
(1) - Member benefit claims are not covered by reinsurance.
F- 49
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
The following table presents the components of the reinsurance receivables:
Prepaid reinsurance premiums:
Life (1)
Accident and health (1)
Property (2)
Total
Ceded claim reserves:
Life
Accident and health
Property
Total ceded claim reserves recoverable
Other reinsurance settlements recoverable
Reinsurance receivables
As of December 31,
2015
2016
$
64,621
$
53,999
94,091
212,711
2,929
10,435
49,917
63,281
20,242
296,234
$
$
61,919
54,357
180,236
296,512
2,664
8,889
30,911
42,464
13,950
352,926
(1) Including policyholder account balances ceded.
(2) Includes a non-cash transaction, as part of a reinsurance contract cancellation, that resulted in a reduction of $92,854 in reinsurance receivable, offset
by an increase of $88,857 in assets and a decrease of $3,997 in liabilities.
The following table presents the aggregate amount included in reinsurance receivables that is comprised of the three largest
receivable balances from unrelated reinsurers:
Total of the three largest receivable balances from unrelated reinsurers
As of
December 31,
2016
$
77,650
At December 31, 2016, the three unrelated reinsurers from whom our specialty insurance business has the largest receivable
balances were: London Life Reinsurance Corporation (A. M. Best Rating: A rated); MFI Insurance Company, LTD (A. M. Best
Rating: Not rated) and Frandicso Property and Casualty Insurance Corporation (A. M. Best Rating: Not rated). The related
receivables of these reinsurers are collateralized by, assets on hand, assets held in trust accounts and letters of credit. At
December 31, 2016, the Company does not believe there is a risk of loss due to the concentration of credit risk in the reinsurance
program given the collateralization.
F- 50
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
(10) Goodwill and Intangible Assets, net
The following table presents identifiable finite- and indefinite-lived intangible assets, accumulated amortization, and goodwill
by segment:
Customer relationships
Accumulated amortization
Trade names
Accumulated amortization
Software licensing
Accumulated amortization
Insurance policies and contracts
acquired
Accumulated amortization
Insurance licensing agreements(1)
Leases in place
Accumulated amortization
Intangible assets, net
Goodwill
Total goodwill and intangible
assets, net
Specialty
insurance
50,500
$
(4,614)
6,500
(1,484)
8,500
(3,542)
As of December 31, 2016
Senior
living
Specialty
finance
$
— $
—
—
—
—
—
— $
—
800
(120)
640
(137)
36,500
(34,184)
13,000
1,317
(18)
72,475
89,854
—
—
—
32,233
(20,413)
11,820
—
—
—
—
—
—
1,183
2,913
As of December 31, 2015
Senior
living
Specialty
finance
$
— $
—
—
—
—
—
— $
—
800
(40)
640
(46)
Specialty
insurance
$ 50,500
(1,200)
6,500
(771)
8,500
(1,842)
36,500
—
(28,510)
—
13,000
—
23,404
—
— (14,095)
9,309
—
82,677
89,854
—
—
—
—
—
1,354
2,913
Total
50,500
(1,200)
7,300
(811)
9,140
(1,888)
36,500
(28,510)
13,000
23,404
(14,095)
93,340
92,767
Total
50,500
(4,614)
7,300
(1,604)
9,140
(3,679)
36,500
(34,184)
13,000
33,550
(20,431)
85,478
92,767
$ 162,329
$ 11,820
$
4,096
$ 178,245
$ 172,531
$
9,309
$
4,267
$ 186,107
(1) Represents intangible assets with an indefinite useful life. Impairment tests are performed at least annually on these assets.
Goodwill
The following table presents the activity in goodwill, by segment, and includes the retrospective adjustments made to the balance
of goodwill to reflect the effect of the final valuation adjustments made for acquisitions, the reduction to goodwill attributable
to discontinued operations and any impairment related charges:
Balance at December 31, 2014
Goodwill acquired in 2015
Goodwill impairment charges
Balance at December 31, 2015
Balance at December 31, 2016
Specialty
insurance
89,854
$
—
—
89,854
89,854
$
Specialty
finance
$
$
1,904
1,708
(699)
2,913
2,913
$
$
$
Total
91,758
1,708
(699)
92,767
92,767
The Company conducts annual impairment tests of its goodwill as of December 31. For the year ended December 31, 2016, no
impairment was recorded on the Company’s goodwill or intangibles. As of December 31, 2015, the Company recorded an
impairment of $699 associated with Luxury within the Specialty Finance segment as a result of qualitative and quantitative
procedures associated with our annual impairment testing. For the year ended December 31, 2014, no impairment was recorded
on the Company’s goodwill or intangibles.
During the fourth quarter of 2016, the Company changed the date of its annual impairment test of goodwill from December 31
to October 1. The Company believes the change in goodwill impairment date does not result in a material change in the method
of applying the accounting principle. This change provides the Company additional time to complete the annual impairment
test of goodwill in advance of our year end reporting. The Company will continue to perform interim impairment testing should
circumstances or events require. This change does not result in a delay, acceleration, or avoidance of an impairment charge. This
change will be applied prospectively beginning in 2017 because it is impracticable to apply it retrospectively due to the difficulty
in making estimates and assumptions without using hindsight.
F- 51
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
Intangible Assets, Net
The following table presents the activity, by segment, in finite and indefinite-lived other intangible assets and includes the
retrospective adjustments made to the balance to reflect the effect of any final valuation adjustments made for acquisitions, the
reduction attributable to discontinued operations and any impairment related charges:
Balance at December 31, 2014
Intangible assets acquired in 2015
Less: amortization expense
Balance at December 31, 2015
Intangible assets acquired in 2016
Less: amortization expense
Balance at December 31, 2016
Specialty
insurance
$ 110,847
—
(28,170)
82,677
1,317
(11,519)
72,475
$
$
$
Senior
living
Specialty
finance
Total
9,547
8,800
(9,038)
9,309
8,829
(6,318)
11,820
$
$
— $ 120,394
10,240
(37,294)
93,340
10,146
(18,008)
85,478
1,440
(86)
1,354
—
(171)
1,183
$
The following table present the amortization expense on finite-lived intangible assets for the following periods:
Year Ended December 31,
2015
2016
2014
Amortization expense on intangible assets
$
18,008
$
37,294
$
8,566
The following table presents the amortization expense on finite-lived intangible assets for the next five years by segment:
As of December 31, 2016
Specialty
insurance
(VOBA)
Specialty
insurance
(other)
Senior
living
Specialty
finance
Total
$
$
1,250
465
217
123
82
179
2,316
$
$
9,975
9,187
7,619
5,137
4,361
20,880
57,159
$
$
3,807
1,569
787
787
787
4,083
11,820
$
$
171
171
171
171
171
328
1,183
$
$
15,203
11,392
8,794
6,218
5,401
25,470
72,478
2017
2018
2019
2020
2021
2022 and thereafter
Total
(11) Derivative Financial Instruments and Hedging
The Company utilizes derivative financial instruments as part of its overall investment and hedging activities. Derivative contracts
are subject to additional risk that can result in a loss of all or part of an investment. The Company’s derivative activities are
primarily classified by underlying credit risk and interest rate risk. In addition, the Company is also subject to additional
counterparty risk should its counterparties fail to meet the contract terms. The derivative financial instruments are located within
trading assets at fair value and are reported in other investments. Trading liabilities are reported within other liabilities and
accrued expenses.
Derivatives, at fair value
Credit Derivatives
Credit derivatives are generally defined as
of default on a set of obligations issued by a specified reference entity.
contracts between a buyer and seller of protection against the risk
Credit Default Swap Indices (CDX) are credit derivatives that reference multiple names through underlying baskets or portfolios
of single name credit default swaps. The Company enters into these contracts as both a buyer of protection and seller of protection
to manage the credit risk exposure of its investment portfolio. The Company is required to deposit cash collateral for these
positions equal to an initial 2.25% of the notional amount of the sold protection side, subject to increase based on additional
maintenance margin as a result of decreases in value. As of December 31, 2016, the total margin was $6,750.
F- 52
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
Foreign Currency Forward Contracts
Foreign currency forward contracts are used as a foreign currency hedge where the Company has an obligation to either make
or take a foreign currency payment at a future date. If the date of the foreign currency payment and the last trading date of the
foreign currency forwards contract are matched, the Company has in effect “locked in” the exchange rate payment amount. The
Company, through its subsidiary Siena, has entered into a foreign exchange forward contract hedge on its foreign loans receivable.
The Company has not elected hedge accounting on such transactions.
Interest Rate Lock Commitments
The Company enters into interest rate lock commitments (IRLCs) in connection with its mortgage banking activities to fund
residential mortgage loans with certain terms at specified times in the future. IRLCs that relate to the origination of mortgage
loans that will be classified as held-for-sale are considered derivative instruments under applicable accounting guidance. As
such, these IRLCs are recorded at fair value with changes in fair value typically resulting in recognition of a gain when the
Company enters into IRLCs. In estimating the fair value of an IRLC, the Company assigns a probability that the loan commitment
will be exercised and the loan will be funded (“pull through”). The fair value of the commitments is derived from the fair value
of related mortgage loans, net of estimated costs to complete. Outstanding IRLCs expose the Company to the risk that the price
of the loans underlying the commitments might decline from inception of the rate lock to funding of the loan. To manage this
risk, the Company utilizes forward delivery contracts and TBA mortgage backed securities to economically hedge the risk of
potential changes in the value of the loans that would result from the commitments.
Forward Delivery Contracts
The Company enters into forward delivery contracts with investors to manage the interest rate risk associated with IRLCs and
loans held for sale.
TBA Mortgage Backed Securities
The Company enters into to be announced (TBA) mortgage backed securities which facilitate hedging and funding by allowing
the Company to prearrange prices for mortgages that are in the process of originating. The Company utilizes these hedging
instruments for Agency (Fannie Mae and Freddie Mac) and FHA/VA (Ginnie Mae) eligible IRLCs and typically commit them
to investors at prices higher than otherwise available.
Interest Rate Swaps
The Company is exposed to interest rate risk when there is an unfavorable change in the value of investments as a result of
adverse movements in the market interest rates. The Company enters into interest rate swaps (IRS) to protect against such adverse
movements in interest rates. The Company is required to post collateral for the benefit of the counterparty. This is included in
other assets in the Consolidated Balance Sheets.
The Company uses interest rate swaps to hedge the variability of floating rate borrowings. Cash flow hedge accounting was
applied to the floating rate borrowings in its specialty insurance business, and during the second quarter of 2016, the Company
elected to apply cash flow hedge accounting to such transactions in its senior living business.
F- 53
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
The following table summarizes the gross notional and fair value amounts of derivatives (on a gross basis) categorized by
underlying risk:
As of December 31, 2016
Asset
Derivatives
Liability
Derivatives
Notional
Values
As of December 31, 2015
Asset
Derivatives
Liability
Derivatives
Notional
Values
Credit risk:
Credit derivatives sold protection
Credit derivatives bought
protection
Sub-total
Foreign currency risk:
$
297,612
$
28,731
$
— $
297,612
$
41,126
$
—
298,173
595,785
—
28,731
14,501
14,501
300,529
598,141
106
41,232
27,655
27,655
Foreign currency forward contracts
965
—
3
683
—
5
Interest rate risk:
Interest rate lock commitments
Forward delivery contracts
TBA mortgage backed securities
Interest rate swaps
Sub-total
Total
203,815
66,731
249,750
134,343
654,639
$ 1,251,389
$
4,872
—
1,678
1,388
7,938
36,669
$
—
84
269
1,042
1,395
15,899
156,309
52,054
136,750
78,988
424,101
$ 1,022,925
$
3,384
11
179
—
3,574
44,806
$
—
8
150
2,310
2,468
30,128
The Company nets the credit derivative assets and liabilities as these credit derivatives are subject to legally enforceable netting
arrangements with the same party. The following table presents derivative instruments that are subject to offset by a master
netting agreement:
Derivatives subject to netting arrangements:
Credit default swap indices sold protection
Credit default swap indices bought protection
Gross assets recognized
Cash collateral
Net assets recognized (included in other investments)
Derivatives designated as cash flow hedging instruments
As of December 31,
2015
2016
$
$
28,731
(14,501)
14,230
(1,632)
12,598
$
$
41,126
(27,549)
13,577
(1,632)
11,945
A subsidiary in our specialty insurance business has one IRS with a counterparty, pursuant to which our subsidiary swapped the
floating rate portion of its outstanding preferred trust securities to a fixed rate. This IRS is designated as a cash flow hedge and
expires in June 2017. As of the December 4, 2014 acquisition date, the IRS was considered a new hedging relationship, and was
redesignated as a hedge.
Subsidiaries in our senior living business have nine IRSs with the same counterparty as the lender, pursuant to which our
subsidiary swapped the floating rate portion of its outstanding debt to a fixed rate. These IRSs are designated as cash flow hedges
and expire between November 30, 2017 and August 1, 2023.
F- 54
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
The following table presents the fair value and the related outstanding notional amounts of the Company's cash flow hedging
derivative instruments and indicates where the Company records each amount in its Consolidated Balance Sheets:
Balance Sheet Location
As of December 31,
2016
2015
Derivatives designated as cash flow hedging instruments:
Notional value
Fair value of interest rate swaps
Fair value of interest rate swaps
Other investments
Other liabilities and
accrued expenses
Unrealized gain (loss), net of tax, on the fair value of
interest rate swaps
AOCI
Range of variable rates on interest rate swaps
Range of fixed rates on interest rate swaps
$
$
$
$
134,343
1,388
1,042
1,759
$
$
$
$
35,000
—
1,283
111
0.67% to
0.96%
1.31% to
4.99%
0.51%
3.47%
The following table presents the pretax impact of the cash flow hedging derivative instruments on the Consolidated Financial
Statements for the following periods:
Year Ended December 31,
2015
2014
2016
Gain (loss) recognized in AOCI on the derivative-effective portion
2,210
(326)
(Gain) loss reclassified from AOCI into income-effective portion
Gain (loss) recognized in income on the derivative-ineffective portion
121
240
274
—
128
97
—
The following table presents the estimated amount to be reclassified to earnings from AOCI during the next 12 months. These
net losses reclassified into earnings are primarily expected to increase net interest expense related to the respective hedged item.
Estimated (gains) losses to be reclassified to earnings from AOCI during the next 12 months
As of
December 31,
2016
$
110
(12) Assets and Liabilities of Consolidated CLOs
The term CLO generally refers to a special purpose vehicle that owns a portfolio of investments and issues various tranches of
debt and subordinated note securities to finance the purchase of those investments. The investment activities of a CLO are
governed by extensive investment guidelines, generally contained within a CLO’s indenture and other governing documents
which limit, among other things, the CLO’s exposure to any single industry or obligor and provide that the CLO’s assets satisfy
certain ratings requirements. Most CLOs have a defined investment period during which they are allowed to make investments
and reinvest capital as it becomes available. The CLOs are considered variable interest entities (VIE).
The assets of each of the CLOs, including cash and cash equivalents, are held solely as collateral to satisfy the obligations of
the CLOs. The Company does not own and has no right to the benefits from, nor does it bear the risks associated with, the assets
held by the CLOs, beyond its direct investments in, and investment advisory fees generated from, the CLOs. If the Company
were to liquidate, the assets of the CLOs would not be available to its general creditors, and as a result, the Company does not
consider these assets available for the benefit of its investors. Additionally, the investors in the CLOs have no recourse to the
Company’s general assets for the debt issued by the CLOs. Therefore, this debt is not the Company’s obligation. The Company
consolidates entities when it is determined to be the primary beneficiary under current VIE accounting guidance.
F- 55
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
The table below represents the assets and liabilities of the consolidated CLOs that are included in the Company’s Consolidated
Balance Sheets as of the dates indicated:
Assets:
Cash and cash equivalents
Loans, at fair value (1)
Other assets
Total assets of consolidated CLOs
Liabilities:
Debt
Other liabilities and accrued expenses
Total liabilities of consolidated CLOs
Net
As of
December 31,
2016
December 31,
2015
$
$
$
$
$
45,589
928,240
15,666
989,495
912,034
19,935
931,969
57,526
$
$
$
$
$
38,716
680,784
9,312
728,812
683,827
14,489
698,316
30,496
(1) The unpaid principal balance for these loans is $952,225 and $727,357 and the difference between their fair value and UPB is $23,985 and $46,573 at
December 31, 2016 and December 31, 2015, respectively.
The Company’s beneficial interests and maximum exposure to loss related to the consolidated CLOs are limited to (i) ownership
in the subordinated notes and related participations in management fees of the CLOs and (ii) accrued management fees. Although
these beneficial interests are eliminated upon consolidation, the application of the measurement alternative results in the net
amount of the CLOs shown above to be equivalent to the beneficial interests retained by the Company as illustrated in the below
table:
Beneficial interests:
As of
December 31,
2016
December 31,
2015
Subordinated notes and related participations in management fees
Accrued management fees
Total beneficial interests
$
$
56,820
706
57,526
$
$
29,857
639
30,496
The following table represents revenue and expenses of the consolidated CLOs included in the Company’s Consolidated
Statements of Operations for the periods indicated:
Year Ended December 31,
2015
2014
2016
Income:
Net realized and unrealized gains (losses)
Interest income
Total revenue
Expenses:
Interest expense
Other expense
Total expense
$
1,865
51,712
53,577
31,033
2,290
33,323
$ (27,569) $ (15,797)
80,478
64,681
51,182
23,613
$
$
29,143
1,359
30,502
43,639
1,517
45,156
Net income (loss) attributable to consolidated CLOs
$
20,254
$
(6,889) $
19,525
F- 56
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
As summarized in the table below, the application of the measurement alternative results in the consolidated net income
summarized above to be equivalent to the Company’s own economic interests in the CLOs which are eliminated upon
consolidation:
Economic interests:
Year Ended December 31,
2015
2014
2016
Distributions received and realized and unrealized gains (losses)
on the subordinated notes held by the Company, net
Management fee income
Total economic interests
$
$
17,335
2,919
20,254
$ (11,020) $
4,131
(6,889) $
$
7,755
11,770
19,525
(13) Debt, net
The following table summarizes the balance of the Company’s debt holdings, net of discounts and deferred financing costs,
excluding notes payable of consolidated CLOs. See Note—(12) Assets and Liabilities of Consolidated CLOs:
Debt Type
Stated Maturity
Date
Stated Interest Rate
or Range of Rates
December 31,
2016
Maximum
Borrowing
Capacity as of
As of December 31,
2016
2015
Secured corporate credit agreements
Asset based revolving financing (1) (2)
Residential mortgage warehouse
borrowings (3)
Real estate commercial mortgage
borrowings:
September 2018 -
December 2019
LIBOR + 3.00% to
6.50%
April 2017 - May
2020
LIBOR + 2.25% to
5.75%
April 2017 -
August 2017
LIBOR + 2.63% to
2.88%
$
255,000
$
164,000
$
137,000
330,000
250,557
218,875
188,000
101,402
110,314
Fixed rate
August 2019 - May
2040
4.00% to 5.12%
82,133
82,133
76,818
Variable rate (LIBOR based)
Variable rate (Prime rate based)
October 2019 -
January 2023
LIBOR + 2.05% to
3.20%
Prime Rate + 1.00%
Subordinated debt
April 2020
12.50%
159,486
—
20,000
June 2037
LIBOR + 4.10%
35,000
January 2021
12.00%
Preferred trust securities
Preferred notes payable
Total debt, face value
Unamortized discount, net
Unamortized deferred financing costs
Total debt, net
158,618
—
8,500
35,000
1,232
801,442
(382)
(8,051)
89,846
717
3,500
35,000
1,562
673,632
(422)
(6,258)
$
793,009
$
666,952
(1) Asset based revolving financing is generally recourse only to specific assets and related cash flows.
(2) The weighted average coupon rate for asset based revolving financing was 3.53% and 2.35% at December 31, 2016 and December 31, 2015, respectively.
(3) The weighted average coupon rate for residential mortgage warehouse borrowings was 3.51% and 3.39% at December 31, 2016 and December 31, 2015,
respectively. Includes debt having a maximum borrowing capacity of $103,000 with a stated interest rate of LIBOR +2.75% and a floor of 3.00%.
The table below presents the amount of interest expense the Company incurred on its debt for the following periods:
Year Ended December 31,
2015
2014
2016
Interest expense
$
29,523
$
23,675
$
11,898
F- 57
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
The following table presents the future maturities of the unpaid principal balance on the Company’s long-term debt as of:
2017
2018
2019
2020
2021
Thereafter
Total
December 31,
2016
$
$
119,294
94,040
216,676
197,801
21,855
151,776
801,442
The following narrative is a summary of certain of the terms of our debt agreements for the years ended December 31, 2015
and December 31, 2016:
Secured Corporate Credit Agreement
On September 18, 2013, Tiptree’s intermediate holding company entered into a corporate Credit Agreement. The obligations
under the Credit Agreement are secured by liens on substantially all of the otherwise unencumbered assets of such holding
company. The principal amount of the loan is to be repaid in quarterly installments, the amount of which may be adjusted based
on the net leverage ratio (as defined in the Credit Agreement) at the end of each fiscal quarter. The Credit Agreement is subject
to a LIBOR floor of 1.25%.
On June 24, 2016, the Company entered into a Fourth Amendment to the Credit Agreement. The Fourth Amendment provides
for additional term loans in an aggregate principal amount of $15,000 with the same maturity date, margin above LIBOR,
principal repayment term, and conditions and covenants as the existing term loans under the Credit Agreement. The Fourth
Amendment also provides the ability to prepay loans under the Credit Agreement, subject to payment of a make-whole premium
until the one year anniversary of the Fourth Amendment. As of December 31, 2016 and 2015, the maximum borrowing capacity
under the agreement was $125,000 and the outstanding amount borrowed was $58,500 and $45,500, respectively.
On December 4, 2014, a subsidiary in our specialty insurance business and its subsidiaries entered into an amended and restated
$140,000 secured credit agreement which is secured by liens on substantially all of the assets of the specialty insurance business.
In addition, such credit agreement is subject to certain leverage and distribution covenants. This agreement provides for a $50,000
term loan facility and a $90,000 revolving credit facility. Our specialty insurance business and its subsidiaries are required to
repay the aggregate outstanding principal amount of the initial $50,000 term loan facility in consecutive quarterly installments
of $1,250, which commenced in March 2015. As of December 31, 2016 and 2015 the maximum borrowing capacity under such
agreement was $130,000 and $135,000, respectively, and the outstanding amount borrowed was $105,500 and $91,500,
respectively.
Asset Based Revolving Financing
The Company has financed purchases of certain investments in commercial loans and NPLs with portfolio-based leverage. These
investments are held in our specialty insurance business. Such borrowings are generally recourse only to the specific investments
in such portfolios. Repayment of such loans is (i) based upon a specific maturity date of May 5, 2020 (for maximum borrowings
of $150,000) or (ii) based upon the earlier of September, 2018 or an amount of approximately 120% of the cash realization
events in the portfolio plus an amount dependent on the balance of the interest reserve account (for a maximum borrowing of
$40,000). As of December 31, 2016 and 2015, a total of $149,106 and $54,900, respectively, was outstanding under such financing
agreements. The loan is subject to a LIBOR floor of 0.40%.
In addition, a subsidiary in the specialty finance business has outstanding borrowings which are recourse to the loan portfolio.
Total outstanding borrowings under such facility totaled approximately $93,627 and $36,192 as of December 31, 2016 and 2015,
respectively. The loan is subject to a LIBOR floor of 0.50%.
Mortgage Warehouse Borrowing
The Company, through subsidiaries in its specialty finance business has five warehouse borrowings with a total borrowing
capacity at December 31, 2016 of $188,000. Such warehouse facilities are recourse to the assets of the subsidiary and are secured
by liens on cash escrow and the loans held for sale in the warehouse. These credit agreements contain customary financial
covenants that require, among other items, minimum amounts of tangible net worth, profitability, maximum indebtedness ratios,
and minimum liquid assets. Three of these credit agreements are subject to a LIBOR floor of 0.25%.
F- 58
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
Real Estate Commercial Mortgage Borrowing
In connection with acquisitions and assets acquired in the senior living business, the Company, along with our joint venture
partners, have entered into fixed and variable rate mortgage borrowings. The Company’s mortgage borrowings contain various
customary financial and other covenants, in some cases including debt service coverage ratios. Generally such loans are secured
by separate first priority mortgages on each of the individual properties and certain loans totaling $20,106 and $14,801 as of
December 31, 2016 and 2015, respectively, are secured by separate cross-collateralized, cross-defaulted first priority deeds of
trust on several of the properties. Certain floating rate borrowings have an interest rate floor of 2.05% to 2.98%. Floating rate
borrowings are generally converted into a fixed rate by entering into interest rate swaps. In 2016, the Company elected to apply
hedge accounting to such swaps, as further described in Note—(11) Derivative Financial Instruments and Hedging.
Subordinated Debt
A subsidiary in our specialty finance business has a subordinated promissory note with an affiliate who owns the non-controlling
interest of our subsidiary. The note has a maturity date of April 9, 2020 or six months following maturity of the asset based
revolving financing held by the same entity. The note may be prepaid following the first anniversary of issuance but there is a
prepayment premium of 3.00% prior to the second anniversary of issuance, 2.00% after the second but before the third anniversary
and 1.00% after the third but before the fourth anniversary.
Preferred Trust Securities
A subsidiary in our specialty insurance business has $35,000 of preferred trust securities due June 15, 2037. Interest is payable
quarterly. In 2012, a subsidiary in our specialty insurance business entered into an interest rate swap that exchanges the floating
rate for a fixed rate, as further described in Note— (11) Derivative Financial Instruments and Hedging. The Company may
redeem the preferred trust securities, in whole or in part, at a price equal to the full outstanding principal amount of such preferred
trust securities outstanding plus accrued and unpaid interest.
Preferred notes payable
A subsidiary in our specially finance business issued a series of notes to pay several former shareholders as part of the acquisition
by the Company. Payments are subject to cash available for distribution based on the profitability of the subsidiary subject to
stipulations governed by the note agreements.
Covenant Compliance
As of December 31, 2016, the Company is in compliance with the representations and covenants for outstanding borrowings or
has obtained waivers for any events of non-compliance.
(14) Liability for Unpaid Claims and Claim Adjustment Expenses
The following tables present undiscounted information about incurred and paid claims development as of December 31, 2016,
net of reinsurance, as well as cumulative claim frequency and the total of incurred-but-not-reported liabilities plus expected
development on reported claims included within the net incurred claims amounts.
This information is presented in the aggregate for all short-duration contracts, due to the commonality of claims characteristics.
The tables reflect three years of information because historically over 99% of incurred losses have been paid within three years
of the accident period.
The information about incurred and paid claims development for the years ended December 31, 2014 and 2015 is presented as
supplementary information and is unaudited.
F- 59
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
Roll forward of Claim Liability
The following table presents the activity in the net liability for unpaid losses and allocated loss adjustment expenses of short-
duration contracts:
Policy liabilities and unpaid claims balance at January 1
Less : liabilities of policy-holder accounts balances, gross
Less : non-insurance warranty benefit claim liabilities
Gross liabilities for unpaid losses and loss adjustment expenses
Less : reinsurance recoverable on unpaid losses - short duration
Less : other lines, gross
Net balance at January 1, short duration
Incurred (short duration) related to:
Current year
Prior years
Total incurred
Paid (short duration) related to:
Current year
Prior years
Total paid
Net balance at December 31, short duration
Plus : reinsurance recoverable on unpaid losses - short duration
Plus : other lines, gross
Gross liabilities for unpaid losses and loss adjustment expenses
Plus : liabilities of policy-holder accounts balances, gross
Plus : non-insurance warranty benefit claim liabilities
Policy liabilities and unpaid claims balance at December 31
Year Ended December 31,
2016
2015
$
$
$
80,663
(19,037)
(116)
61,510
(42,341)
(163)
19,006
84,178
(1,599)
82,579
62,989
16,033
79,022
22,563
63,112
208
85,883
17,417
91
103,391
$
63,364
(21,056)
(171)
42,137
(28,089)
(178)
13,870
59,579
(4,152)
55,427
41,578
8,713
50,291
19,006
42,341
163
61,510
19,037
116
80,663
The following schedule reconciles the total on short duration contracts per the table above to the amount of total losses incurred
as presented in the consolidated statement of operations, excluding the amount for member benefit claims:
Total incurred
Other lines incurred
Unallocated loss adjustment expense
Total losses incurred
Year Ended December 31,
2016
2015
$
$
82,579
277
2,094
84,950
$
$
55,427
296
845
56,568
F- 60
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
Incurred and Paid Development
The following table presents information about incurred and paid loss development and average claim duration as of December 31,
2016, net of reinsurance, as well as cumulative claim frequency and the total of incurred-but-not-reported liabilities plus expected
development on reported claims included within the net incurred claims amounts. The cumulative number of reported claims
represents open claims, claims closed with payment, and claims closed without payment. It does not include an estimated count
of unreported claims. The number of claims is measured by claim event. The Company considers a claim that does not result
in a liability as a claim closed without payment.
Incurred Losses and Allocated Loss Adjustment Expenses,
Net of Reinsurance
As of December 31, 2016
Total of
Incurred-but-
Not-Reported
Liabilities Plus
Expected
Development of
Reported Claims
182
$
132
$
16,582
$
Cumulative
Number of
Reported
Claims
122
176
188
For the Years Ended December 31,
2015 (1)
2014 (1)
2016
$
43,449 $
39,614 $
59,579
Total $
39,914
57,470
84,178
181,562
Cumulative Paid Losses and Allocated Loss Adjustment
Expenses, Net of Reinsurance
For the Years Ended December 31,
2015 (1)
2014 (1)
2016
Accident Year
2014
2015
2016
Accident Year
2014
2015
2016
$
30,435 $
38,752 $
41,578
Total $
39,596
56,445
62,989
159,030
31
All outstanding liabilities before 2014, net of reinsurance
Liabilities for loss and loss adjustment expenses, net of
reinsurance
$
22,563
(1) - The information presented for the years 2014 and 2015 is presented as unaudited supplemental information.
Duration
The following table presents unaudited supplementary information about average historical claims duration as of December 31,
2016 for short-duration contracts:
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years
Short duration
1
75%
2
23%
3
2%
F- 61
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
Reconciliation of Reserves to Balance Sheet
The following table presents a reconciliation of net outstanding liabilities for unpaid loss and loss adjustment expenses of short-
duration contracts to the balance sheet value of policy liabilities and unpaid claims:
Net outstanding liabilities:
Short duration
Insurance lines other than short-duration
Total liabilities for unpaid losses and loss adjustment expenses, net of reinsurance
Reinsurance recoverable on unpaid losses and loss adjustment expenses:
Short duration
Other insurance lines
Total reinsurance recoverable on unpaid losses and loss adjustment expenses
Total gross liability for unpaid losses and loss adjustment expenses
Liabilities of policy-holder accounts balances, gross
Non-insurance warranty benefit claim liabilities
Total policy liabilities and unpaid claims
(15) Other Assets
The following table presents the components of other assets as reported in the Consolidated Balance Sheets:
As of
December 31,
2016
$
$
22,563
40
22,603
63,112
168
63,280
85,883
17,417
91
103,391
Due from brokers and trustees
Furnitures, fixtures and equipment, net
Prepaid expenses
Accrued interest receivable
Management fee receivable
Other fee receivable
Income tax receivable
Other
Total other assets
As of December 31,
2016
2015
2,027
5,936
5,020
2,052
4,308
5,022
4,842
8,679
37,886
$
$
29,052
7,024
2,690
2,625
1,767
3,237
5,810
10,038
62,243
$
$
Depreciation expense related to furniture, fixtures and equipment was $574, $370 and $228 for the years ended December 31,
2016, December 31, 2015 and December 31, 2014, respectively.
(16) Other Liabilities and Accrued Expenses
The following table presents the components of other liabilities and accrued expenses as reported in the Consolidated Balance
Sheets:
Accounts payable and accrued expenses
Deferred tax liabilities, net
Due to broker and trustee
Commissions payable
Accrued interest payable
Trading liabilities, at fair value
Other liabilities
Total other liabilities and accrued expenses
F- 62
As of December 31,
2015
2016
67,837
32,296
8,457
7,466
1,729
1,398
14,552
133,735
$
$
53,594
22,699
8,622
14,866
1,354
22,152
9,438
132,725
$
$
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
(17) Other Income and Other Expenses
The following table presents the components of other income as reported in the Consolidated Statement of Operations, primarily
comprised of interest income and loan fee income related to both loans at fair value and loans at amortized costs, net in our
specialty finance business, and management fees from our asset management business:
Year Ended December 31,
2015
2014
2016
Interest income
Loan fee income
Management fee income
Other
Total other income
$
$
18,908
13,217
9,400
2,144
43,669
$
$
12,412
9,373
6,524
12,041
40,350
$
$
14,642
3,736
259
1,425
20,062
The following table presents the components of other expenses as reported in the Consolidated Statement of Operations:
Year Ended December 31,
2015
2014
2016
Professional fees
Acquisition and transaction costs
General and administrative
Premium taxes
Mortgage origination expenses
Property operating expenses
Rent and related
Other
Total other expense
(18) Stockholders’ Equity
$
$
22,337
711
14,753
8,244
8,079
7,431
12,484
18,235
92,274
$
$
20,991
1,859
13,044
4,468
3,960
6,609
11,056
13,534
75,521
$
$
10,502
6,121
3,873
135
793
1,582
3,081
5,821
31,908
During the year ended December 31, 2016, consolidated subsidiaries of Tiptree purchased 6,596,000 shares of Class A common
stock of Tiptree for aggregate consideration of $42,524. The shares acquired by subsidiaries of Tiptree are accounted for as
treasury shares and therefore are not outstanding for accounting or voting purposes.
As of December 31, 2016 and December 31, 2015, there were 34,983,616 (including the shares of Class A common stock held
by subsidiaries of Tiptree) and 34,899,833 shares of Class A common stock issued and outstanding, respectively. As of
December 31, 2016 and December 31, 2015, there were 8,049,029 shares of Class B common stock issued and outstanding,
respectively, all of which are owned by TFP as a fiduciary for the limited partners of TFP. As a result of the tax reorganization
on January 1, 2016, these shares of Class B common stock are accounted for as treasury stock in Tiptree’s financial statements.
All shares of our Class A common stock have equal rights as to earnings, assets, dividends and voting. Shares of Class B common
stock have equal voting rights but no economic rights (including no right to receive dividends or other distributions upon
liquidation, dissolution or otherwise). Distributions may be paid to holders of Class A common stock when duly authorized by
our board of directors and declared out of legally available assets.
TFP owns a warrant to purchase 652,500 shares of Class A common stock at $11.33 per share which is immediately exercisable
and expires on September 30, 2018. Such an exercise would be accounted for as treasury stock held at TFP and would have no
impact on Tiptree’s financial statements.
Tricadia Capital Management LLC owns an option to purchase 540,000 TFP common units at $15.00 per common unit which
is immediately exercisable and expires on June 12, 2017 (Tricadia Option). The Tricadia Option was amended as of January 31,
2017 solely so that TFP can, at its option, deliver shares of the Company’s Class A common stock on an as exchanged basis of
2.798 shares for each TFP common unit. Such contract is equivalent to an option on 1,510,920 shares of Class A common stock
at a strike price of $5.36.
F- 63
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
The Company paid cash dividends per share during the periods presented as follows:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total cash dividends paid
Dividends per share for
the Year ended December 31,
2016
2015
$
$
0.025
$
0.025
0.025
0.025
0.100
$
0.025
0.025
0.025
0.025
0.100
Statutory Reporting and Insurance Company Subsidiaries Dividend Restrictions
The Company's insurance company subsidiaries may pay dividends to the Company, subject to statutory restrictions. Payments
in excess of statutory restrictions (extraordinary dividends) to the Company are permitted only with prior approval of the insurance
department of the applicable state of domicile. The Company eliminated all dividends from its subsidiaries in the consolidated
financial statements. The following table presents the dividends paid to the Company by its insurance company subsidiaries for
the following periods:
Ordinary dividends
Extraordinary dividends
Total dividends
Year Ended December 31,
2016
2015
$
$
3,081
532
3,613
$
$
6,800
804
7,604
The following table presents the combined statutory capital and surplus of the Company's insurance company subsidiaries, the
required minimum statutory capital and surplus, as required by the laws of the states in which they are domiciled, and the
combined amount available for ordinary dividends of the Company's insurance company subsidiaries for the following periods:
Combined statutory capital and surplus of the Company's insurance company subsidiaries
Required minimum statutory capital and surplus
Amount available for ordinary dividends of the Company's insurance company subsidiaries
$
$
$
As of December 31,
2016
2015
100,920
$
89,500
17,200
9,049
$
$
17,200
1,827
At December 31, 2016, the maximum amount of dividends that our regulated insurance company subsidiaries could pay under
applicable laws and regulations without regulatory approval was approximately $9,049. The Company may seek regulatory
approval to pay dividends in excess of this permitted amount, but there can be no assurance that the Company would receive
regulatory approval if sought.
Under the National Association of Insurance Commissioners (NAIC) Risk-Based Capital Act of 1995, a company's Risk-Based
Capital (RBC) is calculated by applying certain risk factors to various asset, claim and reserve items. If a company's adjusted
surplus falls below calculated RBC thresholds, regulatory intervention or oversight is required. The Company's insurance
company subsidiaries' RBC levels, as calculated in accordance with the NAIC’s RBC instructions, exceeded all RBC thresholds
as of December 31, 2016.
The following table presents the net income of the Company’s statutory insurance companies for the following periods:
Net income of statutory insurance companies
Year Ended December 31,
2016
2015
$
12,369
$
10,805
F- 64
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
(19) Accumulated Other Comprehensive Income (Loss)
The following table presents the activity in accumulated other comprehensive income (loss) (AOCI), net of tax, for the following
periods:
Unrealized gains (losses) on
Available for
sale
securities
Interest rate
swaps
Total
AOCI
Amount Attributable to
Noncontrolling Interests
TFP
Other
Total AOCI
to Tiptree
Inc.
Balance at December 31, 2013
Other comprehensive (losses) gains
before reclassifications
Amounts reclassified from AOCI
Period change
Balance at December 31, 2014
Other comprehensive (losses) before
reclassifications
Amounts reclassified from AOCI
Period change
Balance at December 31, 2015
Other comprehensive income (losses)
before reclassifications
Amounts reclassified from AOCI
Period change
Balance at December 31, 2016
$
$
$
$
33
$
— $
33
$
— $
— $
(197)
(31)
(228)
(195) $
(91)
64
(27)
(222) $
186
(664)
(478)
(700) $
83
63
146
146
(214)
179
(35)
111
1,552
96
1,648
1,759
$
$
$
(114)
32
(82)
(49) $
(305)
243
(62)
(111) $
1,738
(568)
1,170
1,059
$
—
—
—
— $
—
—
—
— $
—
—
—
— $
—
—
—
— $
(128)
—
(128)
(128) $
(376)
—
(376)
(376) $
33
(114)
32
(82)
(49)
(305)
243
(62)
(111)
1,234
(568)
666
555
The following table presents the reclassification adjustments out of AOCI included in net income and the impacted line items
on the Consolidated Statement of Operations for the following periods:
Components of AOCI
Unrealized gains (losses) on available for sale
securities
Related tax (expense) benefit
Net of tax
Unrealized gains (losses) on interest rate swaps
Related tax (expense) benefit
Net of tax
(20) Stock Based Compensation
Equity Plans
Year Ended December 31,
2015
2014
2016
Affected line item in Consolidated
Statement of Operations
50 Net realized and unrealized gains
(losses)
$
$
$
$
1,026
$
(99) $
(362)
664
$
(121) $
25
(96) $
35
(64)
(274)
95
(179)
(19) Provision for income tax
31
(97) Interest expense
34 Provision for income tax
(63)
2007 Manager Equity Plan
The Care Investment Trust Inc. Manager Equity Plan was adopted in June 2007 and will automatically expire on June 21, 2017.
As of December 31, 2016, 134,629 common shares remain available for future issuances. No shares have been issued since
March 30, 2012 from this plan.
2013 Omnibus Incentive Plan
The Company adopted the Tiptree 2013 Omnibus Incentive Plan (2013 Equity Plan) on August 8, 2013, which permits the grant
of stock units, stock, and stock options up to a maximum of 2,000,000 shares of Class A common stock. The general purpose
of the 2013 Equity Plan is to attract, motivate and retain selected employees and directors for the Company, to provide them
with incentives and rewards for performance and to better align their interests with the interests of the Company’s stockholders.
Unless otherwise extended, the 2013 Equity Plan terminates automatically on the tenth anniversary of its adoption.
F- 65
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
The table below summarizes changes to the issuances under the Company’s 2013 Equity Plan for the periods indicated:
Available for issuance as of December 31, 2013
Shares Issued
Available for issuance as of December 31, 2014
Shares issued and granted
Shares forfeited
Available for issuance as of December 31, 2015
Shares issued and granted
Available for issuance as of December 31, 2016
Number of
shares (1)
1,980,690
(49,711)
1,930,979
(354,978)
6,338
1,582,339
(620,689)
961,650
(1) Excludes shares granted under the Company’s subsidiary incentive plans that are exchangeable for Tiptree Class A common stock.
Restricted stock units and restricted stock
A holder of the restricted stock units (RSUs) receive distributions. Generally, the RSUs shall vest and become nonforfeitable
with respect to one-third of Tiptree shares granted on each of the first, second and third anniversaries of the date of the grant,
and expensed using the straight-line method over the requisite service period. The restricted stock is subject to forfeiture as set
forth in the agreement governing the award and receives distributions and has the right to vote.
The following table summarizes changes to the issuances of Class A common stock, restricted stock, and RSUs under the 2013
Equity Plan for the periods indicated:
Unvested units as of December 31, 2013
Vested
Forfeited
Unvested units as of December 31, 2014
Granted
Vested
Forfeited
Unvested units as of December 31, 2015
Granted
Vested(1)
Unvested units as of December 31, 2016
Number of
shares issuable
19,310
(7,184)
—
12,126
143,599
(21,064)
(6,338)
128,323
369,452
(197,958)
299,817
Weighted
Average Grant
Date Fair Value
7.00
$
7.65
—
7.18
7.68
7.51
6.88
7.68
5.71
$
$
6.13
6.27
(1)
Includes 130,946 of immediately vested Class A common stock with a grant date fair value of approximately $750 to settle compensation accrued during the year ended
December 31, 2015.
The Company values RSUs at their grant-date fair value as measured by Tiptree’s common stock price. Included in vested shares
for 2016 are 646 shares surrendered to pay taxes on behalf of the employees with shares vesting. During the year ended December
31, 2016, the Company granted 218,310 RSUs to employees of the Company, of which 111,759 vest over a period of three years
that began in January 2016, 33,624 will vest over a period of two years beginning February 2016, 55,768 will vest over a period
of two years beginning April 2016 and the remainder will vest over a period of three years beginning April 2016.
Subsidiary Incentive Plans
Certain of Tiptree’s subsidiaries have established RSU programs under which they are authorized to issue RSUs or their
equivalents, representing equity of such subsidiaries to certain of their employees. Such awards are accounted for as a liability.
These RSUs are subject to performance-vesting criteria based on the performance of the subsidiary (performance vesting RSUs)
and time-vesting subject to continued employment (time vesting RSUs). Following the service period, such vested RSUs may
be exchanged at fair market value, at the option of the holder, for Tiptree Class A common stock under the 2013 Omnibus
Incentive Plan. The Company has the option, but not the obligation to settle the exchange right in shares or cash.
F- 66
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
The following table summarizes changes to the issuances of subsidiary RSU’s under the subsidiary incentive plans for the periods
indicated:
Unvested balance as of December 31, 2014
$
Granted
Unvested balance as of December 31, 2015
Granted
Vested
Fair value adjustment
Unearned
Unvested balance as of December 31, 2016
$
Grant date fair
value of equity
shares issuable
—
874
874
7,339
(97)
119
(146)
8,089
Stock Options
Option awards have been granted to the Executive Committee with an exercise price equal to the fair market value of our common
stock on the date of grant; those option awards have a 10-year term and are subject the recipient’s continuous service, a market
requirement, and generally vest over five years beginning on the 3rd anniversary of the grant date. Options granted during the
year ended December 31, 2016 contained a market requirement that, at any time during the option term, the 20-day volume
weighted average stock price must exceed the December 31, 2015 book value per share. The market requirement may be met
any time before the option expires and it only needs to be met once for the option to remain exercisable for the remainder of its
term. If the market requirement is not met, but the service condition is met, the full amount of the compensation expense will
be recognized over the appropriate vesting period.
The fair value of each option grant was estimated on the date of grant using a Black-Scholes-Merton option pricing formula
embedded within a Monte Carlo model used to simulate the future stock prices of the Company, which assumes that the market
requirement is achieved. Historical volatility was computed based on historical daily returns of the Company’s stock over a
lookback period equal to 2.5 years from the grant date, which represents the time period since the July 1, 2013 business
combination through which Tiptree became a public company. The valuation is done under a risk-neutral framework using the
10-year zero-coupon risk-free interest rate derived from the Treasury Constant Maturities yield curve on the grant date. The
current quarterly dividend of $0.025 was used to calculate a spot dividend yield as of the date of grant for use in the model.
The following table presents the assumptions used to estimate the fair values of the stock options granted for the following
period:
Valuation Input
Year Ended December 31, 2016
Historical Volatility
Risk-free Rate
Dividend Yield
Expected term (years)
Range
Low
High
50.19%
1.93%
1.70%
50.46%
2.28%
1.76%
Weighted
Average
N/A
N/A
N/A
6.5
The following table presents the Company's stock option activity for the current period:
Balance, December 31, 2015
Granted
Balance, December 31, 2016
Weighted average remaining contractual term
at December 31, 2016 (in years)
Weighted
Average
Exercise Price
(in dollars per
stock option)
Weighted
Average Grant
Date Value (in
dollars per
stock option)
Options
Outstanding
— $
251,237
251,237
$
— $
5.69
5.69
$
—
2.62
2.62
Options
Exercisable
—
—
—
9.0
F- 67
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
Stock-based Compensation Expense
The following table presents the total time-based and performance-based stock-based compensation expense and the related
income tax benefit recognized on the Consolidated Statements of Operations:
Year Ended December 31,
2015
2014
2016
Payroll and employee commissions
Professional fees (1)
Income tax benefit
Net stock-based compensation expense
$
$
2,441
143
(912)
1,672
$
$
304
133
(154)
283
$
$
233
210
(156)
287
(1)
Professional fees consist of the value of restricted stock units and options granted to persons providing services to the Company.
Additional information on total non-vested stock-based compensation is as follows:
Unrecognized compensation cost related to non-vested awards
Weighted - average recognition period (in years)
(21) Related Party Transactions
Tricadia Holdings, L.P.
At
December 31, 2016
Stock
Options
Restricted
Stock Awards
and RSUs
$
$
490
3.2
7,181
1.9
On June 30, 2012, TAMCO, TFP and Tricadia Holdings LP (Tricadia) entered into a transition services agreement (TSA) in
connection with the internalization of the management of Tiptree. Pursuant to the TSA, Tricadia provides the Company with
the services of its Executive Chairman as well as certain administrative and information technology. The TSA was assigned to
the Company in connection with the Contribution Transactions. The Company pays Tricadia specified prices per service which
are detailed in the table below.
Mariner Investment Group LLC
TFP and Back Office Services Group, Inc. (BOSG) entered into an administrative services agreement on June 12, 2007
(Administrative Services Agreement), which was assigned to Tiptree on July 1, 2013 in connection with the Contribution
Transactions, under which BOSG provides certain back office, administrative and accounting services to the Company and it’s
subsidiaries. BOSG is an affiliate of Mariner Investment Group (Mariner). Under the Administrative Services Agreement, the
Company pays BOSG a quarterly fee of 0.025% of the Company’s Net Assets, defined as the Company’s total assets less total
liabilities, including accrued income and expense, calculated in accordance with GAAP. The Administrative Services Agreement
has successive one year terms but may be terminated by either the Company or BOSG upon 60 days prior notice.
As of June 30, 2016, the Company has concluded that Mariner no longer meets the definition of a related party.
F- 68
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
The following table presents the fees paid to related parties for services provided:
Services Provided by Tricadia:
Personnel, including services of our Executive Chairman and personnel
providing accounting services
Incentive compensation for providing services(1)
Legal and compliance services
Human resources, information technology and other personnel
Office space
Total paid to Tricadia
Year Ended December 31,
2016
2015
2014
$
100
$
450
$
1,278
—
112
245
1,735
1,250
150
112
245
2,207
450
1,757
150
112
245
2,714
Services Provided by Mariner:
Personnel, including back office, administrative and accounting services
296
529
413
Total fees paid to related parties
$
2,031
$
2,736
$
3,127
(1) Represents cash bonuses and grant date fair value of immediately vested stock granted to Tricadia or its employees providing services to Tiptree pursuant to the TSA.
The amount of related party receivables and payables as of the balance sheet date was not material.
ProSight Specialty Insurance Group, Inc.
On June 23, 2016, subsidiaries of Tiptree purchased 5,596,000 shares of Class A common stock of Tiptree from entities affiliated
with ProSight Specialty Insurance Group, Inc. (a principal owner of the Company’s Class A common stock prior to the purchase)
for aggregate consideration of $36,374. The shares acquired by subsidiaries of Tiptree are held as treasury shares and are not
outstanding for accounting or voting purposes.
Nomura Securities Co., Ltd.
On September 14, 2016, subsidiaries of Tiptree purchased 1,000,000 shares of Class A common stock of Tiptree from entities
affiliated with Nomura Securities Co., Ltd. (a principal owner of the Company’s Class A common stock prior to the purchase)
for aggregate consideration of $6,150. The shares acquired by subsidiaries of Tiptree are accounted for as treasury shares and
are not outstanding for accounting or voting purposes.
TFPLP Holdings I, LLC
On November 8, 2016, TAMCO Manager, Inc., a subsidiary of Tiptree, which owned 99% of TAMCO, purchased the remaining
1% of TAMCO from TFPLP Holdings I, LLC (TFPLP I) for 28,977 shares of the Company’s Class A common stock. Tricadia
is the managing member of TFPLP I and Michael Barnes, the Company’s Executive Chairman owns an economic interest in
TFPLP I. At the time of the transaction, the shares of the Company’s Class A common stock issued to TFPLP had a market value
of $174 based on the closing stock price of $6.00 per share.
F- 69
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
(22) Income Taxes
The Company’s provision (benefit) for income taxes is reflected as a component of (loss) from continuing operations and
consists of the following:
Year Ended December 31,
2015
2014
2016
Current tax expense:
Federal
State
Total current tax expense
Deferred tax expense (benefit):
Federal
State
Total deferred tax (benefit)
Total income tax expense
$
$
3,667
864
4,531
7,563
(1,116)
6,447
10,978
$
$
18,408
2,522
20,930
(18,492)
(1,061)
(19,553)
1,377
$
$
3,459
931
4,390
(1,043)
794
(249)
4,141
The Company’s income taxes receivable as of December 31, 2016 was $4,842, offset with an income tax payable balance of
$1,617, resulting in a consolidated net receivable of $3,225. As of December 31, 2015, there was a net receivable of $5,810.
The Company’s primary tax jurisdiction is the United States, which currently has a statutory income tax rate equal to 35%. The
Company also operates in several state jurisdictions that have an average combined statutory rate equal to approximately 2.5%.
Both the U.S. federal rate and the state statutory rates are before the consideration of rate reconciling items. A reconciliation of
the expected federal income tax expense on income from continuing operations using the 35% federal statutory income tax rate
to the actual income tax expense and resulting effective income tax rate is as follows for the periods indicated below:
Year Ended December 31,
2015
$ (12,439)
2016
43,316
$
2014
Income (loss) before income taxes from continuing operations
Federal statutory income tax rate
Expected federal income tax expense at 35%
Effect of state income tax expense, net of federal benefit
Effect of permanent differences
Effect of changes in valuation allowance
Effect of change in tax status
Effect of income (loss) allocated to non-taxable entities
Effect of non-deductible transaction costs
Effect of return-to-accrual, deferred tax true-ups, and other items
Tax on income from continuing operations
$
$
35.0%
35.0 %
15,161
205
232
(641)
(4,044)
(120)
—
185
10,978
(4,354)
226
(571)
(1,142)
—
3,640
—
3,578
1,377
$
$
788
35.0%
276
1,459
(278)
1,350
—
371
1,639
(676)
4,141
Effective tax rate
25.3%
(11.1)%
525.5%
For the year ended December 31, 2016, the Company’s effective tax rate on income from continuing operations was equal
to 25.3%, which does not bear a customary relationship to statutory income tax rates. The effective tax rate for the year ended
December 31, 2016 is lower than the U.S. statutory income tax rate of 35.0% primarily due to $4,044 of discrete tax benefits
for the period, primarily related to the tax restructuring that resulted in a U.S. federal consolidated income tax group effective
January 1, 2016. The Company’s effective tax rate before the restructure benefit was equal to 34.7% for the full year 2016.
For the year ended December 31, 2015, the Company’s effective tax rate on income from continuing operations was equal
to (11.1)%, which does not bear a customary relationship to statutory income tax rates. The effective tax rate for the year ended
December 31, 2015 is lower than the U.S. statutory income tax rate of 35%, primarily due to taxes incurred at certain corporate
subsidiaries that do not consolidate with the Company’s taxable income, tax losses generated at certain of our taxable subsidiaries
which require a valuation allowance and do not generate an income tax benefit, and state income taxes incurred on a separate
legal entity basis.
For the year ended December 31, 2014, the Company’s effective tax rate on income from continuing operations was equal
F- 70
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
to 525.5%, which does not bear a customary relationship to statutory income tax rates. Differences from the statutory income
tax rate are primarily the result of: (i) state income taxes; (ii) non-deductible transaction costs incurred on the Fortegra acquisition;
and (iii) the effect of changes in valuation allowance on net operating losses reported by Tiptree Inc., Siena Capital Finance
Acquisition Corp., Luxury and MFCA Funding, Inc.
The table below presents the components of the Company’s net deferred tax assets and liabilities as of the respective balance
sheet dates:
Deferred tax assets:
Net operating loss carryforwards
Unrealized losses
Accrued expenses
Unearned premiums
Deferred revenue
Other deferred tax assets
Total deferred tax assets
Less: Valuation allowance
Total net deferred tax assets
Deferred tax liabilities:
Property
Unrealized gains
Deferred acquisition cost
Basis differences in corporate subsidiaries
Advanced commissions
Intangibles
Other deferred tax liabilities
Total deferred tax liabilities
Net deferred tax liability
As of December 31,
2015
2016
22,741
8,513
6,790
15,326
5,899
3,669
62,938
(1,991)
60,947
5,845
10,855
46,425
—
16,438
13,317
363
93,243
32,296
$
$
4,159
9,352
3,618
9,082
11,555
2,063
39,829
(965)
38,864
1,762
5,924
24,579
1,500
11,683
15,155
960
61,563
22,699
$
$
As of January 2016, Tiptree has established a U.S. federal consolidated income tax group and as such files on a consolidated
basis, with certain exceptions such a Fortegra life insurance company and Luxury. Tiptree consolidated, and certain subsidiaries
on a separate basis, file returns in various state jurisdictions, and as such may have state tax obligations. Additionally, as needed
the Company will take all necessary steps to comply with any income tax withholding requirements.
F- 71
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
As of December 31, 2016, the Company had total U. S. Federal net operating loss carryforwards (NOLs) arising from continuing
operations. The following table presents the U.S. Federal NOLs by tax year of expiration:
Tax Year of Expiration
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
Total
As of December
31,
2016
$
$
86
568
246
286
149
150
189
182
1,893
1,629
47,537
52,915
In addition to the U.S. Federal NOLs, Tiptree and its subsidiaries have NOLs in various state jurisdictions totaling $3,896.
Included in that amount are NOLs of approximately $1,991 that management has concluded will expire unutilized based on
existing positive and negative evidence. As such, a full valuation allowance for that amount has been established.
Other than the valuation allowance discussed above, management believes it is more likely than not the remaining net operating
loss carryforwards will be utilized prior to their expiration dates.
As of December 31, 2015, the consolidated valuation allowance for Tiptree was $965. In 2016, the Company recorded a net
decrease in its valuation allowances equal to $1,026, compared with a decrease in its valuation allowance of $1,743 in 2015.
As of December 31, 2016, the Company had no material unrecognized tax benefits or accrued interest and penalties. This is
consistent with the tax years ending December 31, 2015 and December 31, 2014 as well. Federal tax years 2012
through 2015 were open for examination as of December 31, 2016.
(23) Commitments and Contingencies
Contractual Obligations
The table below summarizes the Company’s contractual obligations by period that payments are due:
Operating lease obligations (1)
Total
As of December 31, 2016
Less than
one year
1-3 years
3-5 years
More than 5
years
Total
$
$
5,140
5,140
$
$
7,827
7,827
$
$
4,425
4,425
$
$
509
509
$
$
17,901
17,901
(1) Minimum rental obligations for Tiptree, Care, MFCA, Siena, Luxury, Reliance and Fortegra office leases. For the year ended December 31, 2016, 2015 and 2014, rent expense
for the Company’s office leases were $6,402, $5,784 and $1,508, respectively.
In addition, Tiptree’s subsidiary Siena issues standby letters of credit for credit enhancements that are required by its borrower’s
respective businesses. As of December 31, 2016, there was $1,611 outstanding relating to these letters of credit.
Litigation
Fortegra is a defendant in Mullins v. Southern Financial Life Insurance Co., which was filed in February 2006, in the Pike Circuit
Court, in the Commonwealth of Kentucky. A class was certified in June 2010. At issue is the duration or term of coverage under
certain policies. The action alleges violations of the Consumer Protection Act and certain insurance statutes, as well as common
F- 72
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
law fraud. The action seeks compensatory and punitive damages, attorney fees and interest. Plaintiffs filed a Motion for Sanctions
in April 2012 in connection with Fortegra's efforts to locate and gather certificates and other documents from Fortegra's producers.
The court did not award sanctions and Fortegra has retained a special master to facilitate the collection of certificates and other
documents from Fortegra's producers. In January 2015, the trial court issued an Order denying Fortegra’s motion to decertify
the class, which was upheld on appeal. Following a February 2017 hearing, the court denied Fortegra’s Motion for Summary
Judgment as to certain disability insurance policies. The court has not yet ruled on Fortegra’s Motion for Summary Judgment
as to certain life insurance policies, and a hearing is currently set for March 2017. No trial or additional hearings are currently
scheduled.
The Company considers such litigation customary in the insurance industry. In management's opinion, based on information
available at this time, the ultimate resolution of such litigation, which it is vigorously defending, should not be materially adverse
to the financial position of the Company. It should be noted that large punitive damage awards, bearing little relation to actual
damages sustained by plaintiffs, have been awarded in certain states against other companies in the credit insurance business.
At this time, the Company cannot estimate a range of loss that is reasonably possible.
The Company and its subsidiaries are parties to other legal proceedings in the ordinary course of business. Although Tiptree’s
legal and financial liability with respect to such proceedings cannot be estimated with certainty, the Company does not believe
that these proceedings, either individually or in the aggregate, are likely to have a material adverse effect on the Company’s
financial position.
(24) Earnings Per Share
The Company calculates basic net income per Class A common share based on the weighted average number of Class A common
shares outstanding (inclusive of vested restricted share units). The unvested restricted share units have the non-forfeitable right
to participate in dividends declared and paid on the Company’s common stock on an as vested basis and are therefore considered
a participating security. The Company calculates basic earnings per share using the “two-class” method, and for the years ended
December 31, 2015 and December 31, 2014, the loss from continuing operations available to common stockholders was not
allocated to the unvested restricted stock units as those holders do not have a contractual obligation to share in net losses.
Diluted net income per Class A common shares for the period includes the effect of potential equity of Siena, Reliance, and
Operating Company as well as potential Class A common stock, if dilutive. For the years ended December 31, 2015 and
December 31, 2014, the assumed exercise of all dilutive instruments were anti-dilutive, and therefore, were not included in the
diluted net income per Class A common share calculation.
F- 73
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
The following table presents a reconciliation of basic and diluted net income per common share for the following periods:
Net income (loss) from continuing operations
$
32,338
$
(13,816) $
(3,353)
Less:
Net income (loss) from continuing operations attributable to non-controlling interests (1)
Net income from continuing operations allocated to participating securities
7,018
224
(5,321)
—
1,939
—
Net income (loss) from continuing operations available to Tiptree Inc. Class A common
shares
25,096
(8,495)
(5,292)
Year Ended December 31,
2015
2014
2016
Discontinued operations, net
Less:
Net income from discontinued operations attributable to non-controlling interests (1)
Net income from discontinued operations attributable to Tiptree Inc. Class A common shares
Net income (loss) attributable to Tiptree Inc. Class A common shares - basic
Effect of Dilutive Securities:
Securities of subsidiaries
Adjustments to income relating to exchangeable interests, net of tax
Net income (loss) attributable to Tiptree Inc. Class A common shares - diluted
$
—
—
—
22,618
7,937
8,344
14,274
4,355
3,582
$
25,096
$
5,779
$
(1,710)
(279)
—
24,817
$
—
—
5,779
$
—
—
(1,710)
Weighted average number of shares of Tiptree Inc. Class A common stock outstanding -
basic
31,721,449
33,202,681
16,771,980
Weighted average number of incremental shares of Tiptree Inc. Class A common stock
issuable from exchangeable interests and contingent considerations
45,225
—
—
Weighted average number of shares of Tiptree Inc. Class A common stock outstanding -
diluted
31,766,674
33,202,681
16,771,980
Basic:
Income (loss) from continuing operations
Income from discontinued operations
Net income (loss) available to Tiptree Inc. Class A common shares
Diluted:
Income (loss) from continuing operations
Income from discontinued operations
Net income (loss) attributable to Tiptree Inc. Class A common shares
$
$
$
$
0.79
—
0.79
0.78
—
0.78
$
$
$
$
(0.26) $
0.43
0.17
$
(0.26) $
0.43
0.17
$
(0.31)
0.21
(0.10)
(0.31)
0.21
(0.10)
(1)
For the year ended December 31, 2015, the total net income (loss) attributable to non-controlling interest was $3,023, comprised of $(5,321) due to continuing operations and
$8,344 attributable to discontinued operations. For the year ended December 31, 2014, the total net income (loss) attributable to non-controlling interest was $6,294, comprised
of $1,939 due to continuing operations and $4,355 attributable to discontinued operations.
F- 74
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
(25) Summarized Quarterly Information (Unaudited)
Total revenues
Total expenses
Net income (loss) attributable to consolidated CLOs
Income (loss) before taxes from continuing operations
Less: provision (benefit) for income taxes
Discontinued operations, net
Net income (loss) before non-controlling interests
Less: net income (loss) attributable to non-controlling interests
Net income (loss) attributable to Tiptree Inc. Class A
common stockholders
Net (loss) income per Class A common share:
Basic, continuing operations, net
Basic, discontinued operations, net
Basic earnings per share
Diluted, continuing operations, net
Diluted, discontinued operations, net
Diluted earnings per share
2016
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
130,738
$
132,161
$
132,160
$
172,095
126,868
126,027
124,642
166,555
1,105
4,975
(2,439)
—
7,414
1,859
4,912
11,046
4,025
—
7,021
888
4,032
11,550
3,712
—
7,838
1,933
10,205
15,745
5,680
—
10,065
2,338
$
$
$
$
$
5,555
$
6,133
$
5,905
$
7,727
0.16
—
0.16
0.16
—
0.16
$
$
$
$
0.18
—
0.18
0.17
—
0.17
$
$
$
$
0.20
—
0.20
0.19
—
0.19
$
$
$
$
0.27
—
0.27
0.25
—
0.25
Weighted average number of Class A common shares:
Basic
Diluted
34,976,485
35,084,505
34,456,096
34,528,977
29,143,470
37,230,650
28,374,850
36,630,783
F- 75
TIPTREE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
(in thousands, except share data)
Total revenues
Total expenses
Net income (loss) attributable to consolidated CLOs
Income (loss) before taxes from continuing operations
Less: provision (benefit) for income taxes
Discontinued operations, net
Net income (loss) before non-controlling interests
Less: net income (loss) attributable to non-controlling interests
Net income (loss) attributable to Tiptree Inc. Class A
common stockholders
Net (loss) income per Class A common share:
Basic, continuing operations, net
Basic, discontinued operations, net
Basic earnings per share
Diluted, continuing operations, net
Diluted, discontinued operations, net
Diluted earnings per share
2015
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
89,063
94,612
(311)
(5,860)
(1,496)
2,345
(2,019)
(1,040)
100,873
102,520
67
(1,580)
(371)
21,003
19,794
4,832
$
120,377
120,734
(3,202)
(3,559)
2,829
—
(6,388)
(1,835)
128,146
126,143
(3,443)
(1,440)
415
(730)
(2,585)
1,066
(979) $
14,962
$
(4,553) $
(3,651)
(0.08) $
0.05
(0.03) $
(0.08) $
0.05
(0.03) $
(0.03) $
0.50
0.47
$
(0.03) $
0.50
0.47
$
(0.13) $
—
(0.13) $
(0.13) $
—
(0.13) $
(0.01)
(0.10)
(0.11)
(0.01)
(0.10)
(0.11)
$
$
$
$
$
$
Weighted average number of Class A common shares:
Basic
Diluted
32,138,455
32,138,455
31,881,904
31,881,904
33,848,463
33,848,463
34,970,731
34,970,731
F- 76
(26) Subsequent Events
On March 9, 2017, the Company’s board of directors declared a quarterly cash dividend of $0.03 per share to Class A stockholders
with a record date of March 27, 2017, and a payment date of April 3, 2017.
F- 77
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of its Executive Chairman, Chief Executive Officer and Chief Financial
Officer, have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as
defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act) as of December 31, 2016. Based upon that evaluation, the Company’s
Executive Chairman, Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls
and procedures were effective as of December 31, 2016.
The Company is committed to maintaining a strong internal control environment which is accompanied by management’s ongoing
focus on processes and related controls to achieve accurate and reliable financial reporting. However, all systems of internal
control, no matter how well designed, have inherent limitations. Therefore, even those systems deemed to be effective can provide
only reasonable assurance with respect to financial statement preparation and presentation. Projections of the effectiveness of
internal control to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
(b) Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Rule 13a-15(f) of the Act. The Company conducted an evaluation of the effectiveness of its internal control over
financial reporting based upon the framework established in the Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that
transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures are made only in accordance with the authorization of management and
the Boards of Directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a material effect on our financial statements.
If the Company identifies any material weaknesses, the COSO Framework does not allow the Company to conclude that our
internal control over financial reporting is effective. A material weakness is a deficiency, or combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s
annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
Consistent with the guidance issued by the Securities and Exchange Commission that an assessment of a recently acquired business
may be omitted from management’s report on internal control over financial reporting in the year of acquisition, management
excluded the two Care Managed Properties acquired during the quarter ended March 31, 2016 and the one Care Managed Property
acquired during the quarter ended September 30, 2016, with total assets of $83.4 million and total revenues of $10.9 million,
from its evaluation of internal controls over financial reporting for the year ended December 31, 2016.
As of December 31, 2016, the following material weaknesses in internal control over financial reporting that were reported as of
December 31, 2015, have been remediated based on our assessment that the design, implementation, and testing of controls to
remedy these weaknesses were operating effectively:
• The Company did not design and operate effective process level controls to prevent or detect and correct material misstatements
on a timely basis in financial statement accounts at its Care Managed Properties.
• The Company did not have sufficient knowledgeable resources to operate the Company’s processes and controls at its Care
Managed Properties. In addition, the Company failed to establish adequate monitoring activities over its Care Managed
Properties to ascertain whether the components of internal control were properly designed and operating effectively.
• The Company did not design management review controls that operated at a sufficient level of precision over the accounting
for and measurement of current and deferred income taxes related to the year-end income tax provision.
Based upon its assessment, management concluded that the Company’s internal control over financial reporting as of December
31, 2016 was effective using the COSO Framework.
63
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 has been audited by KPMG
LLP, an independent registered public accounting firm that audited the Company’s consolidated financial statements as of and
for the year ended December 31, 2016, as stated in their report, included in Item 8 of this Form 10-K, which expresses an
unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016.
(c) Changes in Internal Control over Financial Reporting
Other than the measures taken to ensure that the design, implementation, and testing of controls over Care’s managed properties
and the accounting for and measurement of current and deferred income taxes related to the year-end income tax provision to
ensure these controls were operating effectively as of December 31, 2016, there were no other changes in internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months
ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information concerning our executive officers is incorporated herein by reference to information included in the Proxy Statement for
the Company’s 2017 Annual Meeting of Stockholders.
Information with respect to our directors and the nomination process is incorporated herein by reference to information included in
the Proxy Statement for the Company’s 2017 Annual Meeting of Stockholders.
Information regarding our audit committee and our audit committee financial experts is incorporated herein by reference to information
included in the Proxy Statement for the Company’s 2017 Annual Meeting of Stockholders.
Information required by Item 405 of Regulation S-K is incorporated herein by reference to information included in the Proxy Statement
for the Company’s 2017 Annual Meeting of Stockholders.
Item 11. Executive Compensation
Information with respect to executive compensation is incorporated herein by reference to information included in the Proxy
Statement for the Company’s 2017 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to
information included in the Proxy Statement for the Company’s 2017 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information with respect to such contractual relationships and independence is incorporated herein by reference to the information in
the Proxy Statement for the Company’s 2017 Annual Meeting of Stockholders.
Item 14. Principal Accountant Fees and Services
Information with respect to principal accounting fees and services and pre-approval policies are incorporated herein by reference to
information included in the Proxy Statement for the Company’s 2017 Annual Meeting of Stockholders.
64
PART IV
Item 15. Exhibits, Financial Statement Schedules
The following documents are filed as a part of this Form 10-K:
(a)(1) All Financial Statements
Index to Financial Statements:
Consolidated Balance Sheet as of December 31, 2016 and 2015
Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014
Page
F- 4
F- 5
F- 6
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2016, 2015 and 2014
F- 7
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
F- 9
F- 11
Exhibits:
The Exhibits listed in the Index of Exhibits, which appears immediately following the signature page and is incorporated herein
by reference, as filed as part of this Form 10-K.
(a)(2) Financial Statement Schedules.
Schedule II—“Condensed Financial Information of Registrant”, is filed as part of this Annual Report on Form 10-K and should
be read in conjunction with the financial statements and notes thereto contained in Item 8—“Financial Statements and
Supplementary Data.”
All other financial statements and financial statement schedules for which provision is made in the applicable accounting
regulations of the SEC are not required under the related instruction, are not material or are not applicable and, therefore, have
been omitted.
(a)(3) Exhibits.
See the Exhibit Index attached hereto and incorporated by reference herein.
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Tiptree Inc. has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date:
March 13, 2017
Tiptree Inc.
By:/s/ Jonathan Ilany
Jonathan Ilany
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/s/ Jonathan Ilany
Jonathan Ilany
/s/ Sandra Bell
Sandra Bell
/s/ Timothy Schott
Timothy Schott
/s/ Michael G. Barnes
Michael G. Barnes
/s/ Paul M. Friedman
Paul M. Friedman
/s/ Lesley Goldwasser
Lesley Goldwasser
/s/ John E. Mack
John E. Mack
/s/ Bradley E. Smith
Bradley E. Smith
Chief Executive Officer and
Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Principal Accounting Officer
(Principal Accounting Officer)
March 13, 2017
March 13, 2017
March 13, 2017
Executive Chairman and Director
March 13, 2017
March 13, 2017
March 13, 2017
March 13, 2017
March 13, 2017
Director
Director
Director
Director
66
Exhibit No.
Description
EXHIBIT INDEX
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
4.5
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Fourth Articles of Amendment and Restatement of the Registrant, effective July 1, 2013 (previously filed as Exhibit 3.1
to the Registrant’s Current Report on Form 8-K (File No. 001-33549), filed on July 2, 2013 and herein incorporated by
reference).
Fourth Amended and Restated Bylaws of the Registrant (previously filed as Exhibit 3.2 to the Registrant’s Current Report
on Form 8-K (File No. 001-33549), filed on January 4, 2017 and herein incorporated by reference).
Articles Supplementary of the Registrant, dated December 29, 2014 (previously filed as Exhibit 3.1 to the Registrant’s
Current Report on Form 8-K (File No. 001-33549), filed on December 29, 2014 and herein incorporated by reference).
Articles of Amendment of the Registrant, effective as of December 30, 2016 (previously filed as Exhibit 3.1 to the
Registrant’s Current Report on Form 8-K (File No. 001-33549), filed on January 4, 2017 and herein incorporated by
reference).
Form of Certificate for Class A Common Stock (previously filed as Exhibit 4.1 to the Registrant’s Current Report on Form
8-K (File No. 001-33549), filed on January 4, 2017 and herein incorporated by reference.
Amended and Restated Limited Liability Company Agreement of Tiptree Operating Company, LLC, dated July 1, 2013
(previously filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 001-33549), filed on July 2, 2013
and herein incorporated by reference).
First Amendment to the Amended and Restated Limited Liability Company Agreement of Tiptree Operating Company,
LLC, dated January 1, 2016 (previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No.
001-33549), filed on January 7, 2016 and herein incorporated by reference).
Registration Rights Agreement, dated July 1, 2013, between the Registrant and Tiptree Financial Partners, L.P. (previously
filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 001-33549), filed on July 2, 2013 and herein
incorporated by reference).
Registration Rights Agreement by and between the Registrant and Tiptree Financial Partners, L.P., dated as of March 16,
2010 (previously filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 001-33549), filed on
March 16, 2010 and herein incorporated by reference).
Warrant to Purchase Common Stock, dated as of September 30, 2008 (previously filed as Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K (File No. 001-33549), filed on October 2, 2008 and herein incorporated by reference).
Registrant’s 2013 Omnibus Incentive Plan (previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-
K (File No. 001-33549), filed on November 12, 2013 and herein incorporated by reference).**
Form of Non-Qualified Stock Option Agreement under the Registrant’s 2013 Omnibus Incentive Plan (2015) (previously
filed as Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K (File No. 001-33549), filed on March 15, 2016 and
herein incorporated by reference).**
Form of Non-Qualified Stock Option Agreement under the Registrant’s 2013 Omnibus Incentive Plan (2016) (filed
herewith).**
Form of Restricted Stock Unit Agreement under the Registrant’s 2013 Omnibus Incentive Plan (filed herewith).**
Form of Indemnification Agreement (previously filed as Exhibit 10.9 to the Registrant’s Registration Statement on Form
S-11, as amended (File No. 333-141634), filed on June 7, 2007 and herein incorporated by reference).
Transition Services Agreement, dated as of June 30, 2012, among Tiptree Asset Management Company, LLC, Tricadia
Holdings, L.P. and Tiptree Operating Company, LLC (as assignee of Tiptree Financial Partners, L.P.) (previously filed as
Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-33549), filed on August 13, 2013 and herein
incorporated by reference).
Credit Agreement, dated as of September 18, 2013, between Tiptree Operating Company, LLC and Fortress Credit Corp.
as Lender, Administrative Agent, Collateral Agent and Lead Arranger (previously filed as Exhibit 10.1 to Form 8-K (File
No. 001-33549), filed September 20, 2013 and herein incorporated by reference).
67
EXHIBIT INDEX
10.9
Exhibit No.
Description
First Amendment to Credit Agreement, dated January 26, 2015, by and among Tiptree Operating Company, LLC, Fortress
Credit Corp. as Administrative Agent, Collateral Agent and Lead Arranger, and the lenders party thereto (previously filed
as Exhibit 10.1 to Form 8-K (File No. 001-33549), filed January 27, 2015 and herein incorporated by reference).
10.10
10.11
10.12
10.13
10.14
10.15
10.16
21.1
23.1
31.1
31.2
31.3
32.1
Second Amendment to Credit Agreement, dated August 3, 2015, by and among Tiptree Operating Company, LLC, Fortress
Credit Corp. as Administrative Agent, Collateral Agent and Lead Arranger, and the lenders party thereto (previously filed
as Exhibit 10.1 to Form 8-K (File No. 001-33549), filed August 7, 2015 and herein incorporated by reference).
Third Amendment to Credit Agreement, dated January 14, 2016, by and among Tiptree Operating Company, LLC, Fortress
Credit Corp. as Administrative Agent, Collateral Agent and Lead Arranger, and the lenders party thereto (previously filed
as Exhibit 10.1 to Form 8-K (File No. 001-33549), filed January 14, 2016 and herein incorporated by reference).
Fourth Amendment to Credit Agreement, dated June 24, 2016, by and among Tiptree Operating Company, LLC, Fortress
Credit Corp. as Administrative Agent, Collateral Agent and Lead Arranger, and the lenders party thereto (previously filed
as Exhibit 10.1 to Form 8-K (File No. 001-33549), filed June 24, 2016 and herein incorporated by reference).
Stock Purchase Agreement by and among Reliance Holdings, LLC, Tiptree Operating Company, LLC, the Registrant,
Reliance First Capital, LLC and each equityholder of Reliance First Capital, LLC, dated as of November 24, 2014
(previously filed as Exhibit 10.20 to the Registrant’s Annual Report on Form 10-K (File No. 001-33549), filed on March
31, 2015 and herein incorporated by reference).
Second Amendment to the Securities Purchase Agreement by and among Reliance Holdings, LLC, Tiptree Operating
Company, LLC, the Registrant, Reliance First Capital, LLC and each equityholder of Reliance First Capital, LLC, dated
as of August 4, 2015 (previously filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 001-33549),
filed on August 7, 2015 and herein incorporated by reference).
Stock Purchase Agreement, dated June 23, 2016, by and among Caroline Holdings LLC, the Registrant, New York Marine
and General Insurance Company, Gotham Insurance Co., South West Marine & General Insurance Co. and ProSight
Specialty Insurance Group, Inc. (previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No.
001-33549), filed on June 23, 2016 and herein incorporated by reference).
Stock Purchase Agreement, dated September 14, 2016, by and among Caroline Holdings LLC, the Registrant and Nomura
Securities Co., Ltd. (previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-33549),
filed on September 14, 2016 and herein incorporated by reference).
Subsidiaries of the Registrant (filed herewith).
Consent of Independent Registered Public Accounting Firm (filed herewith).
Certification of Executive Chairman pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of Executive Chairman pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.3
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
101.INS XBRL Instance Document*
101.SCH XBRL Taxonomy Extension Schema Document*
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB XBRL Taxonomy Extension Label Linkbase Document*
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*
101.DEF XBRL Taxonomy Extension Definition Linkbase Document*
68
Exhibit No.
Description
EXHIBIT INDEX
* Attached as Exhibit 101 to this Annual Report on Form 10-K are the following materials, formatted in XBRL (eXtensible Business
Reporting Language): (i) the Consolidated Balance Sheets (audited) for December 31, 2016 and December 31, 2015, (ii) the
Consolidated Statements of Operations (audited) for the years ended December 31, 2016, 2015 and 2014, (iii) the Consolidated
Statements of Comprehensive Income (audited) for the years ended December 31, 2016, 2015 and 2014, (iv) the Consolidated
Statements of Changes in Stockholders’ Equity (audited) for the years ended December 31, 2016, 2015 and 2014, (v) the Consolidated
Statements of Cash Flows (audited) for the years ended December 31, 2016, 2015 and 2014 and (vi) the Notes to the Consolidated
Financial Statements (audited).
** Denotes a management contract or compensatory plan, contract or arrangement.
69
Schedule II — Condensed Financial Information of Registrant
TIPTREE INC.
PARENT COMPANY ONLY CONDENSED STATEMENTS OF INCOME
(All Amounts in Thousands)
Revenues
Interest income*
Other income
Total revenues
Expenses
Other expenses
Total expenses
Equity in earnings (losses) of subsidiaries, net of tax*
Income (loss) before taxes from continuing operations
Less: provision (benefit) for income taxes
Net income (loss) from continuing operations
Discontinued operations:
Income from discontinued operations, net of tax and non-controlling interest
Gain on sale of discontinued operations, net of tax and non-controlling interest
Discontinued operations, net of tax and non-controlling interest
Net income (loss) attributable to Tiptree Inc. Class A common stockholders
* Eliminated in consolidation
Years Ended December 31,
2014
2015
2016
$
$
29
—
29
— $
118
118
—
—
—
—
—
26,176
26,205
885
$ 25,320
31
31
(21,383)
(21,296)
(8,528)
—
—
(6,572)
(6,572)
2,518
$ (12,768) $ (9,090)
—
—
—
$ 25,320
6,592
11,955
18,547
5,779
$
7,380
—
7,380
$ (1,710)
TIPTREE INC.
PARENT COMPANY ONLY CONDENSED BALANCE SHEETS
(All Amounts in Thousands)
Assets
Investment in subsidiaries *
Cash and cash equivalents
Notes receivable*
Other assets
Total assets
Liabilities and Stockholders’ Equity
Liabilities
Other liabilities
Total liabilities
Stockholders' Equity
Preferred stock: $0.001 par value, 100,000,000 shares authorized, none issued or outstanding
Common stock - Class A: $0.001 par value, 200,000,000 shares authorized, 34,983,616 and
34,899,833 shares issued and outstanding, respectively
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
Additional paid-in capital
Accumulated other comprehensive income (loss), net of tax
Retained earnings
Class A common stock held by subsidiaries, 6,596,000 and 0 shares, respectively
Class B common stock held by subsidiaries, 8,049,029 and 0 shares, respectively
Total stockholders’ equity
Total liabilities and stockholders' equity
* Eliminated in consolidation
70
As of December 31,
2015
2016
$ 286,349
—
5,306
3,015
$ 294,670
$ 300,807
17
—
12,016
$ 312,840
$
$
$
1,239
1,239
$
$
— $
35
—
—
—
35
8
297,391
555
37,974
(42,524)
(8)
293,431
$ 294,670
8
297,063
(111)
15,845
—
—
312,840
$ 312,840
TIPTREE INC.
PARENT COMPANY ONLY CONDENSED STATEMENTS OF CASH FLOWS
(All Amounts in Thousands)
Operating Activities:
Net income (loss) attributable to Tiptree Inc. Class A common stockholders
Adjustments to reconcile net income to net cash provided by operating activities
Equity in earnings of subsidiaries*
Changes in operating assets and liabilities
Changes in other operating assets and liabilities
Net cash provided by (used in) operating activities
Financing Activities:
Dividends paid
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Cash paid for income taxes
* Eliminated in consolidation
Note 1. Basis of Presentation
Years Ended December 31,
2014
2015
2016
$ 25,320
$
5,779
$ (1,710)
(26,176)
21,383
6,572
4,030
3,174
(24,113)
3,049
(5,196)
(334)
(3,191)
(3,191)
(17)
17
— $
(3,313)
(3,313)
(264)
281
17
14
$ 20,510
$
$
$
$
—
—
(334)
615
281
581
Tiptree Inc. (formally known as Tiptree Financial Inc., Tiptree or the Company) 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.
Pursuant to the terms discussed in Note—(13) Debt, net in the notes to Consolidated Financial Statements, a secured corporate credit
agreement of a subsidiary of TFP restricts the ability to pay or make any dividend or distribution to Tiptree Inc. In addition, certain
other subsidiaries activity are regulated, or subject to specific restriction on transfers as a result of financing arrangements. As a result
of these restrictions, these Condensed Financial Statements of the Registrant have been prepared in accordance with Rule 12-04 of
Regulation S-X, as restricted net assets of the Company's subsidiaries (as defined in Rule 4-08(e)(3) of Regulation S-X) exceed 25%
of the Company's consolidated net assets as of December 31, 2016.
The Company is a holding company without any operations of its own. These condensed financial statements have been prepared on
a "parent-only" basis. Under a parent-only presentation, the Parent Company's investments in subsidiaries are presented under the
equity method of accounting. Certain information and footnote disclosures normally included in financial statements prepared in
accordance with U.S. GAAP have been condensed or omitted. Stock-based compensation expense associated with equity incentive
awards issued by the Parent Company and the related tax effects are recorded at the subsidiary level where the employees provide
the services. The accompanying condensed financial information should be read in conjunction with the Tiptree, Inc. Consolidated
Financial Statements and related Notes thereto.
Note 2. Dividends Received
The Company received dividends of $3,191, $23,559, and $250 for the years ended December 31, 2016, 2015 and 2014, respectively.
71