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Section 1: 10-K (10-K)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
 
x
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2017
OR
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from            to            
Commission File Number: 001-33549
Tiptree Inc.
(Exact name of Registrant as Specified in Its Charter)
Maryland
38-3754322
(State or Other Jurisdiction of Incorporation of Organization)
(IRS Employer Identification No.)
 
 
780 Third Avenue, 21st Floor, New York, New York
10017
(Address of Principal Executive Offices)
(Zip Code)
(212) 446-1400
(Registrant’s Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Class A Common Stock, par value $0.001 per share
Nasdaq Capital Market

Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨                        Accelerated filer x
Non-accelerated filer ¨ (Do not check if a smaller reporting company)     Smaller reporting company ¨
Emerging Growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No  x
As of June 30, 2017, 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 $163,643,437, based upon the closing sales price of $7.05 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 13, 2018, there were 35,003,004 shares, par value $0.001, of the registrant’s Class A common stock outstanding (including 5,069,990 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 Securities and Exchange Commission relating to the registrant’s 2018 Annual Meeting of Stockholders is incorporated by reference into Part III.




TIPTREE INC.
Table of Contents
Annual Report on Form 10-K
December 31, 2017



ITEM
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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TIPTREE INC.
Table of Contents
Annual Report on Form 10-K
December 31, 2017



ITEM
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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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.
“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.
“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.
“REO” means real estate owned.

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“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.
“Tax Act” means Public Law no. 115-97, commonly referred to as the Tax Cuts and Jobs Act
“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 a holding company that combines insurance operations with investment management expertise. Our principal operating subsidiary is a leading provider of specialty insurance products and related services, including credit protection insurance, warranty and service contract products, and insurance programs which underwrite niche personal and commercial lines of insurance. We also allocate capital across a broad spectrum of investments, which we refer to as Tiptree Capital. Today, Tiptree Capital consists of asset management operations, mortgage operations and other investments.

Our strategic objectives are focused on:
expanding our insurance operations, while continuing to be a leading provider of specialty insurance products and maintaining our strong underwriting performance;
continuing to grow and expand the businesses and investments within Tiptree Capital; and
generating enhanced, risk adjusted investment returns.

When assessing potential acquisitions and investments, 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.

Our financial goals are to generate consistent and growing earnings and to enhance shareholder value as measured by growth in book value per share plus dividends.

As of December 31, 2017, Tiptree and its consolidated subsidiaries had 1,011 employees (of which 918 were full time employees), 26 of which were at corporate headquarters and are full time employees.
 
Significant Developments

On February 1, 2018, we sold our senior living operations to Invesque in exchange for 16.6 million common shares of Invesque. At December 31, 2017, our senior living operations were carried as discontinued operations. The increase to Tiptree’s book value as a result of the sale was approximately $0.91 per share, or a 9.1% increase to our December 31, 2017 book value per share, as exchanged. The transaction is expected to be accretive to our 2018 GAAP earnings per share and Adjusted EBITDA. Through this transaction, along with additional pending or closed sales in 2017, Tiptree’s debt was reduced by approximately $518 million. After giving effect to these transactions, our leverage was reduced from 2.2x as of September 30, 2017 to less than 0.9x as of December 31, 2017.


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On October 1, 2017, we sold our investment in Siena, for $2.5 million in cash and a seller note of $11.0 million. The seller note has an interest rate of 10% and matures in November 2018. On December 12, 2017, we entered into a definitive agreement to sell our investment in Luxury Mortgage. The agreement is subject to, among other things, regulatory approval, and is expected to close during the second half of 2018.

Our Competitive Advantage

We believe our structure as a public company gives us the ability to have a long-term focus on maximizing returns to our shareholders. We believe this long-term perspective provides us the flexibility when investing our capital 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.

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 acquisitions and investment opportunities. Our competitors 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

Overview

Our specialty insurance segment is conducted through Fortegra Financial Corporation (together with its subsidiaries, “Fortegra”), an insurance holding company incorporated in 1981. Our insurance business 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 underwriting of niche personal and commercial lines of insurance.

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, 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. 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-duration” 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 other products which provide value-add services to Fortegra customers, including premium finance and business processing services.


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Marketing and Distribution

We distribute our products through distribution partnerships with our clients, including consumer finance companies, retailers, automobile dealers, credit card issuers, credit unions and regional and community banks. We leverage our clients’ brand and customer base to distribute multiple products and services. 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.

We generally target markets that are niche and specialty in nature, which we believe are underserved by competitors and have high barriers to entry. We focus on establishing quality client relationships and emphasizing customer service. This focus, along with our ability to help clients enhance revenue and reduce costs, has enabled us to develop and maintain numerous long-term client relationships.

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.

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 us.

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 and provide us with stable margins for these services. 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.

Our Competitive Strengths

Specialty Focus

We have a history of operating in niche insurance markets that require specialized knowledge and expertise to profitably service and/or underwrite policies or insurance coverages. Our expertise and focus, developed over Fortegra’s 35-year history, has contributed to our position as one of the leading providers of credit insurance products in the United States. In addition, our “A-” (Excellent) (stable outlook) rating by A.M. Best Company, Inc. (“A.M. Best”) and broad licensure provide us the opportunity to write niche commercial and personal lines insurance programs through managing general agents and other program managers to whom we have granted authority to produce, underwrite and administer policies that meet our underwriting and pricing guidelines. In the markets we serve, we focus on underwriting small premium policies and contracts where we can utilize our technology and refined administration processes to manage efficiently the high volume of policies and claims that result from serving large numbers of small policyholders and contract holders. We believe these 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 believe we can capitalize on opportunities presented by our underwriting expertise and operating platform.


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Broad Service Delivery Expertise

Over the years, we have invested resources and 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 and claims management. Integrated, proprietary technology delivers low cost, highly automated services to our clients, while our scalable technology infrastructure affords us the opportunity to add new clients and services without significant additional expense. The breadth of our capabilities enables us to provide multiple services to each client, thus creating the opportunity to generate more revenue and establish more entrenched relationships with clients. We believe our broad capabilities are a key driver of our high client retention rates. In our credit protection insurance products, our annual renewal rates are consistently in excess of 90%, which we believe is among the highest in the industry and 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. 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.

Investment Capabilities

Our investment management operations provide access to extensive investment expertise and investment opportunities. We believe our ability to source investments provides us access to a broader universe of investment opportunities, providing us the opportunity to generate superior risk-adjusted investment returns over the long term compared to what a traditional insurer could produce on its own, which we believe distinguishes us from many other insurance companies.

Market Opportunity

Credit Insurance

We are one of the leading providers of credit insurance protection products in the United States and believe we are well positioned to increase our market share both organically and through acquisition. We believe our capabilities and reputation have allowed us to better position ourselves competitively for business as we compete for new business and renewals in the marketplace. We also believe our market position, capabilities and reputation will make us a preferred acquisition partner for smaller competitors that may choose to exit the market or desire a partner with more resources.

Warranty Products

We believe we can significantly increase our market presence in the warranty sector. We entered the warranty market as a natural extension of our business given it possesses similar attributes and distribution channels as our credit-insurance products. In 2012, our insurance business acquired a provider of wireless-device protection plans and mobile services. Our warranty market gross premiums grew to $110.3 million in the year ended December 31, 2017, a $47.9 million or 76.7% increase from the year ended December 31, 2016. We believe the demand from consumers for products such as automobile warranties and mobile device protection will continue to drive long-term growth opportunities for us.

International Markets

We plan to selectively expand our product offerings to international markets such as Asia, Europe and Canada, where we believe profitable opportunities exist. We believe our existing product offerings can be successfully distributed in these markets while maintaining similar levels of underwriting performance as our core United States markets.

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 insurance 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, Louisiana and Wisconsin. 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 concentration limits among asset classes. 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 respective 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.

Our reinsurance companies that are domiciled in Turks and Caicos 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-

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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 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, 2017, our specialty insurance segment employed 432 employees of which 374 were on a full time basis.

Tiptree Capital

Overview

Tiptree also allocates its capital across a broad spectrum of investments which we refer to as Tiptree Capital. As of February 1, 2018, Tiptree Capital includes our Invesque common shares, asset management operations, mortgage operations and other non-operating asset or security investments. We manage Tiptree Capital on a total return basis balancing current cash flow and long term value appreciation.

As of February 1, 2018, Tiptree owned 16.6 million common shares of Invesque, a real estate investment company that specializes in health care and senior living property investment throughout North America. Tiptree and Invesque are party to a Governance and Investor Rights Agreement whereby Tiptree has the right to nominate one board member to Invesque’s Board of Directors as well as customary Canadian demand and piggyback registrations rights. Tiptree is also subject to customary standstill voting and lock-up restrictions. In future periods, Tiptree will report unrealized gains and losses and dividend income from ownership of the shares in Other Investments as part of Tiptree Capital.

Asset Management

Our asset management operations are conducted through TAMCO, an SEC-registered investment adviser. 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 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. As of December 31, 2017, we managed $1.6 billion of fee earning AUM in CLOs. Our strategy is to grow our fee earning AUM, and to the extent that market conditions warrant, to grow our business by offering new investment products.

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 - As of December 31, 2017, we had approximately $22.8 million of capital invested in funds we manage for others, 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.

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 we 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,

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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, 2017, our asset management segment had 9 employees on a full time basis.

Mortgage

Our mortgage operations are conducted through Reliance Holdings, LLC. 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. The growth in our mortgage business is expected primarily to come from increased origination volume, new products, and, to a lesser extent, through acquisition.

Competition

The residential mortgage market is 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.

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 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, 2017, our Mortgage operations had 401 employees of which 371 were on a full time basis.

Other Investments

Other Investments includes our investments directly in assets, securities, other alternative investments or immaterial operating businesses. For the period ending December 31, 2017, our now divested commercial lending operation and the results from Luxury, which is held for sale are included in Other Investments for reporting purposes. As noted above, we will report our investment in Invesque as part of Other Investments.


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STRUCTURE

On an as exchanged basis, we had 37,854,482 shares of Class A common stock as of December 31, 2017 (which excludes 5,197,551 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 the same voting rights as the Class A, 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:


392601840_tfi10k2016orgcharta12.jpg

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.

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.


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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

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.

Our investment in Invesque shares is subject to transfer restrictions, market volatility and the risk that Invesque changes its dividend policy.
As of February 1, 2018, we owned 16.6 million shares, or approximately 34%, of Invesque, a real estate investment company that specializes in health care real estate and senior living property investment throughout North America.
    
Pursuant to the Investor Rights Agreement, we have agreed to restrictions on the sale of our Invesque shares for a period ranging from 6 months to 18 months. The value of our Invesque shares will be reported at fair market value on a quarterly basis and may fluctuate. Invesque has historically paid monthly dividends but there can be no assurance that Invesque will continue to pay dividends in the same frequency or amount.
    
A loss in the fair market value of our Invesque shares or a reduction or discontinuation in the dividends paid on our Invesque shares could have a material adverse effect on our financial condition and results of operations.

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.

We are exposed to risks associated with acquiring or divesting businesses or business operations.

We regularly evaluate strategic acquisition opportunities for growth. 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.

We have also divested, and may in the future divest, businesses or business operations. Any divestitures may involve a number of risks, including the diversion of management’s attention, significant costs and expenses, the loss of customer relationships and cash flow, and the disruption of the affected business or business operations. Failure to timely complete or to consummate a divestiture

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may negatively affect the valuation of the affected business or business operations or result in restructuring charges.

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 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 or refinance our indebtedness 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.


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Our insurance business 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 our insurance business’s products and services could materially and adversely affect its business, results of operations and financial condition.

Our insurance business 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 our insurance business’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, our insurance business’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 our insurance business’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 our insurance business’s products could materially reduce our insurance business’s sales and revenues and have a material adverse effect on its business, results of operations and financial condition.

Our insurance business 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. Our insurance business 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 our insurance 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.

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.

Our insurance business’s reinsurance facilities are generally subject to annual renewal. Our insurance business 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, our insurance business may not be able to obtain other reinsurance facilities in adequate amounts and at favorable rates. If our insurance business 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 our insurance business’s commissions, it is exposed to risks related to the creditworthiness of some of its agents.

Our insurance business is subject to the credit risk of some of the agents with which it contracts to sell its products and services.

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Our insurance business typically advances agents’ commissions as part of its product offerings. These advances are a percentage of the premiums charged. If our insurance business 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 our insurance business’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.
   
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.

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.    

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.

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;

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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, 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 our mortgage business.
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

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representations concerning the licensing of a mortgage broker;
we fail to secure adequate mortgage insurance within a certain period after closing;
a mortgage insurance provider denies coverage; or
we fail to comply, at the individual loan level or otherwise, with regulatory requirements in the current dynamic regulatory environment.

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

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, 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.
    
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, 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.

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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 holdings and increasing our cost of borrowing to finance operations.
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 fixed income investments 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 have included short Treasury positions, interest rate swaps, foreign exchange derivatives, credit derivatives and other 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.
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 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, 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. As such, we may be unable to realize the carrying value upon a sale of these investments.

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

Accounting rules for consolidations, income taxes, business acquisitions, transfers of financial assets, securitization transactions and other aspects of our operations are highly complex and require the application of judgment and assumptions by our management. 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 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 and income from assets.

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 and income from assets. The amount of dividends

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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 insurance business Junior Subordinated Notes due 2057 restrict dividends to us based on the leverage ratio of our insurance business and its subsidiaries. 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 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.

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

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

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

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

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

20




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.

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 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, our insurance business does not collect sales or other related taxes on its services. Whether sales of our insurance business’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 our insurance business, whether based on sales by our insurance business or its resellers or clients, including for past sales. A successful assertion that our insurance business should be collecting sales or other related taxes on its services could result

21




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 our insurance business’s payment protection products, there are federal and state laws and regulations that govern the disclosures related to lenders’ sales of those products. Our insurance business’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, our insurance business’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 our insurance business’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 our insurance business underwrites, federal legislative proposals regarding national catastrophe insurance, if adopted, could reduce the business need for some of the related products that our insurance business 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 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.

22




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 our insurance 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 our insurance business’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 our insurance business’s revenues.

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

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

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

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


23




Cyberattacks targeting Tiptree’s process control networks or other digital infrastructure could have a material adverse impact on the company’s business and results of operations 

There are numerous and evolving risks to cybersecurity and privacy from cyber threat actors, including criminal hackers, state-sponsored intrusions, industrial espionage and employee malfeasance. These cyber threat actors are becoming more sophisticated and coordinated in their attempts to access the Company’s information technology (“IT”) systems and data, including the IT systems of cloud providers and third parties with which the Company conducts business. Although the Company devotes significant resources to prevent unwanted intrusions and to protect its systems and data, whether such data is housed internally or by external third parties, the Company has experienced immaterial cyber incidents and will continue to experience cyber incidents of varying degrees in the conduct of its business. Cyber threat actors could compromise the Company’s process control networks or other critical systems and infrastructure, resulting in disruptions to its business operations, access to its financial reporting systems, or loss, misuse or corruption of its critical data and proprietary information, including without limitation its business information and that of its employees, customers, partners and other third parties.  Cyber events could result in significant financial losses, legal or regulatory violations, reputational harm, and legal liability and could ultimately have a material adverse effect on the Company’s business and results of operations.

We have had a material weakness in internal control over financial reporting in the past and cannot assure you that additional material weaknesses will not be identified in the future. Our failure to implement and maintain effective internal control over financial reporting could result in material misstatements in our financial statements which could require us to restate financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on our stock price.

As reported in our Annual Report on Form 10-K for the year ended December 31, 2015, management and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting. We have remediated this material weakness, by implementing corrective measures as described in Item 9A. Controls and Procedures of our Form 10-K for the year ended December 31, 2016.

We cannot assure you that additional material weaknesses or significant deficiencies in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses or significant deficiencies, cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting. The existence of a material weakness or significant deficiency could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

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, 2017, the Company’s owned real estate properties consisted of 42 properties in our senior living operations (which were all sold to Invesque in February 2018), which are located across 11 states primarily in the Mid-Atlantic and Southern United States and 91 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 disability and life credit insurance policies. The action alleges violations of the Consumer Protection Act and certain insurance statutes,

24




as well as common law fraud and seeks compensatory and punitive damages, attorney fees and interest. To date, the court has not awarded sanctions in connection with Plaintiffs’ April 2012 Motion for Sanctions. 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. In January 2018, in response to a Plaintiffs’ Motion the court vacated its November 2017 order granting Fortegra’s Motion for Summary Judgment as to the life certificates at issue with leave to refile. 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.

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, 2017, there were 104 Class A common stockholders of record. This number does not include beneficial owners whose shares are held by nominees in street name.

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.
2017
High Price
Low Price
Dividends
First Quarter
$
7.45

$
6.00

$
0.030

Second Quarter
$
7.60

$
5.80

$
0.030

Third Quarter
$
7.20

$
5.69

$
0.030

Fourth Quarter
$
7.23

$
5.75

$
0.030

 
 
 
 
2016
High Price
Low Price
Dividends
First Quarter
$
6.78

$
5.33

$
0.025

Second Quarter
$
6.82

$
4.74

$
0.025

Third Quarter
$
6.16

$
5.03

$
0.025

Fourth Quarter
$
7.15

$
5.53

$
0.025


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.


25




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, 2017 are included in results of operations since their respective dates of acquisition.
Consolidated Statement of Operations Data:
 
For the Years Ended December 31,
(in thousands, except shares and per share amounts)
 
2017(1)
 
2016(1)
 
2015(1)(3)
 
2014(1)(2)(3)
 
2013(1)(4)
Total revenues
 
$
581,798

 
$
506,423

 
$
392,331

 
$
51,032

 
$
14,869

Total expenses
 
595,585

 
477,537

 
388,346

 
72,940

 
24,258

Net income (loss) attributable to consolidated CLOs
 
10,457

 
20,254

 
(6,889
)
 
19,525

 
28,865

Income (loss) before taxes from continuing operations
 
(3,330
)
 
49,140

 
(2,904
)
 
(2,383
)
 
19,476

Less: provision (benefit) for income taxes
 
(12,562
)
 
12,515

 
(753
)
 
5,317

 
854

Net income (loss) from continuing operations
 
9,232

 
36,625

 
(2,151
)
 
(7,700
)
 
18,622

Net income (loss) from discontinued operations
 
(3,998
)
 
(4,287
)
 
10,953

 
12,284

 
22,107

Net income (loss) before non-controlling interests
 
5,234

 
32,338

 
8,802

 
4,584

 
40,729

Less: net income (loss) attributable to non-controlling interests
 
1,630

 
7,018

 
3,023

 
6,294

 
30,336

Net income (loss) attributable to Tiptree Inc. Class A common stockholders
 
$
3,604

 
$
25,320

 
$
5,779

 
$
(1,710
)
 
$
10,393

 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per Class A common share:
 
 
 
 
 
 
 
 
 
 
Basic, continuing operations, net
 
$
0.22

 
$
0.88

 
$
(0.01
)
 
$
(0.58
)
 
$
0.48

Basic, discontinued operations, net
 
(0.10
)
 
(0.09
)
 
0.18

 
0.48

 
0.53

Basic earnings per share
 
0.12

 
0.79

 
0.17

 
(0.10
)
 
1.01

 
 
 
 
 
 
 
 
 
 
 
Diluted, continuing operations, net
 
0.21

 
0.86

 
(0.01
)
 
(0.58
)
 
0.48

Diluted, discontinued operations, net
 
(0.10
)
 
(0.08
)
 
0.18

 
0.48

 
0.53

Diluted earnings per share
 
$
0.11

 
$
0.78

 
$
0.17

 
$
(0.10
)
 
$
1.01

 
 
 
 
 
 
 
 
 
 
 
Weighted average number of Class A common shares:
 
 
 
 
 
 
 
 
 
 
Basic
 
29,134,190

 
31,721,449

 
33,202,681

 
16,771,980

 
10,250,438

Diluted
 
37,306,632

 
31,766,674

 
33,202,681

 
16,771,980

 
10,250,438

 
 
 
 
 
 
 
 
 
 
 
Cash dividends paid per common share
 
$
0.12

 
$
0.10

 
$
0.10

 
$

 
$
0.175

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31,
Consolidated Balance Sheet Data: (in thousands)
 
2017
 
2016
 
2015
 
2014
 
2013
Total assets (5)
 
$
1,989,742

 
$
2,890,050

 
$
2,494,970

 
$
8,202,447

 
$
6,872,271

Debt, net (6)
 
346,081

 
554,870

 
502,255

 
254,072

 
188,978

Total stockholders’ equity
 
$
396,774

 
$
390,144

 
$
397,694

 
$
401,621

 
$
396,896

Total Tiptree Inc. stockholders’ equity
 
300,077

 
293,431

 
312,840

 
284,462

 
98,979


(1)
Care revenues of $76.0 million, $60.7 million, $46.1 million, $29.3 million and $8.9 million and net income (loss) of $(4.0) million, $(4.3) million, $(11.7) million, $4.3 million and $(2.9) million for the years ended December 31, 2017, 2016, 2015, 2014 and 2013, respectively, are included in Net income (loss) from discontinued operations, net.
(2)
2014 results reflects the impact of the acquisition of Fortegra in December 2014.
(3)
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 Net income (loss) from discontinued operations, net.
(4)
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.
(5)
Total assets on December 31, 2016, 2015, 2014, and 2013 include $989.5 million, $728.8 million, $1,978.1 million, and $1,405.4 million and of assets held by consolidated CLO entities, respectively.
(6)
Excludes debt of discontinued operations.


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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

OVERVIEW

Tiptree is a holding company that combines insurance operations with investment management expertise. Our principal operating subsidiary is a leading provider of specialty insurance products and related services, including credit protection insurance, warranty and service contract products, and insurance programs which underwrite niche personal and commercial lines of insurance. We also allocate capital across a broad spectrum of investments, which we refer to as Tiptree Capital. Today, Tiptree Capital consists of asset management operations, mortgage operations and other investments, which effective February 1, 2018, include our minority interest in Invesque. When considering capital allocation decisions, we take a diversified approach, looking across sectors, geographies and asset classes, all with a longer-term horizon. 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.

During 2017 and early 2018, in furtherance of our strategy to grow sustainable earnings and Adjusted EBITDA, we executed on several strategic objectives:

Insurance:
Specialty Insurance operations continued to grow and expand product offerings. Gross written premiums were $767 million, up 8.3%, driven by growth in warranty and credit products. Net written premiums were $418 million, up 24.0%, driven by increase in retention of credit products and growth in warranty products.
In Q4'17, we completed the issuance of $125 million of 40 year Junior Subordinated Notes which refinanced existing indebtedness and strengthened the capital position as part of our strategy to grow the insurance company.

Tiptree Capital:
On February 1, 2018, we sold our senior living operations to Invesque in exchange for 16.6 million shares of Invesque common stock. Tiptree’s increase to book value was approximately $0.91 per share, or a 9.1% increase over our December 31, 2017 book value per share, as exchanged. The transaction is expected to be accretive to our 2018 GAAP earnings per share and Adjusted EBITDA. At December 31, 2017, our senior living operations are carried as discontinued operations.
Through the Invesque transaction, along with additional pending or closed sales in 2017, Tiptree’s consolidated debt was reduced by $518 million from September 30, 2017 to December 31, 2017. After giving effect to these transactions, the Company’s debt to equity leverage was reduced from 2.2x to less than 0.9x.
On October 1, 2017, we sold our investment in our commercial lending subsidiary for $13.5 million in a combination of cash and a seller’s note.
On December 12, 2017, we entered into a definitive agreement to sell Luxury Mortgage. The agreement is subject to, among other things, regulatory approval, and is expected to close during the second half of 2018.
Throughout 2017, we exited substantially all of our CLO subordinated note positions and related hedges for $3.9 million in gains over our carrying value.
As a result of the above divestitures, we have approximately $90 million of cash, net of cash at regulated insurance subsidiaries, that can be used for investments and acquisitions.
We returned $11.8 million to investors through $7.3 million of share buy-backs and $4.5 million of dividends paid.

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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. 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 business focuses on products which are low severity but high frequency loss profile and short-duration in nature. Our insurance business has historically also generated a significant proportion of fee based revenues. In general, the types of

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products we offer tend to have limited aggregation risk, and thus, limited catastrophic and residual risk. We mitigate our underwriting risk through a combination of reinsurance and retrospective commission structures with our distribution partners and/or third party reinsurers. Our insurance results primarily depend on our pricing, underwriting, risk retention and the accuracy of reserves, reinsurance arrangements, returns on invested assets, and policy and contract renewals and run-off. While our insurance operations have historically maintained a relatively stable combined ratio which support steady earnings, our initiatives to change our business mix along with economic factors could generate different results than we have historically experienced. We believe there are additional growth opportunities to expand our warranty and programs insurance business model to other niche products and markets.

Our insurance company investment portfolio primarily serves as a source to pay claims and secondarily as a source of income for our operations. Our investments include fixed maturity securities, loans, credit investment funds, equity securities, CLOs, and senior living related assets. Many of our investments are held at fair value. Changes in fair value for loans, credit investment funds, equity securities and CLO assets and liabilities are reported quarterly as unrealized gains or losses in revenues and can be impacted by changes in interest rates, credit risk, or market risk, including specific company or industry factors. 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. Our equity holdings are relatively concentrated. General equity market trends, along with company and industry specific factors, can impact the fair value of our holdings and can result in unrealized gains and losses affecting our results. In addition, separate from our insurance company investments, as of February 1, 2018, our common shares of Invesque will represent a significant asset on our balance sheet. Any change in the fair value of Invesque’s common stock or Invesque’s dividend policy could have a significant impact on our financial condition and results of operations.

Our business can also be impacted in various ways by changes in interest rates which can result in fluctuations in fair value of our investments, revenues associated with floating rate loans, volume and revenues in our mortgage business and interest expense associated with floating rate debt used to fund many of our operations.

On December 22, 2017, the U.S. government enacted the Tax Act, which, among other things, reduces the corporate federal income tax rate from 35% to 21% effective January 1, 2018. As a result of the Tax Act, we remeasured our net deferred tax liabilities and recognized a net tax benefit of $15.2 million. We estimate that our 2018 consolidated effective tax rate will be between 24% and 26%. We do not expect a significant near-term impact on cash used to pay taxes.

RESULTS OF OPERATIONS
The following is a summary of our consolidated financial results. 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.

Selected Key Metrics
($ in thousands)
Year Ended December 31,
GAAP:
2017
 
2016
 
2015
Total revenues
$
581,798

 
$
506,423

 
$
392,331

Net income before non-controlling interests
5,234

 
32,338

 
8,802

Net income attributable to Tiptree Inc. Class A common stockholders
3,604

 
25,320

 
5,779

Diluted earnings per share
0.11

 
0.78

 
0.17

Cash dividends paid per common share
0.12

 
0.10

 
0.10

 
 
 
 
 
 
Non-GAAP: (1)
 
 
 
 
 
Adjusted EBITDA
37,988

 
78,916

 
$
58,419

Book value per share, as exchanged
9.97

 
10.14


8.90

(1)
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.”

Revenues


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The increase in revenues from 2016 to 2017 was $75.4 million, or 14.9%, driven by growth in earned premiums and net investment income in our insurance operations, partially offset by reduced service and administrative fees, ceding commissions, and unrealized losses on equities in our specialty insurance investment portfolio, as compared to prior period gains. This was consistent with our strategy to grow written premiums of our insurance business which contributes to increased investable assets and investment income. In addition to the growth in revenues, the combination of unearned premiums and deferred revenues on the balance sheet grew by $93.0 million or 19.9%, as we continue to grow credit protection and warranty written premiums, which are earned over multiple years.

For the year ended December 31, 2016, the Company reported revenues of $506.4 million, an increase of $114.1 million or 29.1% from the year ended December 31, 2015. The primary drivers of the increase in revenues were increases 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, and increased mortgage volume.

Net Income (Loss) before non-controlling interests

For the year ended December 31, 2017, net income before non-controlling interests was $5.2 million compared to net income of $32.3 million in the 2016 period, a decrease of $27.1 million, or 83.8%. The decline was primarily a result of the unrealized losses on equities in our insurance investment portfolio, compared to unrealized gains in the prior period. Increased stock-based compensation expense in specialty insurance and increased earn-out expense associated with our Reliance acquisition also contributed to the decline. We also reduced our exposure to CLO subordinated notes throughout 2017 which resulted in less distributions compared to 2016. Those factors were partially offset by a net tax benefit of $15.2 million driven by remeasurement of our net deferred tax liabilities as a result of the Tax Act’s change in federal income tax rate from 35% to 21% and decreases in corporate expenses.

For the year ended December 31, 2016, net income before non-controlling interests was $32.3 million compared to $8.8 million in 2015. The key drivers of the $23.5 million increase were improved profitability in our specialty insurance segment driven by higher revenues and investment income, including unrealized gains on equities, increased profits from our asset management segment as a result of incentive fees and higher CLO subordinated note returns, increased rental income in our senior living operations impacting discontinued 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. In addition, in 2015, we recorded $22.6 million of earnings from discontinued operations of PFG, which included the one-time net gain on the sale of $15.6 million, which did not repeat in 2016. Finally, 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.

Net Income (Loss) Available to Class A Common Stockholders

For the year ended December 31, 2017, net income available to Class A common stockholders was $3.6 million, a decrease of $21.7 million from the prior year period. 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, from the prior year period. The key drivers of net income available to Class A common stockholders were the same factors which impacted the net income before non-controlling interests.

Adjusted EBITDA - Non GAAP

Total Adjusted EBITDA for the year ended December 31, 2017 was $38.0 million compared to $78.9 million for the 2016 period, a decrease of $40.9 million, or 51.8%. The key drivers of the change in Adjusted EBITDA were the same as those which impacted our net income before non controlling interests, excluding the increase in the Reliance earn-out expense, the change in the tax provision and non-recurring expenses which were added back to Adjusted EBITDA. See “Non-GAAP Reconciliations” for a reconciliation to GAAP net income.

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 net income before non controlling interests. See “Non-GAAP Reconciliations” for a reconciliation to GAAP net income.

Book Value per share, as exchanged - Non GAAP

Total stockholders’ equity was $396.8 million as of December 31, 2017 compared to $390.1 million as of December 31, 2016, primarily driven by 2017 net income and the net increase in equity outstanding as a result of an option exercise, net of the share re-purchase.

As exchanged book value per share for the period ended December 31, 2017 was $9.97, a decrease from $10.14 as of December 31, 2016. The key drivers of the period-over-period impact were increases in net income that drove 2017 diluted earnings per share of $0.11 and the purchase of 1.0 million shares at an average 28% discount to book value. Those increases were more than offset by

29




dividends paid of $0.12, officer and director compensation share issuances, and the exercise of an option in June 2017, the latter of which resulted in 1.5 million shares being issued at $5.36 per share. Given the strike price of the option, the impact was a $0.19 reduction to book value per share. In 2017, Tiptree returned $11.8 million to shareholders through share repurchases and dividends paid.

The increase in book value per share from 2015 to 2016 was driven by increases in net income that drove 2016 diluted earnings per share of $0.78, and purchases of 6.8 million shares at an average 30% discount to book value. Those increases were partially offset by dividends paid of $0.10 and officer and director compensation share issuances. In 2016, Tiptree returned $47.8 million to shareholders through share repurchases and dividends paid.

Key Non-Cash Drivers of Results

The table below highlights certain key non-cash drivers impacting our consolidated results presented on a pre-tax basis. Our investments are focused on a longer term investment horizon. In addition, our equity securities holdings are relatively concentrated, and are carried at fair value and marked to market through unrealized gains and losses. As a result, we expect our earnings relating to these securities to be relatively volatile between periods in contrast to our fixed income securities, which are marked to market through accumulated other comprehensive income (“AOCI”) in stockholders equity.
Since a significant portion of our stock based compensation is performance based, and vests over multiple years, we believe that providing this information separately to investors allows them to evaluate the alignment of non-cash compensation to management with our overall performance trends.
A portion of the purchase price for Reliance was contingent upon performance in the three years ending June 30, 2018. Increases or decreases in the contingent purchase price liability flow through our income statement each period, and are not deductible for tax purposes. Given Reliance’s performance over the latest performance measurement period, the fair value of the Tiptree shares issued for the second performance period were treated as an expense in 2017. As of December 31, 2017, the fair value of the remaining liability was zero.
Lastly, depreciation and amortization has increased, primarily as a result of property acquisitions in our senior living operations, partially offset by a reduction in value of business acquired (“VOBA”) at Fortegra. Because we carry our real estate assets at original cost, not at fair value, we believe that highlighting the impact depreciation and amortization have on Tiptree’s overall results period-over-period, and on the carrying value of our real estate assets, is useful additional information for investors.
($ in thousands)
Year Ended December 31,
 
2017
 
2016
 
2015
Unrealized & realized gains (losses) on equity securities
$
(23,753
)
 
$
11,694

 
$
141

Stock-based compensation
(6,560
)
 
(2,584
)
 
(437
)
Reliance contingent earn-out liability (1)
(3,039
)
 
(1,277
)
 
1,300

Depreciation and amortization (1)(2)
(29,486
)
 
(28,468
)
 
(45,124
)
(1)
Added back to Adjusted EBITDA. For a reconciliation of Adjusted EBITDA to GAAP financials, see “—Non-GAAP Reconciliations.”
(2)
Includes depreciation and amortization from continuing and discontinued operations. Depreciation and amortization associated with Care was $15.6 million for 2017, $14.2 million for 2016, and $14.5 million for 2015.

Results by Segment
Tiptree is a holding company that combines insurance operations with investment management expertise. In addition to our specialty insurance operations, we allocate our capital across our investments in other companies and assets which we refer to as Tiptree Capital. As of December 31, 2017, Tiptree Capital consists of asset management operations, mortgage operations and other investments. As such, we classify our business into three reportable segments– specialty insurance, asset management and mortgage. Corporate activities include holding company interest expense, employee compensation and benefits, and other expenses.

As of December 31, 2017, the Company sold its interests in Siena and classified Care and Luxury as held for sale. At the time of such classification, the pending sale of Care also met the requirements to be classified as a discontinued operation. Each of these divestitures are no longer considered operating segments. As a result of these divestitures, our reportable segments dropped from four to three, with the elimination of Senior Living segment and renaming Specialty Finance to Mortgage. The following table presents the components of total pre-tax income including continuing and discontinued operations.




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Pre-tax Income
($ in thousands)
Year Ended December 31,
 
2017
 
2016
 
2015
Specialty insurance
$
5,404

 
$
46,804

 
$
32,012

Tiptree Capital:

 



Asset management
14,245

 
25,264

 
(6,753
)
Mortgage
2,090

 
4,882

 
2,464

Other
4,001

 
6,996

 
3,475

Corporate
(29,070
)
 
(34,806
)
 
(34,102
)
Pre-tax income (loss) from continuing operations
$
(3,330
)
 
$
49,140

 
$
(2,904
)
Pre-tax income (loss) from discontinued operations (1)
$
(6,222
)
 
$
(5,824
)
 
$
16,879

(1)
Includes PFG for 2015 and Care for 2015, 2016, 2017. Includes $15.6 million net gain on sale of PFG in 2015.

Total Capital and Adjusted EBITDA - Non-GAAP (1) 

Management evaluates the return on Invested Capital and Total Capital, which are non-GAAP financial measures, when making capital investment decisions. Invested Capital represents its total cash investment, including any re-investment of earnings, and acquisition costs, net of tax. Total Capital represents Invested Capital plus Corporate Debt. Management believes the use of these financial measures provide supplemental information useful to investors as they are frequently used by the financial community to analyze how the Company has allocated capital over-time and provide a basis for determining the return on capital to shareholders. Management uses both of these measures when making capital investment decisions, including reinvesting cash, and evaluating the relative performance of its businesses and investments. The following table presents the components of Total Capital and Adjusted EBITDA.
($ in thousands)
Year Ended December 31,
 
Total Capital
 
Adjusted EBITDA

2017
 
2016
 
2015
 
2017
 
2016
 
2015
Specialty Insurance
$
441,317

 
$
410,190

 
$
331,799

 
$
26,961

 
$
60,526

 
$
43,349

Tiptree Capital
161,825

 
215,262

 
210,125

 
35,430

 
49,954

 
5,406

Asset management
4,977

 
73,173

 
98,849

 
14,245

 
25,265

 
(6,753
)
Mortgage
30,725

 
25,257

 
21,479

 
5,677

 
6,671

 
1,406

Other (2)
126,123

 
116,832

 
89,797

 
15,508

 
18,018

 
10,753

Corporate
37,965

 
393

 
56,161

 
(24,403
)
 
(31,564
)
 
(22,837
)
Discontinued Operations (PFG)

 

 

 

 

 
32,501

Total Tiptree
$
641,107

 
$
625,845

 
$
598,085

 
$
37,988

 
$
78,916

 
$
58,419

(1)  
For further information relating to the Company’s Total Capital and Adjusted EBITDA, including a reconciliation to GAAP total stockholders equity and pre-tax income, see “—Non-GAAP Reconciliations.”
(2)
Includes discontinued operations related to Care. As of February 1, 2018, invested capital from Care discontinued operations is represented by our investment in Invesque common shares. For more information, see ““Note—(4) Dispositions, Assets Held for Sale and Discontinued Operations.”

Specialty Insurance

Our principal operating subsidiary is a provider of specialty insurance products and related services, including 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 administration and fronting services for our self-insured clients who own captive producer owned reinsurance companies (“PORCs”). We generate income from insurance underwriting operations and our investment portfolio. Insurance underwriting operations revenues are primarily generated from net earned premiums, service and administrative fees and ceding commissions. We measure insurance underwriting operations performance by adjusted underwriting margin, combined ratio and Adjusted EBITDA. The investment portfolio income consists of investment income, gains and losses and is measured by net portfolio income which is the equivalent of Adjusted EBITDA.

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

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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 we earn under reinsurance agreements are based on contractual formulas that take into account, in part, underwriting performance and investment returns experienced by the assuming companies.

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 year ended December 31, 2015, 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, 2017, 2016 and 2015.

Operating Results
($ in thousands)
Year Ended December 31,
 
2017
 
2016
 
2015
Gross written premiums
$
766,889


$
708,287


$
686,007

Net written premiums
418,020


337,171


182,096

Revenues:
 
 
 
 
 
Net earned premiums
$
371,700

 
$
229,436

 
$
166,265

Service and administrative fees
95,160

 
109,348

 
106,525

Ceding commissions
8,770

 
24,784

 
43,217

Net investment income
16,286

 
12,981


5,455

Net realized and unrealized gains (losses)
(16,503
)
 
14,762

 
1,065

Other income
3,552

 
2,859

 
8,361

Total revenues
$
478,965

 
$
394,170

 
$
330,888

Expenses:
 
 
 
 

Policy and contract benefits
123,959

 
106,784

 
86,312

Commission expense
241,835

 
147,253

 
105,751

Employee compensation and benefits
41,300

 
37,937

 
38,786

Interest expense
15,072

 
9,244

 
6,968

Depreciation and amortization expenses
12,799

 
13,184

 
29,673

Other expenses
38,596

 
32,964

 
31,386

Total expenses
$
473,561

 
$
347,366

 
$
298,876

Pre-tax income (loss)
$
5,404

 
$
46,804

 
$
32,012


Results

Our specialty insurance operations are currently expanding product lines in an effort to increase written premiums. As part of this process, the business is investing to grow warranty and programs, while maintaining a leading position in our credit protection markets. That, combined with the earnings performance of the investment portfolio, are key drivers in comparing 2017 versus 2016 results. The growth in written premiums combined with extending the duration of our products has resulted in an increase of unearned premiums and deferred revenue on the balance sheet of 19.9% from $467.2 million as of December 31, 2016 to $560.2 million as of December 31, 2017.

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In the fourth quarter of 2016, our captive reinsurance subsidiary replaced a third party 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. As a result, several income statement line items increased for the year ended December 31, 2017 when compared to prior periods including net earned premiums, commission expense and policy and contract benefits, partially offset by the decline in ceding commissions.

The application of push-down accounting for the Fortegra acquisition resulted in purchase price accounting adjustments (VOBA) whereby deferred service and administrative fees and costs associated with deferred commission expense on acquired contracts were recognized differently from those related to newly originated contracts. For the years ended December 31, 2017 and 2016, the VOBA impacts on pre-tax income were $1.2 million and $1.8 million, respectively. Where significant to the period-over-period comparisons of revenue and expense, VOBA impacts are discussed separately below.

Pre-tax income was $5.4 million for the year ended December 31, 2017, a decrease of $41.4 million, over the prior year financial results. The primary drivers of the decline were period-over-period reductions in net realized and unrealized gains and losses of $31.3 million related to equities held in the portfolio, increases in interest expense of $5.8 million primarily associated with asset-based interest expense in the investment portfolio, partially offset by increases in net investment income of $3.3 million. Insurance operations results declined versus prior year driven primarily by increases in stock-based compensation expense of $2.8 million and increased other expenses of $5.6 million primarily related to premium taxes which increased consistent with growth in written premiums, which was partially offset by increased underwriting margin of $4.4 million.

Pre-tax income increased by $14.8 million from 2015 to 2016, primarily driven by improvement of $18.9 million in earnings related to the investment portfolio which included increased net investment income, realized and unrealized gains on equities which were slightly offset by higher asset-based interest expense. Insurance operations declined from 2015 to 2016 by $4.1 million primarily driven by competitive pressures in the mobile protection product and increased operating costs as the business continues to invest in additional product offerings.

Revenues

Revenues are generated by the sale of the following 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 auto service contracts, furniture and appliance service contracts and mobile device protection. Programs are primarily personal and commercial lines and other property-casualty products.

For the year ended December 31, 2017, total revenues were $479.0 million, up $84.8 million, or 21.5%, over the prior year period. The increase was primarily driven by an increase in earned premiums of $142.3 million, which was partially offset by decreases in service and administrative fees of $14.2 million and ceding commissions of $16.0 million. Revenues increased by $63.3 million from 2015 to 2016 primarily driven by increases in earned premiums. For both periods, the increase in earned premiums was driven by growth in our credit protection and warranty products with the primary driver being our captive reinsurance subsidiary replacing a third party as reinsurer of certain credit protection products. Ceding commissions declines are consistent with this strategy to retain a higher portion of written business which results in less revenues from experience refunds. Service and administrative fees are lower period-over-period primarily from a reduction in fee-related revenues on our mobile protection and roadside assistance products.

For the year ended December 31, 2017, revenues on the investment portfolio, including net investment income and realized and unrealized gains, were a loss of $0.2 million compared to $27.7 million of income in the 2016 period, a decrease of $28.0 million. This was primarily driven by unrealized losses on equities of $23.8 million in 2017 compared to unrealized gains of 7.3 million in 2016. From 2015 to 2016, revenues on the investment portfolio increased by $21.2 million, going from $6.5 million in the 2015 period to $27.7 million for the year ended December 31, 2016. This was consistent with the strategy to grow investable assets and selectively use alternative investments in increase yield over the long-term. See “—Specialty Insurance Investment Portfolio” for further discussion of the investment results.

Expenses

Total expenses include policy and contract benefits, commissions expense and operating expenses. For the year ended December 31, 2017, total expenses were $473.6 million compared to $347.4 million in the 2016 period. The primary drivers of the increase were policy and contract benefits and commission expense as net written premiums increased over the 2016 period.

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 warranty protection and car club 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

33




claims for credit life and other insurance lines. 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. Loss occurrences in our insurance products are characterized by low severity and high frequency. 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 the year ended December 31, 2017, policy and contract benefits were $124.0 million, up $17.2 million from the prior year primarily as a result of increased retention in our credit protection and program products. The increase in net losses over the prior year period was a function of growth in earned premiums, including the contract assumptions mentioned above, partially offset by lower claims in mobile devices consistent with the decline in written premiums.

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, warranty and mobile device protection service contracts, and motor club memberships. 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, 2017 was $241.8 million compared to $147.3 million in 2016. The primary drivers of the increase were the commission expense associated with the higher retention rate on our credit protection products along with VOBA purchase accounting impacts. Commission expense, excluding the impacts of VOBA, was $244.1 million for 2017, up $86.1 million, driven primarily by the increase in retention of credit insurance products, partially offset by declines in commissions related to the mobile protection and other warranty products.

Operating expenses include employee compensation and benefits, interest expense, depreciation and amortization expenses and other expenses. For 2017, total employee compensation and benefits were $41.3 million, up $3.4 million from 2016 primarily as a result of increased stock based compensation expense. Interest expense of $15.1 million in 2017 increased by $5.8 million versus the prior year, primarily from one quarter of interest expense on the Junior Subordinated Notes and increased asset based borrowings on certain investments within the investment portfolio. Other expenses for the year ended December 31, 2017 were $38.6 million, up $5.6 million from 2016 primarily as a result of increased premium taxes as written and earned premiums grew. Depreciation and amortization expense was lower period-over-period 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 $0.2 million for the year ended December 31, 2017 versus $3.3 million for the prior year period. This was partially offset by increases in amortization of other intangibles including customer relationships, trade names and software licensing.

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. For 2016, policy and contract benefits 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. 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 was the impact of VOBA on commission expense along with the commission expense associated with the credit business re-assumed in October 2016.

The primary driver of the period-over-period decrease in operating expenses from 2015 to 2016 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.

Key Operating Metrics and Non-GAAP Operating Results

Gross & Net Written Premiums

Gross written premiums represents total premiums from insurance policies and warranty service contracts 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. 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.


34




Written Premium Metrics
 
Year Ended December 31,
 
Gross Written Premiums
 
Net Written Premiums
Specialty Insurance Products:
2017
 
2016
 
2015
 
2017
 
2016
 
2015
Credit protection
$
512,298

 
$
488,183

 
$
527,452

 
$
328,936

 
$
257,601

 
$
121,737

Warranty
110,309

 
62,433

 
50,545

 
60,330

 
46,076

 
42,004

Programs
144,253

 
157,649

 
107,977

 
28,754

 
33,494

 
18,355

Services and Other
29

 
22

 
33

 

 

 

Total Specialty Insurance
$
766,889


$
708,287


$
686,007

 
$
418,020


$
337,171


$
182,096

 
 
 
 
 
 
 
 
 
 
 
 
Total gross written premiums for the year ended December 31, 2017 were $766.9 million, which represented an increase of $58.6 million, or 8.3%, from the prior year period. The amount of business retained was 54.5%, up from 47.6% in the prior year period. Total net premiums written for 2017 were $418.0 million, up $80.8 million, or 24.0%. The increase in retention and net written premiums was consistent with our strategy and largely driven by our captive reinsurer retaining credit protection products as discussed above. Warranty and service contract net written premiums were $60.3 million, up $14.3 million from 2016 and specialty program products were $28.8 million, down $4.7 million from the 2016 period. Warranty increases were driven by increases in our furniture, appliances and auto products. The amount of warranty product ceded period-over-period increased as we expand into new products and continue to build our underwriting performance and relationships with distributors. Programs written premiums declined as we discontinued certain specialty programs that did not meet underwriting performance standards. We believe there are additional opportunities to expand our warranty and programs insurance business through both organic and inorganic growth.

Total net premiums written for the year ended December 31, 2016 were $337.2 million, up $155.1 million or 85.2% period-over-period. The largest driver of the increase was related to the transaction mentioned earlier where we re-assumed contracts of $138.7 million which were previously reinsured by 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 in October 2016. 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.

Product Underwriting Margin - Non-GAAP

The following table presents product specific revenue and expenses within the specialty insurance operations. 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 are adjusted 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 distribution partners 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 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 - Adjusted Underwriting Margin. For the same reasons that we adjust our combined ratio for the effects of purchase accounting, VOBA can also impact 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.

Adjusted Revenues and Underwriting Margin - Non-GAAP
 
Year Ended December 31,
 
Adjusted Revenues
 
Adjusted Underwriting Margin
Specialty Insurance Products:
2017
 
2016
 
2015
 
2017

2016

2015
Credit protection
$
352,760

 
$
231,938

 
$
203,197

 
$
67,356

 
$
64,769

 
$
61,353

Warranty
80,648

 
87,928

 
112,086

 
25,919

 
23,813

 
31,845

Programs
36,880

 
42,001

 
20,353

 
9,841

 
9,095

 
5,539

Services and Other
9,915

 
10,612

 
11,661

 
8,984

 
10,022

 
11,330

Total Specialty Insurance
$
480,203

 
$
372,479

 
$
347,297

 
$
112,100

 
$
107,699

 
$
110,067

(1) For further information relating to the Company’s adjusted underwriting margin, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted underwriting margin for the year ended December 31, 2017 was $112.1 million, up from $107.7 million in 2016. Credit

35




protection adjusted underwriting margin was $67.4 million, an increase from 2016 results by $2.6 million, or 4.0%. Credit protection products continue to provide opportunities for steady growth through a combination of expanded product offerings and new clients. Adjusted underwriting margin for warranty products was $25.9 million for 2017, up $2.1 million, or 8.8%, from 2016. The effects experienced in previous periods from our mobile protection products has slowed, and was more than offset by growth in furniture, appliances, and auto warranty business. Programs adjusted underwriting margin for 2017 was $9.8 million, down 8.2% from 2016, as certain non-standard auto programs were exited over the last year. We believe our warranty service contracts and light commercial programs provide opportunity for growth through expanded product offerings, new clients and geographic expansion. Services and other contributed $9.0 million in 2017, down $1.0 million from 2016 as certain business processing services are in run-off.

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. Adjusted underwriting margin for warranty products was $23.8 million for 2016, down $8.0 million or 25.2% from 2015. For the 2016 period, we experienced 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. Services and other contributed $10.0 million in 2016, down $1.3 million from 2015 as certain business processing services are in run-off.

Invested Capital, Total Capital, Adjusted EBITDA and Insurance Operating Ratios

We use the combined ratio as an operating metric to evaluate our insurance 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 adjusted basis, eliminating the accounting effects of VOBA. Management believes showing an adjusted combined ratio provides useful information to investors to compare period-over-period operating results. The below table outlines the insurance operating ratios, capital invested and the drivers of Adjusted EBITDA split between underwriting and investments for the past three years as management evaluates the return on the investment portfolio separately from the returns from underwriting activities.

Invested Capital, Total Capital, Adjusted EBITDA and Operating Ratios - Non-GAAP(1) 
($ in thousands)
Year Ended December 31,
 
2017
 
2016
 
2015
Invested Capital(1)
$
281,317

 
$
269,690

 
$
205,299

Total Capital(1)
$
441,317

 
$
410,190

 
$
331,799

 
 
 
 
 
 
Adjusted EBITDA drivers:
 
 
 
 
 
Underwriting
$
33,803

 
$
35,938

 
$
37,661

Investments - Net Portfolio Income (Loss)
(6,842
)

24,588


5,688

Specialty Insurance Adjusted EBITDA(1)
$
26,961

 
$
60,526

 
$
43,349

 
 
 
 
 
 
Key drivers of Adjusted EBITDA:
 
 
 
 
 
Unrealized gains (losses)
$
(22,318
)

$
10,042


$
1,633

Stock-based compensation expense
$
3,934

 
$
1,108

 
$

 
 
 
 
 
 
Insurance operating ratios:
 
 
 
 
 
Combined ratio
92.9
%

87.9
%

77.9
%
Adjusted Combined ratio - Non-GAAP (1)
93.2
%

89.5
%

87.4
%
(1) For further information relating to the Company’s Adjusted EBITDA, Invested and Total Capital, adjusted combined ratio, and Net Portfolio Income (Loss), including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”

The combined ratio was 92.9% for the year ended December 31, 2017, compared to 87.9% for the prior year period. The increase was primarily driven by VOBA purchase accounting impacts which are outlined in the “Specialty Insurance - Adjusted Underwriting Margin - Non-GAAP” table below.

36




The adjusted combined ratio was 93.2% for the year ended December 31, 2017, compared to 89.5% for prior year period. The increases across both years were driven primarily by the higher retention impacting underwriting margins and higher premium tax, and increased stock based compensation. Increased stock-based compensation expense which is a result of time and performance based stock grants contributed to 0.6% of the combined ratio increase from 2016 to 2017 and 0.3% from 2015 to 2016.
Underwriting Adjusted EBITDA declined by $2.1 million from 2016 to 2017 and by $1.7 million from 2015 to 2016. The declines were driven by the same factors discussed above under “Results.” See “—Specialty Insurance Investment Portfolio” for further discussion of the investment results and “Non-GAAP Reconciliations” for a reconciliation to GAAP pre-tax income.

Insurance Investment Portfolio

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 over the entire investment horizon across select asset classes, sectors and geographies while maintaining adequate liquidity to meet our claims payment obligations. As such, volatility from realized and unrealized gains and losses may impact period-over-period performance.Unrealized gains and losses on equity securities and loans impact current period net income, while unrealized gains and losses on available for sale securities impact AOCI.

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 related to certain investments. Our presentation of net portfolio income equals net investment income plus realized and unrealized gains and losses, excluding unrealized gains and losses on securities which are taken to AOCI, 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 is one of the measures management uses to analyze the profitability of our investment portfolio. Management believes this information on a cumulative basis 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.
Specialty Insurance Investment Portfolio - Non-GAAP
($ in thousands)
Year Ended December 31,

2017
 
2016

2015
Cash and cash equivalents (1)
$
53,904

 
$
31,723

 
$
9,010

Available for sale securities, at fair value
182,448

 
146,171

 
184,703

Equity securities, trading, at fair value
25,536

 
48,612

 
3,786

Loans, at fair value (2)
83,869

 
103,937

 
60,078

Real estate, net
35,282

 
23,579

 
2,197

Other investments
15,438

 
3,957

 
4,191

Net investments
$
396,477

 
$
357,979

 
$
263,965

 
 
 
 
 
 
(1) Cash and cash equivalents, plus restricted cash, net of due from/due to brokers on consolidated loan funds, see “—Non-GAAP Reconciliations”, for a reconciliation to GAAP financials.
(2) Loans, at fair value, net of asset based debt, see “—Non-GAAP Reconciliations”, for a reconciliation to GAAP financials.
 
 
 
Specialty Insurance Net Investment Portfolio Income - Non-GAAP
 
 
($ in thousands)
Year Ended December 31,
 
2017
 
2016
 
2015
Net investment income
$
16,286

 
$
12,981

 
$
5,455

Realized gains (losses)
5,815


4,720


(568
)
Unrealized gains (losses)
(22,318
)

10,042


1,633

Interest expense
(6,625
)

(3,155
)

(832
)
Net portfolio income (loss)
$
(6,842
)

$
24,588


$
5,688

Average Annualized Yield % (1)
(1.9
)%

8.0
%

2.5
%
(1) Average Annualized Yield % represents the ratio of annualized net investment income, realized and unrealized gains (losses) less investment portfolio interest expense to the average of the prior two quarters total investments less investment portfolio debt plus cash, but does not reflect the cumulative return on the portfolio.

Net investments of $396.5 million have grown 10.8% from December 31, 2016 through a combination of internal growth and increased

37




retention of premiums written. From December 31, 2015 to December 31, 2017, invested assets have grown by $132.5 million, or 50.2% which was through a combination of internal growth, increased retention of premiums written, and assets contributed by Tiptree in 2016 to further capitalize Fortegra.

Our net investment income includes interest, dividends and rental income, net of investment expenses, on our invested assets. Our loans, at fair value, generally earn LIBOR plus a spread. Generally, our interest income on those loans will increase in a rising interest rate environment, or decrease in a declining rate environment, subject to any LIBOR floors. Our held to maturity investments generally carry fixed coupons, which can impact our returns on investment. 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. The treatment of loans at fair value, primarily related to our credit asset investments and non-performing loans, and equity securities, is currently different from most other insurance companies.

For the year ended December 31, 2017, the net investment portfolio loss was $6.8 million compared to $24.6 million of income in the comparable 2016 period. The average annualized yield for the nine months declined from 8.0% in 2016 to (1.9)% in 2017 as a result of year to date unrealized losses of $22.3 million, primarily related to investments in equities, compared to unrealized gains of $10.0 million in 2016. For 2017, fair market valuation on equities resulted in $23.8 million of unrealized losses compared to $7.3 million of unrealized gains in 2016. In addition, interest expense increased by $3.5 million as a result of increased borrowings on credit asset investments and non-performing loans. Those factors were partially offset by increases in net investment income of $3.3 million, as interest income improved period-over-period, and realized gains improved by $1.1 million, primarily from gains on sales of our non-performing residential loans.

For the year ended December 31, 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.

Tiptree Capital

We allocate capital across a broad spectrum of investments, which we refer to as Tiptree Capital. As of December 31, 2017, Tiptree Capital includes our asset management operations, mortgage operations (both reportable segments), and other investments. As of February 1, 2018, Tiptree Capital also includes our Invesque common shares. We manage Tiptree Capital on a total return basis balancing current cash flow and long term value appreciation.

In the fourth quarter 2017, we sold our interest in our commercial lending business and signed an agreement to exit our interest in Luxury Mortgage. As of December 31, 2017, we exited our investments in the subordinated notes of Telos 5, 6 and 7 and settled related credit derivatives thus deconsolidating each CLO. We have re-balanced our exposure to subordinated notes by retaining vertical tranches of our newly issued CLOs in the insurance company investment portfolio including Telos 3 (August 2017) and Telos 4 (January 2018). In the fourth quarter 2017, we entered into an agreement to sell Care, our Senior Living operations, to Invesque. On February 1, 2018, we completed the sale of Care. In exchange for the sale, we received consideration of 16.6 million shares of which 13.5 million shares are held in other investments as part of Tiptree Capital, 2.9 million shares are held in the insurance investment portfolio and 0.3 million shares were paid as compensation to former Care employees. We classified Care as held for sale as of December 31, 2017. At the time of such classification, the pending sale also met the requirements to be classified as a discontinued operation.

As a result of these divestitures, our reportable segments reduced from four to three, with the elimination of Senior Living as a segment and renaming Specialty Finance to Mortgage.
 
 
 
 
 
 

38




Operating Results
($ in thousands)
Year Ended December 31,
Revenues:
2017
 
2016
 
2015
Asset Management
$
9,741

 
$
13,114

 
$
6,770

Mortgage
56,571

 
56,294

 
22,934

Other
36,521

 
42,845

 
31,739

 
 
 
 
 
 
Expenses:
 
 
 
 
 
Asset Management
$
(5,953
)
 
$
(8,104
)
 
$
(6,634
)
Mortgage
(54,481
)
 
(51,412
)
 
(20,470
)
Other
(32,520
)
 
(35,849
)
 
(28,264
)
 
 
 
 
 
 
Asset Management - Net income attributable to consolidated CLOs
$
10,457


$
20,254


(6,889
)
 
 
 
 
 
 
Pre-tax income:
 
 
 
 
 
Asset Management
$
14,245

 
$
25,264

 
$
(6,753
)
Mortgage
2,090

 
4,882

 
2,464

Other
4,001

 
6,996

 
3,475

Discontinued operations (Care)
(6,222
)

(5,824
)

(9,535
)

Tiptree Capital earns revenues from net interest income, fees and gain on sale of mortgages originated and sold to investors; management fees from CLOs under management (both consolidated and deconsolidated); distributions from investments; realized and unrealized gains on the Company’s investment holdings (historically, primarily CLO subordinated notes and related CLO warehouses); and rental and related income from senior housing triple net lease properties and Managed Properties (classified as discontinued operations).

Asset Management Results

The decline in pre-tax income from 2016 to 2017 was driven by reduced income from consolidated CLOs, primarily related to reductions in distributions on the subordinated notes as a result of our sales of those notes, and reduced management and incentive fees as discussed below. Total investment in CLO subordinated notes, management fee participation rights, and related derivatives, at fair market value, as of December 31, 2017 was $2.7 million, down from $68.9 million as of December 31, 2016 and $96.4 million as of December 31, 2015. This contributed to the decline in revenues and income for the 2017 period compared to the prior year. From 2015 to 2016 pre-tax income from asset management increased by $32.0 million which was driven primarily by unrealized gains on CLO investments of $2.6 million, compared to unrealized and realized losses in 2015 of $29.1 million.

Management and incentive fee income, including management fees on consolidated CLOs, were $9.5 million for 2017 compared to $12.3 million for 2016. The decline was driven by reduced fee-earning AUM and lower incentive fees on older CLOs (Telos 1 & 2). As of December 31, 2017, total fee earning AUM was $1.6 billion, which declined from $1.9 billion as of December 31, 2016 as the run-off in our older CLOs have not been replaced with new AUM. Management fee income for 2016 increased by $1.7 million from $10.7 million in 2015 primarily from increased incentive fees on older CLOs.

The sale of CLO subordinated notes resulted in decreased distributions which were $6.9 million in 2017 compared to $15.7 million in 2016. Realized and unrealized gains associated with the CLO subordinated notes and related derivatives were $3.9 million in 2017 compared to $2.6 million in 2016. From 2015 to 2016, distributions on CLOs increased by $1.0 million, primarily as a result of increased incentive fees and the issuance of Telos 7.

Mortgage Results

Pre-tax income for the year ended December 31, 2017 was $2.1 million compared to $4.9 million in 2016. The decline was primarily driven by the increase in contingent earn-out of $1.8 million associated with the Reliance acquisition. Revenues on mortgages held for sale in 2017 were $56.6 million compared to $56.3 million in 2016. The slight increase was driven by expanding gain on sale margins and interest income associated with holding the loans while in the warehouse which was substantially offset by reduced volumes which were $957.4 million for the 2017 period compared to $999.2 million for the 2016 period. Expenses, excluding the earn-out expense, were $51.4 million for 2017, which was flat to the prior year period.

Pre-tax income was $4.9 million in 2016, compared to $2.5 million in 2015. Reliance was acquired in July 2015 and was included in our financial results for six months of the year. In addition to the incremental six months of income, the 2016 versus 2015 increase was driven by expanding gain on sale margins and increased volume from $397.6 million for the six month period in 2015 to $999.2

39




million for the full year in 2016. The impact of the earn-out for the 2016 period was a $1.3 million expense compared to $1.3 million of income for the 2015 period. The contingent purchase price is carried as a liability on our balance sheet and is re-valued in each period until paid out in Tiptree shares. Increases or decreases in each period flow through the income statement, and are not deductible for tax purposes.

Other Results

Pre-tax income from other investments includes Luxury Mortgage, our commercial lending operations through its sale date in December 2017, and legacy principal investments. Revenues and pre-tax income declined in 2017 as realized gains from the sale of certain legacy investments in 2016 did not repeat. These declines were partially offset by a $2.0 million gain on the sale of our commercial lending business. Pre-tax income from 2015 to 2016 increased by $3.5 million primarily driven by the gain on sale of the legacy investments.

Discontinued Operations Results - Care

Discontinued Operations includes the results from our investment in Care, previously reported in the Senior Living segment. For the year ended December 31, 2017, the pre-tax loss was $6.2 million compared to a loss of $5.8 million in 2016. The higher loss was driven by $1.2 million of deal related expenses and $1.5 million of incremental depreciation and amortization associated with properties acquired in the 2017 period, partially offset by higher revenues from acquired properties. Total gross accumulated depreciation and amortization on the Care properties as of December 31, 2017 was $54.2 million, which net of non controlling interests and tax approximates the estimated increase to book value of $34.4 million as of February 1, 2018. In 2018, the results from our investment in Invesque shares (as a result of the Care sale) will be dividends received and unrealized gains and losses impacting our financial results. This will be reported in “Other” as part of Tiptree Capital.

Tiptree Capital Operating Results - Non-GAAP (1) 
 
Year Ended December 31,
($ in thousands)
Invested Capital (1)
 
Adjusted EBITDA (1)
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
Asset management - fees, net(2)
$
2,247

 
$
4,308

 
$
2,451

 
$
3,514

 
$
4,794

 
$
4,560

Asset management - credit investments
2,730

 
68,865

 
96,398

 
10,731

 
20,470

 
(11,313
)
Mortgage
30,725

 
25,257

 
21,479

 
5,677

 
6,671

 
1,406

Other
6,619

 
16,031

 
15,233

 
4,927

 
7,549

 
4,163

Care - Discontinued Operations(3)
119,504

 
100,801

 
74,564

 
10,581

 
10,469

 
6,590

Tiptree Capital
$
161,825

 
$
215,262

 
$
210,125

 
$
35,430

 
$
49,953

 
$
5,406

 
 
 
 
 
 
 
 
 
 
 
 
Net realized and unrealized gains (losses)(4)
 
 
 
 
 
 
$
3,824

 
$
5,883

 
$
(29,833
)
(1) For further information relating to Invested Capital and Adjusted EBITDA, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”
(2) Includes management and incentive fees net of operating expenses including compensation.
(3) Includes discontinued operations related to Care. For more information, see “—FN 4 Dispositions, Assets Held for Sale and Discontinued Operations.”
(4) Excludes unrealized and realized gains (losses) from mortgage operations. Included within the number are unrealized gains (losses) on consolidated CLO of $3,559, $2,510, $(25,480) for 2017, 2016, 2015. respectively.

Invested Capital

Invested Capital declined from $215.3 million as of December 31, 2016 to $161.8 million as of December 31, 2017. As a result of the asset sales in 2017, cash held at Tiptree corporate increased from $8.5 million as of December 31, 2016 to $66.1 million as of December 31, 2017.

In January 2017, we sold our investment in Telos 5 for consideration of $15.9 million which resulted in deconsolidation for the 2017 period. In August 2017, we liquidated Telos 7 for $21.9 million which resulted in deconsolidation as of that date. For risk retention purposes, we purchased a vertical tranche of Telos 3 in the insurance investment portfolio. In November 2017, the Company sold its investment in Telos 6 for consideration of $16.3 million which resulted in deconsolidation as of that date. Over 2017, Tiptree invested in 13 senior living properties for approximately $91.0 million of aggregate purchase price which were included in the sale to Invesque, and is now reported as held for sale on the consolidated balance sheet for all periods presented.

Adjusted EBITDA

Adjusted EBITDA for Tiptree Capital declined from $50.0 million in 2016 to $35.4 million in 2017. The decline was primarily driven by a $11.0 million reduction in asset management income as a result of reduced CLO distributions and lower incentive fees on older

40




CLOs. Mortgage Adjusted EBITDA also declined period-over-period by $1.0 million as volume declined from the 2016 period.

Adjusted EBITDA for our senior housing investments that are carried in discontinued operations were flat period-over-period. Several of the recent recent acquisitions included properties that were being renovated in an effort to grow revenue and to allow them to operate more efficiently. These upgrades were completed in the first quarter of 2017, but occupancy and rental income had not yet stabilized.

Corporate
($ in thousands)
Year Ended December 31,
 
2017
 
2016
 
2015
Employee compensation and benefits
14,178

 
13,400


14,002

Interest expense
4,812

 
4,730


5,630

Depreciation and amortization expenses
248

 
248


145

Other expenses
9,832

 
16,428


14,325

Total expenses
$
29,070

 
$
34,806


$
28,264

Results

Corporate expenses include holding company interest expense, employee compensation and benefits, 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 related expenses.

Employee compensation and benefits increased $0.8 million from 2016 to 2017 as corporate staff increased as a result of improvements to our reporting and controls infrastructure, which was partially offset by lower accrued incentive compensation. Employee compensation and benefits in 2015 included a non-recurring severance expense of $6.5 million.

Interest expense remained flat period-over-period as reduced borrowings were partially offset by increases in LIBOR. As of December 31, 2017 the outstanding borrowings were $28.5 million compared to $58.5 million at year-end 2016. Interest expense increased in the 2017 and 2016 periods compared to 2015 as a result of increased borrowings on the facility.

Other expenses were $9.8 million for 2017 as compared to $16.4 million in 2016 a reduction of $6.6 million, or 40.2%. The period-over-period decrease was driven by reduced audit fees and external consulting expenses as a result of our improved reporting and controls infrastructure. Included within the 2017 results were approximately $1.3 million of expenses related to the delayed filing of the first quarter Form 10-Q and deal related expenses. For 2017, approximately 42% of other expenses were associated with audit, Sarbanes-Oxley compliance and tax professional fees as compared to 58% for 2016.

Provision for income taxes

Provision for income taxes - Total Operations

On December 22, 2017, the U.S. government enacted the Tax Act, which, among other things, reduces the federal income tax rate from 35% to 21% effective January 1, 2018, and requires mandatory deemed repatriation of foreign earnings. As a result of the Tax Act, we re-measured our net deferred tax liabilities and recognized a net tax benefit of $15.2 million. We estimate that our 2018 consolidated effective tax rate will be between 24% and 26%. We do not expect a significant near-term impact on cash paid for taxes nor any impact from the mandatory deemed repatriation, as the Company does not have significant foreign operations.

The total income tax benefit of $14.8 million for the year ended December 31, 2017, expense of $11.0 million for the year ended December 31, 2016, and expense of $1.4 million for the year ended December 31, 2015 is reflected as a component of net income. For the year ended December 31, 2017, the Company’s effective tax rate was equal to 154.8%, which does not bear a customary relationship to the statutory income tax rates. The effective rate for the year ended December 31, 2017 is higher than the U.S. federal statutory rate of 35%, primarily due to a $15.2 million benefit for the revaluation of net deferred tax liabilities due to the reduction of the federal tax rate effective January 1, 2018.

Provision for income taxes - Continuing Operations

The Company had a tax benefit from continuing operations of $12.6 million for the year ended December 31, 2017 as compared to a tax expense of $12.5 million for the year ended December 31, 2016. The effective tax rate on income from continuing operations for the year ended December 31, 2017 was approximately 377.2% compared to 25.5% for the year ended December 31, 2016. Differences from the statutory income tax rates are primarily the result of the tax law change signed on December 22, 2017 effective

41




January 1, 2018, which required revaluing the net deferred tax liability for a significant benefit of approximately $15.2 million. Continuing operations excludes the Care segment since it is included in discontinued operations as of year-end 2017.

For the year ended December 31, 2016, the Company’s effective tax rate on income from continuing operations was equal to 25.5%, 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 which related to the tax restructuring that resulted in a consolidated corporate tax group effective January 1, 2016.

For the year ended December 31, 2015, the Company’s effective tax rate on income from continuing operations was equal to 25.9%, 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 taxable losses allocated to non-controlling interests, offset by a decrease in the valuation allowance on certain deferred tax assets, state tax benefits, and other permanent items.
 
 
 
 
 
 
Balance Sheet Information - as of December 31, 2017 compared to the year ended December 31, 2016

Tiptree’s total assets were $2.0 billion as of December 31, 2017, compared to $2.9 billion as of December 31, 2016. The $900.2 million decrease in assets is primarily attributable to the deconsolidation of three CLOs, due to the sale of subordinated notes during the year ended December 31, 2017. Additionally, loans at fair value and amortized cost and equity securities decreased, partially offset by increases in assets held for sale, notes and accounts receivable and reinsurance receivable in our specialty insurance operations. In addition, the combination of unearned premiums and deferred revenues increased as a result of growth in written premiums and extending contract durations in the insurance business.

Total Tiptree Inc. stockholders’ equity was $300.1 million as of December 31, 2017 compared to $293.4 million as of December 31, 2016, primarily driven by 2017 net income and the net increase in equity outstanding as a result of the Tricadia Option, net of the share re-purchase. As of December 31, 2017 there were 29,805,453 shares of Tiptree Class A common stock outstanding, net of Treasury shares held at a subsidiary, as compared to 28,387,616 as of December 31, 2016.

NON-GAAP RECONCILIATIONS

EBITDA and Adjusted EBITDA - Non-GAAP

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) adjust for non-cash fair value adjustments, and (iv) any significant non-recurring expenses.
($ in thousands)
Year Ended December 31,

2017

2016
 
2015
Net income (loss) available to Class A common stockholders
$
3,604


$
25,320

 
$
5,779

Add: net (loss) income attributable to noncontrolling interests
1,630


7,018

 
3,023

Less: net income from discontinued operations
(3,998
)

(4,287
)
 
$
10,953

Income (loss) from continuing operations
$
9,232


$
36,625

 
$
(2,151
)
Consolidated interest expense
25,562


21,010

 
16,695

Consolidated income tax expense (benefit)
(12,562
)

12,515

 
(753
)
Consolidated depreciation and amortization expense
13,841


14,302

 
$
30,578

EBITDA from Continuing Operations
$
36,073


$
84,452

 
$
44,369

Asset-based interest expense(1)
(12,724
)

(10,492
)
 
(5,065
)
Effects of purchase accounting (2)
(1,433
)

(5,054
)
 
(24,166
)
Non-cash fair value adjustments (3)
3,547


1,277

 
(1,300
)
Non-recurring expenses (4)
1,944


(1,736
)
 
5,489

Adjusted EBITDA from Continuing Operations
$
27,407


$
68,447


$
19,327

 
 
 
 
 
 
Income (loss) from discontinued operations
$
(3,998
)
 
$
(4,287
)
 
$
10,953

Consolidated interest expense
13,068


8,691

 
12,022

Consolidated income tax expense (benefit)
(2,224
)

(1,537
)
 
5,926

Consolidated depreciation and amortization expense
15,645


14,166

 
15,408

EBITDA from discontinued operations
$
22,491

 
$
17,033

 
$
44,309

Asset based interest expense(1)
(13,068
)
 
(8,691
)
 
(6,796
)
Non-recurring expenses (4)
1,158

 
2,127

 
1,579

Adjusted EBITDA from discontinued operations
$
10,581

 
$
10,469

 
$
39,092

Total Adjusted EBITDA
$
37,988

 
$
78,916

 
$
58,419


42




(1)
The consolidated asset-based 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, mortgage and other operations.
(2)
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.
(3)
For Reliance, within our mortgage operations, Adjusted EBITDA excludes the impact of changes in contingent earn-outs. For our specialty insurance operations, depreciation and amortization on senior living real estate that is within net investment income is added back to Adjusted EBITDA.
(4)
Acquisition, start-up and disposition costs including legal, taxes, banker fees and other costs. Also includes payments pursuant to a separation agreement, dated as of November 10, 2015.

EBITDA and Adjusted EBITDA - Non-GAAP

The tables below present EBITDA and Adjusted EBITDA by business component.
 
Year Ended December 31, 2017
 
 
 
Tiptree Capital
 
 
 
 
($ in thousands)
Specialty insurance
 
Asset Management
 
Mortgage
 
Other
 
Discontinued Operations(1)
 
Tiptree Capital
 
Corporate Expenses
 
Total
Pre-tax income/(loss) from continuing ops
$
5,404

 
$
14,245

 
$
2,090

 
$
4,001

 
$

 
$
20,336

 
$
(29,070
)

$
(3,330
)
Pre-tax income/(loss) from discontinued ops

 

 



 
(6,222
)
 
(6,222
)
 


(6,222
)
Add back:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
15,072

 
12

 
1,034

 
4,632

 
13,068

 
18,746

 
4,812


38,630

Depreciation and amortization expenses
12,799

 

 
548