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Section 1: 10-Q (10-Q)

Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
 
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly period ended June 30, 2018
OR
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from            to            
Commission File Number: 001-33549
Tiptree Inc.
(Exact name of Registrant as Specified in Its Charter)
Maryland
 
38-3754322
(State or Other Jurisdiction of
 
(IRS Employer
Incorporation of Organization)
 
Identification No.)
 
 
 
 
 
 
780 Third Avenue, 21st Floor, New York, New York
 
10017
(Address of Principal Executive Offices)
 
(Zip Code)
(212) 446-1400
(Registrant’s Telephone Number, Including Area Code)
Not applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x No ¨ 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨                    Accelerated filer x
Non-accelerated filer ¨                    Smaller reporting company ¨
Emerging growth company ¨
If an emerging company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No  x
As of August 1, 2018, there were 36,561,931 shares, par value $0.001, of the registrant’s Common Stock outstanding.





Tiptree Inc.
Quarterly Report on Form 10-Q
June 30, 2018

Table of Contents
ITEM
 
Page Number
 
Item 1. Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I. FINANCIAL INFORMATION
Forward-Looking Statements

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

Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, many of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those described in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and in our other public filings with the SEC.
 
The factors described herein are not necessarily all of the important factors that could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements.  Other unknown or unpredictable factors also could affect our forward-looking statements. Consequently, our actual performance could be materially different from the results described or anticipated by our forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by the applicable law, we undertake no obligation to update any forward-looking statements.

Market and Industry Data

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

Note to Reader

In reading this Quarterly Report on Form 10-Q, references to:
“AUM” means assets under management.
“Care” means Care Investment Trust LLC.
“CLOs” means collateralized loan obligations.
“Code” means the Internal Revenue Code of 1986, as amended.
“Common Stock” means Class A common stock $0.001 par value for periods prior to June 7, 2018 and thereafter the common stock $0.001 par value.
“consolidated CLOs” means Telos 5, Telos 6 and Telos 7.
“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.
“Invesque” means Invesque Inc. (f/k/a Mainstreet Health Investments Inc.).
“Luxury” means Luxury Mortgage Corp.
“NAIC” means the National Association of Insurance Commissioners.
“NPL” means nonperforming residential real estate mortgage loans.
“Operating Company” means Tiptree Operating Company, LLC.
“Reliance” means Reliance First Capital, LLC.
“REO” means real estate owned.
“SEC” means the U.S. Securities and Exchange Commission.
“Securities Act” means the Securities Act of 1933, as amended.
“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 5” means Telos CLO 2014-5, Ltd.

F- 1


“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.)

F- 2

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

Item 1. Financial Statements (Unaudited)
 
As of
 
June 30, 2018
 
December 31, 2017
Assets:
 
 
 
Investments:
 
 
 
Available for sale securities, at fair value
$
234,361

 
$
182,448

Loans, at fair value
233,535

 
258,173

Equity securities, at fair value
140,132

 
25,536

Other investments
56,442

 
59,142

Total investments
664,470

 
525,299

Cash and cash equivalents
91,490

 
110,667

Restricted cash
18,148

 
31,570

Notes and accounts receivable, net
194,971

 
186,422

Reinsurance receivables
373,145

 
352,967

Deferred acquisition costs
146,882

 
147,162

Goodwill
91,562

 
91,562

Intangible assets, net
56,936

 
64,017

Other assets
40,329

 
31,584

Assets held for sale
51,598

 
448,492

Total assets
$
1,729,531

 
$
1,989,742


 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Debt, net
$
366,215

 
$
346,081

Unearned premiums
526,282

 
503,446

Policy liabilities and unpaid claims
122,290

 
112,003

Deferred revenue
63,797

 
56,745

Reinsurance payable
93,488

 
90,554

Other liabilities and accrued expenses
110,379

 
121,321

Liabilities held for sale
46,264

 
362,818

Total liabilities
$
1,328,715

 
$
1,592,968


 
 
 
Stockholders’ Equity: (1)
 
 
 
Preferred stock: $0.001 par value, 100,000,000 shares authorized, none issued or outstanding
$

 
$

Common Stock: $0.001 par value, 200,000,000 shares authorized, 36,643,317 and 35,003,004 shares issued and outstanding, respectively
37

 
35

Common stock - Class B: $0.001 par value, none and 50,000,000 shares authorized, none and 8,049,029 shares issued and outstanding, respectively

 
8

Additional paid-in capital
335,749

 
295,582

Accumulated other comprehensive income (loss), net of tax
(2,399
)
 
966

Retained earnings
60,265

 
38,079

Common Stock held by subsidiaries, 0 and 5,197,551 shares, respectively

 
(34,585
)
Class B common stock held by subsidiaries, none and 8,049,029 shares, respectively

 
(8
)
Total Tiptree Inc. stockholders’ equity
393,652

 
300,077

Non-controlling interests - TFP

 
77,494

Non-controlling interests - Other
7,164

 
19,203

Total stockholders’ equity
400,816

 
396,774

Total liabilities and stockholders’ equity
$
1,729,531

 
$
1,989,742

(1) See Note (16) Stockholders’ Equity for information related to changes in the Company’s equity capitalization.

See accompanying notes to condensed consolidated financial statements.


F- 3

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



Three Months Ended June 30,

Six Months Ended June 30,

2018

2017

2018

2017
Revenues:







Earned premiums, net
$
100,044


$
87,477


$
201,689


$
176,708

Service and administrative fees
24,891


23,067


49,467


46,843

Ceding commissions
2,242


2,017


4,525


4,288

Net investment income
4,927


3,687


9,132


8,192

Net realized and unrealized gains (losses)
11,472


11,445


18,078


27,657

Other revenue
9,133


11,552


17,890


21,746

Total revenues
152,709


139,245


300,781


285,434

Expenses:







Policy and contract benefits
34,174


29,802


70,800


62,794

Commission expense
62,562


56,546


125,195


113,339

Employee compensation and benefits
27,188


29,035


54,976


58,065

Interest expense
6,655


6,305


12,601


12,383

Depreciation and amortization
2,953


3,471


5,910


7,025

Other expenses
17,600


21,886


36,765


39,505

Total expenses
151,132


147,045


306,247


293,111

Other income:







Income attributable to consolidated CLOs


7,941




16,808

Expenses attributable to consolidated CLOs


5,046




9,998

Net income (loss) attributable to consolidated CLOs


2,895




6,810

Total other income


2,895




6,810

Income (loss) before taxes from continuing operations
1,577


(4,905
)

(5,466
)

(867
)
Less: provision (benefit) for income taxes
701


(1,305
)

(867
)

263

Net income (loss) from continuing operations
876


(3,600
)

(4,599
)

(1,130
)
Discontinued operations:







Income (loss) before taxes from discontinued operations


(2,294
)

624


(3,824
)
Gain on sale of discontinued operations, net




46,184



Less: Provision (benefit) for income taxes


(570
)

12,327


(972
)
Net income (loss) from discontinued operations


(1,724
)

34,481


(2,852
)
Net income (loss) before non-controlling interests
876


(5,324
)

29,882


(3,982
)
Less: net income (loss) attributable to non-controlling interests - TFP
108


(1,045
)

5,500


(837
)
Less: net income (loss) attributable to non-controlling interests - Other
(58
)

164


(4
)

198

Net income (loss) attributable to Common Stockholders
$
826


$
(4,443
)

$
24,386


$
(3,343
)








Net income (loss) per Common Share:







Basic, continuing operations, net
$
0.02


$
(0.11
)

$
(0.11
)

$
(0.05
)
Basic, discontinued operations, net


(0.04
)

0.84


(0.07
)
Basic earnings per share
$
0.02


$
(0.15
)

$
0.73


$
(0.12
)








Diluted, continuing operations, net
0.02


(0.11
)

(0.11
)

(0.05
)
Diluted, discontinued operations, net


(0.04
)

0.84


(0.07
)
Diluted earnings per share
$
0.02


$
(0.15
)

$
0.73


$
(0.12
)








Weighted average number of Common Shares:







Basic
36,593,154


28,832,975


33,245,921


28,630,027

Diluted
37,386,319


28,832,975


33,245,921


28,630,027









Dividends declared per Common Share
$
0.035


$
0.030


$
0.070


$
0.060


See accompanying notes to condensed consolidated financial statements.

F- 4

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



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net income (loss) before non-controlling interests
$
876

 
$
(5,324
)
 
$
29,882

 
$
(3,982
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale securities:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
(752
)
 
767

 
(3,045
)
 
1,445

Related tax (expense) benefit
174

 
(268
)
 
678

 
(511
)
Reclassification of (gains) losses included in net income
4

 
(20
)
 
535

 
27

Related tax expense (benefit)
(1
)
 
7

 
(117
)
 
(9
)
Unrealized gains (losses) on available-for-sale securities, net of tax
(575
)
 
486

 
(1,949
)
 
952

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

 
(510
)
 
1,111

 
(378
)
Related tax (expense) benefit

 
144

 
(276
)
 
96

Reclassification of (gains) losses included in net income (1)

 
93

 
(3,845
)
 
237

Related tax expense (benefit)

 
(32
)
 
936

 
(77
)
Unrealized (losses) gains on interest rate swaps from cash flow hedges, net of tax

 
(305
)
 
(2,074
)
 
(122
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
(575
)
 
181

 
(4,023
)
 
830

Comprehensive income (loss)
301

 
(5,143
)
 
25,859

 
(3,152
)
Less: Comprehensive income (loss) attributable to non-controlling interests - TFP
108

 
(982
)
 
4,937

 
(658
)
Less: Comprehensive income (loss) attributable to non-controlling interests - Other
(58
)
 
12

 
(440
)
 
72

Comprehensive income (loss) attributable to Common Stockholders
$
251

 
$
(4,173
)
 
$
21,362

 
$
(2,566
)
(1) Deconsolidated as part of the sale of Care. See Note (3) Dispositions, Assets Held for Sale & Discontinued Operations.





















See accompanying notes to condensed consolidated financial statements.

F- 5

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



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

 
8,049,029

 
$
35

 
$
8

 
$
297,391

 
$
555

 
$
37,974

 
(6,596,000
)
 
$
(42,524
)
 
(8,049,029
)
 
$
(8
)
 
$
293,431

 
$
76,077

 
$
20,636

 
$
390,144

Amortization of share based incentive compensation

 

 

 

 
976

 

 

 

 

 

 

 
976

 

 

 
976

Vesting of share-based incentive compensation
19,388

 

 

 

 
(537
)
 

 

 
99,537

 
647

 

 

 
110

 

 

 
110

Issuance of common stock for cash upon exercise of stock options

 

 

 

 
(1,371
)
 

 

 
1,510,920

 
9,471

 

 

 
8,100

 

 

 
8,100

Other comprehensive income, net of tax

 

 

 

 

 
777

 

 

 

 

 

 
777

 
179

 
(126
)
 
830

Non-controlling interest contributions

 

 

 

 

 

 

 

 

 

 

 

 

 
2,464

 
2,464

Non-controlling interest distributions

 

 

 

 

 

 

 

 

 

 

 

 
(483
)
 
(1,120
)
 
(1,603
)
Shares acquired by subsidiaries

 

 

 

 

 

 

 
(1,000,000
)
 
(7,300
)
 

 

 
(7,300
)
 

 

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

 

 

 

 
(177
)
 

 

 

 

 

 

 
(177
)
 

 
2,816

 
2,639

Dividends declared

 

 

 

 

 

 
(1,706
)
 

 

 

 

 
(1,706
)
 

 

 
(1,706
)
Net income

 

 

 

 

 

 
(3,343
)
 

 

 

 

 
(3,343
)
 
(837
)
 
198

 
(3,982
)
Balance at June 30, 2017
35,003,004

 
8,049,029

 
$
35

 
$
8

 
$
296,282

 
$
1,332

 
$
32,925

 
(5,985,543
)
 
$
(39,706
)
 
(8,049,029
)
 
$
(8
)
 
$
290,868

 
$
74,936

 
$
24,868

 
$
390,672
















See accompanying notes to condensed consolidated financial statements.

F- 6

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


 
Number of Shares
 
Par Value
 
Additional paid in capital
 
Accumulated
other
comprehensive
income (loss)
 
Retained
earnings
 
Shares held by subsidiaries
 
Total stockholders’ equity to Tiptree Inc.
 
Non-controlling
interests - TFP
 
Non-controlling
interests - Other
 
Total stockholders' equity
 
Common Stock
 
Class B
 
Common Stock
 
Class B
 
 
 
 
Common Stock
 
Common Stock Amount
 
Class B Shares
 
Class B Amount
 
 
 
 
Balance at December 31, 2017
35,003,004

 
8,049,029

 
$
35

 
$
8

 
$
295,582

 
$
966

 
$
38,079

 
(5,197,551
)
 
$
(34,585
)
 
(8,049,029
)
 
$
(8
)
 
$
300,077

 
$
77,494

 
$
19,203

 
$
396,774

Amortization of share-based incentive compensation

 

 

 

 
1,204

 

 

 

 

 

 

 
1,204

 

 
1,080

 
2,284

Vesting of share-based incentive compensation

 

 

 

 
(1,041
)
 

 

 
161,574

 
1,050

 

 

 
9

 

 

 
9

Other comprehensive income, net of tax

 

 

 

 

 
(3,024
)
 

 

 

 

 

 
(3,024
)
 
(563
)
 
(436
)
 
(4,023
)
Non-controlling interest contributions

 

 

 

 

 

 

 

 

 

 

 

 

 
1,418

 
1,418

Non-controlling interest distributions

 

 

 

 

 

 

 

 

 

 

 

 
(241
)
 

 
(241
)
Shares purchased under stock purchase plan
(1,372,739
)
 

 
(1
)
 

 
(8,857
)
 

 

 

 

 

 

 
(8,858
)
 

 

 
(8,858
)
Net changes in non-controlling interest
 
 
 
 

 

 
(132
)
 

 

 

 

 

 

 
(132
)
 

 
(14,097
)
 
(14,229
)
Reorganization merger
8,049,029

 
(8,049,029
)
 
8

 
(8
)
 
82,523

 
(341
)
 
 
 
 
 
 
 
8,049,029

 
8

 
82,190

 
(82,190
)
 

 

Cancellation of treasury shares
(5,035,977
)
 

 
(5
)
 

 
(33,530
)
 

 

 
5,035,977

 
33,535

 
 
 
 
 

 

 

 

Dividends declared
 
 
 
 

 

 

 

 
(2,200
)
 

 

 

 

 
(2,200
)
 

 

 
(2,200
)
Net income

 

 

 

 

 

 
24,386

 

 

 

 

 
24,386

 
5,500

 
(4
)
 
29,882

Balance at June 30, 2018
36,643,317

 

 
$
37

 
$

 
$
335,749

 
$
(2,399
)
 
$
60,265

 

 
$

 

 
$

 
$
393,652

 
$

 
$
7,164

 
$
400,816















See accompanying notes to condensed consolidated financial statements.

F- 7

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


 
Six months ended June 30,
 
2018
 
2017
Operating Activities:
 
 
 
Net income (loss) attributable to Common Stockholders
$
24,386

 
$
(3,343
)
Net income (loss) attributable to non-controlling interests - TFP
5,500

 
(837
)
Net income (loss) attributable to non-controlling interests - Other
(4
)
 
198

Net income (loss)
29,882

 
(3,982
)
Adjustments to reconcile net income to net cash provided by (used in) operating activities
 
 
 
Net realized and unrealized (gains) losses
(18,078
)
 
(27,657
)
Net (gain) on sale of subsidiary
(46,184
)
 

Net unrealized loss (gain) on interest rate swaps

 
(25
)
Change in fair value of contingent consideration

 
3,615

Non cash compensation expense
2,284

 
3,140

Amortization/accretion of premiums and discounts
430

 
686

Depreciation and amortization expense
5,911

 
16,232

Provision for doubtful accounts
126

 
378

Amortization of deferred financing costs
523

 
1,426

Loss on extinguishment of debt
428

 

Deferred tax expense (benefit)
11,460

 
(339
)
Changes in operating assets and liabilities:
 
 
 
Mortgage loans originated for sale
(730,657
)
 
(720,123
)
Proceeds from the sale of mortgage loans originated for sale
778,671

 
779,304

(Increase) decrease in notes and accounts receivable
(8,994
)
 
(12,032
)
(Increase) decrease in reinsurance receivables
(20,178
)
 
(39,010
)
(Increase) decrease in deferred acquisition costs
280

 
(326
)
(Increase) decrease in other assets
(19,091
)
 
(5,040
)
Increase (decrease) in unearned premiums
22,836

 
26,866

Increase (decrease) in policy liabilities and unpaid claims
10,287

 
4,633

Increase (decrease) in deferred revenue
7,052

 
281

Increase (decrease) in reinsurance payable
2,934

 
16,991

Increase (decrease) in other liabilities and accrued expenses
(19,759
)
 
(16,347
)
Operating activities from consolidated CLOs

 
(1,452
)
Net cash provided by (used in) operating activities
10,163

 
27,219

 
 
 
 
Investing Activities:
 
 
 
Purchases of investments
(182,294
)
 
(73,541
)
Proceeds from sales and maturities of investments
122,511

 
122,220

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

 
(2,001
)
Purchases of real estate capital expenditures
(592
)
 
(359
)
Proceeds from the sale of real estate
9,384

 
6,510

Purchases of corporate fixed assets
(2,032
)
 
(1,340
)
Proceeds from the sale of subsidiaries
3,561

 
4,846

Proceeds from notes receivable
14,923

 
27,678

Issuance of notes receivable
(15,040
)
 
(27,635
)
Business and asset acquisitions, net of cash and deposits

 
(75,782
)
Investing activities from consolidated CLOs

 
48,470

Net cash provided by (used in) investing activities
(49,579
)
 
29,066

 
 
 
 
Financing Activities:
 
 
 
Dividends paid
(2,200
)
 
(1,706
)
Non-controlling interest contributions
1,418

 
2,464

Non-controlling interest distributions
(241
)
 
(1,130
)
Payment of debt issuance costs
(657
)
 
(1,267
)

F- 8

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


 
Six months ended June 30,
 
2018
 
2017
Proceeds from borrowings and mortgage notes payable
786,705

 
822,119

Principal paydowns of borrowings and mortgage notes payable
(776,031
)
 
(800,944
)
Proceeds from the exercise of options for Common Stock

 
8,100

Repurchases of common stock
(8,858
)
 
(7,300
)
Financing activities from consolidated CLOs

 
(49,010
)
Net cash provided by (used in) financing activities
136

 
(28,674
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(39,280
)
 
27,611

Cash, cash equivalents and restricted cash – beginning of period
142,237

 
74,258

Cash, cash equivalents and restricted cash – beginning of period - held for sale
10,533

 
13,224

Cash, cash equivalents and restricted cash – end of period
113,490

 
115,093

Less: Reclassification of cash to assets held for sale
3,852

 
8,619

Cash, cash equivalents and restricted cash– end of period
$
109,638

 
$
106,474

 
 
 
 
Supplemental Schedule of Non-Cash Investing and Financing Activities:
 
 
 
Assets of consolidated CLOs deconsolidated due to sale and redemption
$

 
$
405,263

Liabilities of consolidated CLOs deconsolidated due to sale and redemption
$

 
$
387,273

Equity securities acquired through the sale of a subsidiary and asset sales
$
134,083

 
$

Real estate acquired through asset acquisition
$

 
$
8,178

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

 
$
2,049

Debt assumed through acquisitions
$

 
$
7,586

Cancellation of treasury shares
$
33,535

 
$

Acquisition of non-controlling interest
$
82,190

 
$

Acquired real estate properties through, or in lieu of, foreclosure of the related loan
$
5,100

 
$
6,976

 
 
 
 
 
As of
Reconciliation of cash, cash equivalents and restricted cash shown in the statement of cash flows
June 30, 2018
 
December 31, 2017
Cash and cash equivalents
$
91,490

 
$
110,667

Restricted cash
18,148

 
31,570

Total cash, cash equivalents and restricted cash shown in the statement of cash flows
$
109,638

 
142,237





See accompanying notes to condensed consolidated financial statements.

F- 9

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(in thousands, except share data)



(1) Organization

Tiptree Inc. (together with its consolidated subsidiaries, collectively, Tiptree, the Company, or we) is a Maryland Corporation that was incorporated on March 19, 2007. Tiptree’s Common Stock trades on the Nasdaq Capital Market under the symbol “TIPT”. Tiptree is a holding company that combines specialty insurance operations with investment management expertise. We allocate our capital across our insurance operations and investments in other companies and assets which are managed as part of Tiptree Capital. As of June 30, 2018, 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.

On April 10, 2018, Tiptree completed a reorganization merger whereby Tiptree Financial Partners, L.P. (TFP) merged with and into Tiptree, with Tiptree continuing as the surviving company. Prior to the merger Tiptree owned approximately 84% of TFP, with the remaining portion accounted for as non-controlling interest. See Note (16) Stockholders’ Equity for additional information.

In this report “Common Stock” means Class A common stock $0.001 par value for periods prior to June 7, 2018 and thereafter the common stock $0.001 par value. See Note (16) Stockholders’ Equity for more information.

(2) Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements of Tiptree have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) and include the accounts of the Company and its subsidiaries. The condensed consolidated financial statements are presented in U.S. dollars, the main operating currency of the Company. The unaudited condensed consolidated financial statements presented herein should be read in conjunction with the annual audited financial statements included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2017. In the opinion of management, the accompanying unaudited interim financial information reflects all adjustments, including normal recurring adjustments necessary to present fairly the Company’s financial position, results of operations, comprehensive income and cash flows for each of the interim periods presented. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the full year ending on December 31, 2018.

As a result of changes in presentation made in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, certain prior period amounts related to discontinued operations have been reclassified from continuing operations to conform to the current presentation. These reclassifications had no effect on the reported results of operations. The primary difference in the presentation of the condensed consolidated financial statements from the prior year is the reclassification of Care, our senior living business, to discontinued operations in the condensed consolidated statement of operations. See Note (3) Dispositions, Assets Held for Sale & Discontinued Operations for additional information.

As a result of the adoption of ASU 2016-01, an immaterial amount of equity securities classified as available for sale as of December 31, 2017 were reclassified to equity securities, at fair value as of March 31, 2018. The net unrealized loss was immaterial. The adoption of ASU 2016-18 resulted in reclassification of restricted cash balances into cash, cash equivalents and restricted cash on the condensed consolidated statements of cash flows for the six months ended June 30, 2018 and 2017.

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

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


F- 10

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(in thousands, except share data)


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

Use of Estimates

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

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

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

Business Combination Accounting

The Company accounts for business combinations by applying the acquisition method of accounting. The acquisition method requires, among other things, that the assets acquired and liabilities assumed in a business combination be measured at fair value as of the closing date of the acquisition. The net assets acquired may consist of tangible and intangible assets and the excess of purchase price over the fair value of identifiable net assets acquired, or goodwill. The determination of estimated useful lives and the allocation of the purchase price to the intangible assets requires significant judgment and affects the amount of future amortization and possible impairment charges. Contingent consideration, if any, is measured at fair value on the date of acquisition. The fair value of any contingent consideration liability is remeasured at each reporting date with any change recorded in other expense in the condensed consolidated statements of operations. Acquisition and transaction costs are expensed as incurred.

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

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

Fair Value Measurement

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

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

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

Level 2 – Significant inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data. Level 2 inputs include quoted prices for similar instruments

F- 11

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(in thousands, except share data)


in active markets, and inputs other than quoted prices that are observable for the asset or liability. The types of financial assets and liabilities carried at level 2 are valued based on one or more of the following:

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

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

Fair Value Option

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

Recent Accounting Standards

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this standard affects any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. On July 9, 2015, the FASB decided to delay the effective date of ASU 2014-09 by one year. Reporting entities may choose to adopt the standard as of the original effective date. The deferral results in ASU 2014-09 being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. A substantial majority of the Company’s non-investment related revenues are comprised of revenues from insurance contracts that are accounted for under Financial Services-Insurance (Topic 944) or certain financial services products (e.g. gains upon the origination of mortgages) that are not within the scope of the new standard.  The Company’s remaining revenues that are within the scope of Topic 606 are primarily comprised of revenues from contracts with customers for monthly membership dues for motor clubs, monthly administration fees for services provided for premiums, claims and reinsurance processing revenues, vehicle service contracts and warranty coverage revenues for household goods and appliances (collectively, remaining contracts). The Company has chosen the modified-retrospective method of adopting Topic 606, and has assessed these contracts and concluded that changes in accounting and revenue recognition upon adoption of Topic 606 was not material to the Company’s financial position as of January 1, 2018, and did not have a material impact on the Company’s condensed consolidated financial statements. No cumulative effect adjustment was made due to the adoption of this standard. See Note (13) Revenue From Contracts with Customers for disclosures required under ASU 2014-09 and others related to Topic 606.

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

F- 12

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(in thousands, except share data)


on available-for-sale debt securities. ASU 2016-01 was effective for the Company as of January 1, 2018. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarify the implementation guidance on principal versus net considerations. The effective date and transition requirements for this standard are the same as the effective date and transition requirements of ASU 2014-09. See discussion of the impact of ASU 2014-09 above which addresses the total impact of Topic 606.

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

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

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides guidance on collectability, noncash consideration, and completed contracts at transition.  Additionally, the amendments in this Update provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers.  The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). See discussion of the impact of ASU 2014-09 above which addresses the total impact of Topic 606.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted, including the adoption in an interim period. The amendments in this Update should be applied using a retrospective transition method to each period presented. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which addresses classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 requires an entity’s reconciliation of the beginning-of-period and end-of-period total amounts shown on the statement of cash flows to include in cash and cash equivalents amounts generally described as restricted cash and restricted cash equivalents. The ASU does not define restricted cash or restricted cash equivalents, but an entity will need to disclose the nature of the restrictions. ASU 2016-18 is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. The adoption of ASU 2016-18 resulted in reclassification of restricted cash balances into cash, cash equivalents and restricted cash on the condensed consolidated statements of cash flows in the first quarter of 2018.

In February 2017, the FASB issued ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial

F- 13

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(in thousands, except share data)


Assets (Subtopic 610-20) Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The new guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted for interim or annual reporting periods beginning after December 15, 2016. The guidance may be applied retrospectively for all periods presented or retrospectively with a cumulative-effect adjustment at the date of adoption. The new guidance clarifies the scope and accounting of a financial asset that meets the definition of an “in-substance nonfinancial asset” and defines the term, “in-substance nonfinancial asset.” The ASU also adds guidance for partial sales of nonfinancial assets. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

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

Recently Issued Accounting Pronouncements, Not Yet Adopted

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

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

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. ASU 2017-04 does not change the qualitative assessment; however, it removes “the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.” Instead, all reporting units, even those with a zero or negative carrying amount will apply the same impairment test. Therefore, as the FASB notes in the ASU’s Basis for Conclusions, the goodwill of reporting units with zero or negative carrying values will not be impaired, even when conditions underlying the reporting unit indicate that goodwill is impaired. Entities will, however, be required to disclose any reporting units with zero or negative carrying amounts and the respective amounts of goodwill allocated to those reporting units. The amendments in ASU 2017-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the effect on its condensed consolidated financial statements.


F- 14

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(in thousands, except share data)


In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The new guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those years. Early adoption is permitted for interim or annual reporting periods beginning after December 15, 2017. The guidance is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The guidance shortens the amortization period for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. The Company believes that the adoption of ASU 2017-08 will not have a material impact on its condensed consolidated financial statements.

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

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits companies to reclassify stranded tax effects caused by Public Law no. 115-97, commonly referred to as the Tax Cuts and Jobs Act (Tax Act) from accumulated other comprehensive income (AOCI) to retained earnings. Deferred tax assets (DTA) related to available for sale (AFS) securities unrealized gains and losses that were revalued as of December 31, 2017 created stranded tax effects in accumulated other comprehensive income (AOCI) due to the enactment of the tax act, due to the nature of existing GAAP requiring recognition of tax rate change effects on the DTA revaluation related to AFS securities as an adjustment to provision for income taxes. Specifically, ASU 2018-02 permits a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Act. Additionally, the ASU requires new disclosures by all companies, whether they opt to do the reclassification or not. The amendments in ASU 2018-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company believes that the adoption of ASU 2018-02 will not have a material impact on its consolidated financial statements.

(3) Dispositions, Assets Held for Sale and Discontinued Operations

Dispositions

On January 18, 2017 and November 7, 2017, the Company sold its ownership in the subordinated notes of Telos 5 and Telos 6 (collectively, the Disposed CLOs). As a result of the sales, the Company determined that it no longer had the controlling interest in such entities. The Company, therefore, deconsolidated its ownership in the subordinated notes of the Disposed CLOs and is no longer reporting the assets and liabilities of the Disposed CLOs in its consolidated balance sheet as of December 31, 2017. The operations of the Disposed CLOs were consolidated in the results of the Company through the respective dates.

The operations of the Disposed CLOs were consolidated in the Company’s consolidated financial statements through the respective sale dates. On August 10, 2017, the Company’s ownership in the subordinated notes of Telos 7 was redeemed for cash as part of the complete liquidation of the CLO. The operations of Telos 7 were consolidated in the results of the Company through the redemption date.

The Company sold Siena on October 1, 2017. Consideration consisted of $2,500 in cash and $11,000 of seller provided financing at the time of sale. The financing has an interest rate of 10% and matures on November 18, 2018. The operations of Siena were consolidated in the results of the Company through the sale date.

The Company completed the sale of Care, as well as two senior living properties held in our specialty insurance business on February 1, 2018. The Company received approximately 16.6 million shares of Invesque Inc. (Invesque) with an estimated fair value of $134.1 million at the time of sale, resulting in an ownership of approximately 34% of the acquiring company at the time of sale. The Company has elected to apply the fair value option to the investment in Invesque. As such, these shares are held at fair value within equity securities, at fair value.

The pre-tax comprehensive income on the sale was approximately $44.2 million, which consists of $46.2 million gain on sale of subsidiary, $1.8 million of realized gain on the sale of the specialty insurance properties, offset by the reclassification of the interest rate swap from AOCI of $3.8 million.

F- 15

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(in thousands, except share data)



On July 3, 2018 the Company received approximately 0.2 million shares of Invesque as a result of a final working capital calculation. This was recorded as a receivable at the time of sale, and there was no change to the gain on sale of Care as a result of this final payment.

The Care sale contract also contains a provision which provides for contingent consideration should a specified portion of the portfolio be disposed of within a 3 year period at a gain, which must exceed a predefined threshold. This contingent consideration represents a gain contingency, and, as a result, the Company will not recognize any additional gain unless such consideration is realized.

The Company has reclassified the income and expenses attributable to Care to net income (loss) from discontinued operations for the three and six months ended June 30, 2018 and 2017.

The Company has entered into a definitive agreement to sell Luxury and classified Luxury as held for sale as of December 31, 2017. The agreement did not meet the requirements to be classified as a discontinued operation. Assets and liabilities attributable to Luxury have been reclassified to assets held for sale and liabilities held for sale, respectively, as of June 30, 2018 and December 31, 2017.

As of June 30, 2018 and December 31, 2017, the Company did not record any impairments with respect to assets held for sale or discontinued operations.

Assets Held for Sale

The following table represents detail of assets and liabilities held for sale in the condensed consolidated balance sheets for the following periods:
 
As of
 
June 30, 2018(1)
 
December 31, 2017
Assets
Luxury
 
Care
Luxury
Total
Investments:
 
 
 
 
 
Loans, at fair value
$
45,654

 
$

$
57,255

$
57,255

Loans at amortized cost, net

 
700


700

Real estate, net of accumulated depreciation of $0 and $26,823

 
347,303


347,303

Other investments
887

 
1,853

677

2,530

Total Investments
46,541

 
349,856

57,932

407,788

Cash and cash equivalents
3,852

 
8,316

2,217

10,533

Notes and accounts receivable, net
233

 
5,318

263

5,581

Intangible assets, net of accumulated amortization of $0 and $26,944

 
17,417


17,417

Other assets
972

 
6,508

665

7,173

Assets held for sale
$
51,598

 
$
387,415

$
61,077

$
448,492

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Debt, net
$
44,721

 
$
296,868

$
53,835

$
350,703

Other liabilities and accrued expenses
1,543

 
10,693

1,422

12,115

Liabilities held for sale
$
46,264

 
$
307,561

$
55,257

$
362,818


(1) Reflects the closing of the sale of Care discussed above. The reduction in net assets and liabilities held for sale included approximately $13.4 million related to non-controlling interest.

F- 16

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(in thousands, except share data)


Discontinued Operations

The following table represents detail of revenues and expenses of discontinued operations in the condensed consolidated statements of operations for the following periods:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 

 

Rental and related revenue
$

 
$
18,246

 
$
6,476

 
$
35,649

Other revenue

 
379

 
149

 
695

Total revenues

 
18,625

 
6,625

 
36,344

Expenses:
 
 
 
 
 
 
 
Employee compensation and benefits

 
7,697

 
2,788

 
14,776

Interest expense

 
2,999

 
1,252

 
5,700

Depreciation and amortization

 
4,726

 

 
8,981

Other expenses

 
5,497

 
1,961

 
10,711

Total expenses

 
20,919

 
6,001

 
40,168

Net income (loss) before taxes from discontinued operations

 
(2,294
)
 
624

 
(3,824
)
Gain on sale of discontinued operations, net

 

 
46,184

 

Less: provision (benefit) for income taxes

 
(570
)
 
12,327

 
(972
)
Net income (loss) from discontinued operations
$

 
$
(1,724
)
 
$
34,481

 
$
(2,852
)
The following table represents a summary of cash flows related to discontinued operation included in the condensed consolidated statements of cash flows for the following periods:
 
Six Months Ended June 30,
 
2018
 
2017
Net cash provided by (used in):
 
 
 
Operating activities
$
(2,095
)
 
$
10,003

Investing activities
(592
)
 
(74,796
)
Financing activities
(123
)
 
53,376

Net cash flows provided by discontinued operations
$
(2,810
)
 
$
(11,417
)

(4) Operating Segment Data

Tiptree is a holding company that combines specialty insurance operations with investment management expertise. We allocate our capital across our insurance operations and investments which are managed as part of Tiptree Capital. Today, 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.

Each reportable segment’s income (loss) is reported before income taxes, discontinued operations and non-controlling interests. Segment results incorporate the revenues and expenses of these subsidiaries since they commenced operations or were acquired.

Descriptions of each of our reportable segments are as follows:

Insurance:
Specialty Insurance operations are conducted through Fortegra Financial Corporation (Fortegra), an insurance holding company. Fortegra underwrites and provides specialty insurance products, primarily in the United States, and is a leading provider of credit insurance and asset protection products. Fortegra’s range of products and services include credit protection insurance, warranty and service contract products, and insurance programs which underwrite niche personal and commercial lines of insurance. We also offer various other insurance related products and services throughout the U.S. through our non-regulated subsidiaries.

F- 17

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(in thousands, except share data)


Tiptree Capital:
Asset Management operations are primarily conducted through Telos Asset Management LLC’s (Telos) management of CLOs. Telos is a subsidiary of Tiptree Asset Management Company, LLC (TAMCO), an SEC-registered investment advisor owned by the Company. Results include net income (loss) from consolidated CLOs.
Mortgage operations are conducted through Reliance. The Company’s mortgage origination business originated loans for sale to institutional investors, including GSEs and FHA/VA.
Other includes operations and investments that are not considered reportable segments. This includes the investment in Invesque not held in Specialty Insurance, Siena, which was sold on October 1, 2017, and Luxury which is classified as held for sale.
The tables below present the components of revenue, expense, pre-tax income (loss), and segment assets for each of the operating segments for the following period.
 
Three Months Ended June 30, 2018
 
 
 
Tiptree Capital
 
 
 
Specialty insurance
 
Asset management
 
Mortgage
 
Other
 
Total
Total revenue
$
134,111

 
$
181

 
$
12,688

 
$
5,729

 
$
152,709

Total expense
(125,380
)
 
(795
)
 
(12,334
)
 
(5,974
)
 
(144,483
)
Corporate expense

 

 

 

 
(6,649
)
Income (loss) before taxes from continuing operations
$
8,731

 
$
(614
)
 
$
354

 
$
(245
)
 
$
1,577

Less: provision (benefit) for income taxes
 
 
 
 
 
 
 
 
701

Net income (loss) from discontinued operations
 
 
 
 
 
 
 
 

Net income (loss) before non-controlling interests
 
 
 
 
 
 
 
 
$
876

Less: net income (loss) attributable to non-controlling interests
 
 
 
 
 
 
 
 
50

Net income (loss) attributable to Common Stockholders
 
 
 
 
 
 
 
 
$
826


 
Three Months Ended June 30, 2017
 
 
 
Tiptree Capital
 
 
 
Specialty insurance(1)
 
Asset management
 
Mortgage
 
Other
 
Total
Total revenue
$
111,171

 
$
3,818

 
$
14,384

 
$
9,872

 
$
139,245

Total expense
(111,903
)
 
(2,184
)
 
(15,684
)
 
(8,646
)
 
(138,417
)
Net income attributable to consolidated CLOs

 
2,895

 

 

 
2,895

Corporate expense

 

 

 

 
(8,628
)
Income (loss) before taxes from continuing operations
$
(732
)
 
$
4,529

 
$
(1,300
)
 
$
1,226

 
$
(4,905
)
Less: provision (benefit) for income taxes
 
 
 
 
 
 
 
 
(1,305
)
Net income (loss) from discontinued operations
 
 
 
 
 
 
 
 
(1,724
)
Net income (loss) before non-controlling interests
 
 
 
 
 
 
 
 
$
(5,324
)
Less: net income (loss) attributable to non-controlling interests
 
 
 
 
 
 
 
 
(881
)
Net income (loss) attributable to Common Stockholders
 
 
 
 
 
 
 
 
$
(4,443
)

F- 18

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(in thousands, except share data)


 
Six Months Ended June 30, 2018
 
 
 
Tiptree Capital
 
 
 
Specialty insurance
 
Asset management
 
Mortgage
 
Other
 
Total
Total revenue
$
264,109

 
$
2,036

 
$
25,686

 
$
8,950

 
$
300,781

Total expense
(254,035
)
 
(1,758
)
 
(25,179
)
 
(11,912
)
 
(292,884
)
Corporate expense

 

 

 

 
(13,363
)
Net income (loss) before taxes from continuing operations
$
10,074

 
$
278

 
$
507

 
$
(2,962
)
 
$
(5,466
)
Less: provision (benefit) for income taxes
 
 
 
 
 
 
 
 
(867
)
Net income (loss) from discontinued operations
 
 
 
 
 
 
 
 
34,481

Net income (loss) before non-controlling interests
 
 
 
 
 
 
 
 
$
29,882

Less: net income (loss) attributable to non-controlling interests
 
 
 
 
 
 
 
 
5,496

Net income (loss) attributable to Common Stockholders
 
 
 
 
 
 
 
 
$
24,386


 
Six Months Ended June 30, 2017
 
 
 
Tiptree Capital
 
 
 
Specialty insurance
 
Asset management
 
Mortgage
 
Other
 
Total
Total revenue
$
233,017

 
$
6,791

 
$
27,212

 
$
18,414

 
$
285,434

Total expense
(228,948
)