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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, 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 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
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 every Interactive Data File required to be submitted 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 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 ¨                     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 29, 2018, 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 $197,215,232, based upon the closing sales price of $6.80 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 11, 2019, there were 34,505,782 shares, par value $0.001, of the registrant’s 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 2019 Annual Meeting of Stockholders is incorporated by reference into Part III.


TIPTREE INC.
Table of Contents
Annual Report on Form 10-K
December 31, 2018


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TIPTREE INC.
Table of Contents
Annual Report on Form 10-K
December 31, 2018


ITEM
 
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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.
“A.M. Best” means A.M. Best Company, Inc.
“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.
“Common Stock” or “Common Shares” means Tiptree’s 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, for the year ended December 31, 2014: Telos 1, Telos 2, Telos 3, Telos 4, Telos 5 and Telos 6; for the year ended December 31, 2015: Telos 2, Telos 4, Telos 5 and Telos 6; and for the years ended December 31, 2016 and 2017, Telos 5, Telos 6 and Telos 7. During 2017 the Company exited all consolidated CLOs.
“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.
“GSE” means government-sponsored enterprise
“Invesque” means Invesque 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.

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“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.
“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, Tiptree Inc. and its consolidated subsidiaries.
“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 collectively, Tricadia Holdings, L.P., Tricadia Capital Management, LLC, Tricadia Holdings GP, LLC, Tricadia Holdings and Tricadia GP Holdings LLC.

Item 1. Business

OVERVIEW

Our Business

Tiptree is a holding company that combines insurance operations with investment management capabilities. Our principal operating subsidiary is a leading provider of specialty insurance products and related services. We also allocate capital across a broad spectrum of businesses, assets and other investments.

Our business is comprised of the following types of operations and investments:

•
Specialty Insurance
◦
Operations - Our insurance operations underwrite and administer programs and products for our clients, including credit protection insurance, warranty and service contract products, and niche commercial and consumer insurance programs.
◦
Investments - The funds in our insurance investment portfolio are generated by our underwriting activities, with a majority of the portfolio invested in high quality corporate, government and municipal bonds to support our claims paying activities. Benefiting from our investment management capabilities, our insurance portfolio from time to time, includes investments that are generated from the activities of Tiptree Capital and other alternative investments.

•
Tiptree Capital - Our non-insurance capital is typically allocated across four broad sectors where we have developed a track record of investment expertise - asset management, mortgage operations, real assets and credit-related investments. Today, Tiptree Capital consists of our investment in Invesque, asset management operations, mortgage operations, dry bulk shipping operations and other investments.

Our Executive Committee, which is composed of our Executive Chairman and CEO, is responsible for allocating capital between insurance operations, insurance investments and Tiptree Capital. In addition, the Executive Committee also uses its investment expertise to assist in the selection of alternative investments in our insurance company portfolio.

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.



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

As of December 31, 2018, Tiptree and its consolidated subsidiaries had 972 employees (of which 946 were full time employees), 27 of which were at Tiptree’s 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. Tiptree’s increase to book value as a result of the sale was $1.16 per share, inclusive of a pre-tax $10.7 million earnout gain related to Invesque’s December 2018 sale of specified properties formerly owned by Care.

On April 10, 2018, we completed a corporate reorganization that eliminated Tiptree’s dual class stock structure.

Effective January 1, 2019, we began re-positioning our asset management platform, by agreeing to invest $75 million to seed new investment funds in exchange for management control of and a profit participation in Tricadia.

In 2018, we returned $19.2 million to investors through $14.2 million of share buy-backs and $5.0 million of dividends paid. Through March 11, 2019, we repurchased 1.4 million shares for $9.1 million resulting in Common Shares outstanding of 34.5 million as of March 11, 2019.


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 impact GAAP earnings and/or the book value of our holdings in the short term.

Competition

Our businesses face competition, as discussed below. In addition, 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 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.”


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 programs and products, primarily in the United States, and is a leading provider of credit and asset protection products and administration services. Our programs are provided across a diverse range of products and services including 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.


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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.

Other Specialty Programs - We also offer programs focused on fronting and underwriting certain niche light 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.

Marketing and Distribution

We distribute our credit and warranty 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 specialty light commercial and personal 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 and warranty 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 many 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 niche light commercial and personal insurance program business, our reinsurers tend to be highly rated, well-capitalized professional third-party reinsurers.


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Our Competitive Strengths

Specialty Focus

We have a history of operating in niche insurance markets that require specialized knowledge, administrative capabilities 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 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.

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 and consistent service delivery are key drivers 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 broad investment expertise and a range of 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 might 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 that 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 $123.7 million in the year ended December 31, 2018, a $13.4 million or 12.2% increase from the year ended

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December 31, 2017. We believe the demand from consumers for products such as automobile, furniture, and electronics warranties and mobile device protection will continue to drive long-term growth opportunities for us.

International Markets

We are in the process of selectively expanding our product offerings to international markets such as Asia, Europe and Canada, where we believe profitable opportunities exist. In March 2018, we expanded into Europe with the establishment of a Malta insurance company. 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 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.

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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-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, 2018, our specialty insurance segment employed 393 employees of which 391 were on a full time basis.

Tiptree Capital

Tiptree allocates its non-insurance capital across a broad spectrum of businesses, assets and other investments which is comprised of our non-reportable operating segments and other businesses, which we refer to as Tiptree Capital. We manage Tiptree Capital on a total return basis, balancing current cash flow and long term value appreciation.

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.

Tiptree has historically focused its capital allocated to Tiptree Capital in four major sectors described below. However, we anticipate the nature, mix and type of investments could change over time.

•
Asset Management - Our asset management activities have historically specialized 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. Today, our asset management operations are conducted through TAMCO, an SEC-registered investment adviser. As of December 31, 2018, we managed $1.7 billion of fee earning AUM, including CLOs and a credit opportunity fund.


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•
Specialty Finance - Our Specialty Finance activities have been focused broadly within the sector, including commercial credit, consumer credit and mortgage origination. Historically, we have realized on our invested capital allocated to an asset backed commercial lender, and a jumbo mortgage originator. Today, we own Reliance, which originates conforming and government single family, residential mortgage loans, primarily sold to secondary market investors. Reliance also owns a small servicing portfolio, subserviced by a third party. Revenues are generated from gain on sale of loans, net interest income and loan fee income, and to a lesser extent, servicing fee income.

•
Real Assets - Historically, our capital in this sector has been allocated to real estate, primarily in commercial real estate and seniors housing. Today, we own 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, which we received as consideration when we sold our senior living business in February 2018. In addition, we have $50.1 million of capital allocated to dry bulk vessels managed by a third party.

•
Credit Investments - Historically, we have owned subordinated notes in the CLO’s we managed, and have engaged in select hedging strategies. Today, the credit investments we own and manage are held in our insurance portfolio in the form of the ownership of vertical slices of CLO liabilities and a leveraged credit opportunities fund.

Competitive Strengths

The depth and breadth of experience of our Executive Committee and management team enables us to source, structure, execute and manage the capital allocated to our non-insurance businesses and investments. In addition, in each of our non-insurance businesses, we benefit by partnering with experienced management teams and third party managers, which we have hired or chosen based on their depth of experience in their respective sectors.

Competition

In the sectors in which Tiptree Capital participates, the markets are highly competitive, There are a large number of competitors offering similar products and services, including many that operate on a international scale, and which are often affiliated with major multi-national companies, commercial financial institutions or investment banks. Many of these organizations have substantially more personnel and greater financial and commercial resources than we do. Some of these competitors have proprietary products and distribution capabilities that may make it more difficult for us to compete with them. Some competitors also have greater name recognition, have managed their businesses for longer periods of time, have greater experience over a wider range of products or have other competitive advantages.

Regulation

In the sectors in which Tiptree Capital participates, we are subject to extensive regulation by international, federal, state and local governmental authorities, including the SEC, CFPB, the Federal Trade Commission, the European Union, the UK and various state agencies. Our asset manager is 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.

Our dry bulk shipping business and the operation of our vessels are regulated under international conventions, classification societies, national, state and local laws and regulations in force in the jurisdictions in which our vessels operate, as well as in the country or countries of their registration, that mandate safety and environmental protection policies. Government regulation of vessels, particularly environmental regulations, have become more stringent and may require us to incur significant capital expenditures on our vessels. Our international operations and activities also expose us to risks associated with trade and economic sanctions, prohibitions or other restrictions imposed by the United States or other governments or organizations, including the United Nations, the European Union and its member countries. Under economic and trade sanctions laws, governments may seek to impose modifications to, prohibitions/restrictions on business practices and activities, and modifications to compliance programs, which may increase compliance costs, and, in the event of a violation, may subject us to fines and other penalties. In our international activities, we are subject to anti-corruption, anti-bribery, anti-money laundering and similar laws and regulations in various jurisdictions in which we conduct business, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act 2010. We operate in countries known to present heightened risks for corruption, and our dry bulk shipping and related operations requires us to interact with government officials, including port officials, harbor masters, maritime regulators, customs officials and pilots.


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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, 2018, Tiptree Capital’s combined operations had 552 employees of which 528 were on a full time basis.

AVAILABLE INFORMATION

We are required to file annual, quarterly and current reports, proxy statements and other information with the SEC.

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: [email protected].

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 equity securities, real estate, dry-bulk vessels, 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 December 31, 2018, we owned 16.6 million shares, or approximately 31%, 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, as of February 1, 2019, 50% of our Invesque shares are no longer subject to transfer restrictions. The transfer restrictions will lapse on another 25% of our Invesque shares on May 1, 2019 and all remaining transfer restrictions will lapse by August 1, 2019. 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. To the extent we determine to sell all or a portion of our Invesque shares, there can be no assurance that we will be able to do so on a timely basis or at acceptable prices.


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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:

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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;
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receipt of necessary consents, clearances and approvals in connection with the acquisition;
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diversion of management’s attention from other strategies and objectives;
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motivating, recruiting and retaining executives and key employees; and
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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 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

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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.

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,

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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. 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.

A significant decrease of the market values of our vessels could cause us to incur an impairment loss.

We review our vessels for impairment whenever events or changes in circumstances indicate that the carrying amount of the vessels may not be recoverable. Such indicators include declines in the fair market value of vessels, decreases in market charter rates, vessel sale and purchase considerations, fleet utilization, vessels’ useful lives, scrap values, regulatory changes in the drybulk shipping industry or changes in business plans or overall market conditions that may adversely affect cash flows. We may be required to record an impairment charge with respect to our vessels and any such impairment charge may have a material adverse effect on our business, financial condition and results of operations.

Charter hire rates for dry bulk vessels are volatile.

The dry bulk shipping industry is cyclical with high volatility in charter hire rates and profitability.  The degree of charter hire rate volatility among different types of dry bulk vessels has varied widely. Fluctuations in charter rates result from changes in the supply of and demand for vessel capacity and changes in the supply of and demand for the major commodities carried by vessels internationally. Demand is a function of world economic conditions and the consequent requirement for commodities, production and consumption patterns, as well as events, which interrupt production, trade routes, and consumption. The factors affecting the supply of and demand for vessels are outside of our control and are unpredictable. We may not be able to employ our vessels at charter rates as favorable to us as historical rates or operate our vessels profitably. Significant declines in dry bulk charter rates could adversely affect our revenues and profitability.

Our vessels may suffer damage and we may face unexpected drydocking costs.

If our vessels suffer damage, they may need to be repaired at a drydocking facility. The costs of drydock repairs are unpredictable and can be substantial. The loss of earnings while a vessel is being repaired and repositioned, as well as the actual cost of these repairs not covered by our insurance, would decrease our earnings and available cash. While we carry insurance on our vessels, that insurance may not be sufficient to cover all or any of the costs or losses for damages to our vessels and may have to pay drydocking costs not covered by our insurance.

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The operation of drybulk vessels has certain unique operational risks.

With a drybulk vessel, the cargo itself and its interaction with the vessel may create operational risks. By their nature, drybulk cargoes are often heavy, dense and easily shifted, and they may react badly to water exposure. In addition, drybulk vessels are often subjected to battering treatment during unloading operations with grabs, jackhammers (to pry encrusted cargoes out of the hold) and small bulldozers. This treatment may cause damage to the vessel. Vessels damaged due to treatment during unloading procedures may be more susceptible to breach while at sea. Breaches of a drybulk vessel’s hull may lead to the flooding of the vessel’s holds. If a drybulk vessel suffers flooding in its forward holds, the bulk cargo may become so dense and waterlogged that its pressure may buckle the vessel’s bulkheads, leading to the loss of a vessel. If we do not adequately maintain our vessels, we may be unable to prevent these events. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.

Acts of piracy on ocean-going vessels occur and may increase in frequency.

Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China Sea, the Indian Ocean and in the Gulf of Aden off the coast of Somalia. Although the frequency of sea piracy worldwide has generally decreased since 2013, sea piracy incidents continue to occur, particularly in the Gulf of Aden off the coast of Somalia and increasingly in the Sulu Sea and the Gulf of Guinea, with dry bulk vessels and tankers particularly vulnerable to such attacks. Acts of piracy could result in harm or danger to the crews that man our vessels.

If these piracy attacks occur in regions in which our vessels are deployed that insurers characterized as “war risk” zones or Joint War Committee “war and strikes” listed areas, premiums payable for such coverage could increase significantly and such insurance coverage may be more difficult to obtain. In addition, crew costs, including the employment of onboard security guards, could increase in such circumstances. Furthermore, while we believe the charterer remains liable for charter payments when a vessel is seized by pirates, the charterer may dispute this and withhold payment until the vessel is released. A charterer may also claim that a vessel seized by pirates was not “on-hire” for a certain number of days and is therefore entitled to cancel the charter. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on us. In addition, any detention hijacking as a result of an act of piracy against our vessels, or an increase in cost, or unavailability, of insurance for our vessels, could have a material adverse impact on our business, financial condition and earnings.

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

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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 current investments are, and future investments may be, 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:

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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;
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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;
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our partners may have competing interests in our markets that could create conflict of interest issues;
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any sale or other disposition of our interest in such a venture may require consents which we may not be able to obtain;
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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
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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

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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:

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our representations and warranties concerning loan quality and loan circumstances are inaccurate, including representations concerning the licensing of a mortgage broker;
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we fail to secure adequate mortgage insurance within a certain period after closing;
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a mortgage insurance provider denies coverage; or
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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,

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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 may leverage certain of our assets and a decline in the fair value of such assets may adversely affect our financial condition and results of operations.

We leverage certain of 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. 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 may pursue risk mitigation and hedging strategies to seek to reduce our exposure to losses from adverse credit events, interest rate changes, market risk and other risks. These strategies may include short Treasury positions, interest rate swaps, foreign exchange derivatives, credit derivatives, freight forward agreements, fuel oil swaps 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.

19

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 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.

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

20

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

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

Maryland law provides that “control shares” of a corporation acquired in a “control share acquisition” will have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter under the Maryland Control Share Acquisition Act. “Control shares” means voting shares of stock that, if aggregated with all other shares of stock owned by the acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power: one-tenth or more but less than one-third; one-third or more but less than a majority; or a majority or more of all voting power. A “control share acquisition” means the acquisition of issued and outstanding control shares, subject to certain exceptions.

Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which such stockholder became an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities.

Our bylaws contain a provision exempting from the control share statute any and all acquisitions by any person of our shares of stock. Our board of directors has also adopted a resolution which provides that any business combination between us and any other person is exempted from the provisions of the business combination statute, provided that the business combination is first approved by the board of directors. However, our board of directors may amend or eliminate this provision in our bylaws regarding the control share statute or amend or repeal this resolution regarding the business combination statute. If our board takes such action in the future, the control share and business combination statutes may prevent or discourage others from trying to acquire control of us and increase the difficulty of consummating any offer, including potential acquisitions that might involve a premium price for our Common Stock or otherwise be in the best interest of our stockholders.

Our holding company structure with multiple lines of business, may adversely impact the market price of our 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 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,

21

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 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.

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 2017, the CFPB issued rules under its unfair, deceptive and abusive acts and practices rulemaking authority relating to consumer installment loans, among other things. Such CFPB rules regarding consumer installment loans could adversely impact our insurance business’s volume of insurance products and services and cost structure. 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.

22


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.
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.

Our drybulk shipping business and the operation of our vessels are regulated under international conventions, classification societies, national, state and local laws and regulations in force in the jurisdictions in which our vessels operate, as well as in the country or countries of their registration, that mandate safety and environmental protection policies. Government regulation of vessels, particularly environmental regulations, have become more stringent and may require us to incur significant capital expenditures on our vessels.

For example, various jurisdictions have regulated management of ballast waters to prevent the introduction of non-indigenous species that are considered invasive which requires us to make changes to the ballast water management plans we currently have in place and to install new equipment on board our vessels. Various jurisdictions have also regulated or are considering the further regulation of greenhouse gases from vessels and emissions of sulfur and nitrogen oxides which may increase the cost of new vessels and require retrofitting equipment on existing vessels.

These requirements can also affect the resale prices or useful lives of our vessels or require reductions in cargo capacity, ship modifications or operational changes or restrictions. Failure to comply with these requirements could lead to decreased availability of, or more costly insurance coverage for environmental matters or result in the denial of access to certain jurisdictional waters or ports, or detention in certain ports. Under local, national and foreign laws, as well as international treaties and conventions, we could incur material liabilities, including cleanup obligations and claims for natural resource, personal injury and property damages in the event that there is a release of petroleum or other hazardous materials from our vessels or otherwise in connection with our operations. Violations of, or liabilities under, environmental regulations can result in substantial penalties, fines and other sanctions, including, in certain instances, seizure or detention of our vessels. In addition, we are subject to the risk that we, our affiliated entities, or our or their respective officers, directors, shore employees, crew on board and agents may take actions determined to be in violation of such environmental regulations and laws and our environmental policies. Any such actual or alleged environmental laws regulations and policies violation, under negligence, willful misconduct or fault, could result in substantial fines, civil and/or criminal penalties or curtailment of operations in certain jurisdictions, and might adversely affect our business, results of operations or financial condition. In addition, actual or alleged violations could damage our reputation and ability to do business. Furthermore, detecting, investigating

23

and resolving actual or alleged violations is expensive and can consume significant time and attention of our senior management. Events of this nature could have a material adverse effect on our business, financial condition and results of operations.

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.

Our international activities increase the compliance risks associated with economic and trade sanctions imposed by the United States, the European Union and other jurisdictions.

Our international operations and activities expose us to risks associated with trade and economic sanctions, prohibitions or other restrictions imposed by the United States or other governments or organizations, including the United Nations, the European Union and its member countries. Under economic and trade sanctions laws, governments may seek to impose modifications to, prohibitions/restrictions on business practices and activities, and modifications to compliance programs, which may increase compliance costs, and, in the event of a violation, may subject us to fines and other penalties.

We could be materially adversely affected by violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and anti-corruption laws in other applicable jurisdictions.

We are subject to anti-corruption, anti-bribery, anti-money laundering and similar laws and regulations in various jurisdictions in which we conduct business, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act 2010. We operate in countries known to present heightened risks for corruption and our dry bulk shipping and related operations requires us to interact with government officials, including port officials, harbor masters, maritime regulators, customs officials and pilots.

Non-compliance with anti-corruption, anti-bribery or anti-money laundering laws could subject us to whistleblower complaints, adverse media coverage, investigations, and severe administrative, civil and criminal sanctions, collateral consequences, remedial measures and legal expenses, all of which could materially and adversely affect our business, results of operations, financial condition and reputation.

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.

24


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.

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, 2018, the Company owned 45 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, 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.

25


PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information
Tiptree’s Common Stock has traded on the Nasdaq Capital Market under the ticker symbol “TIPT” since August 9, 2013.

Holders
As of December 31, 2018, there were 72 Common Stockholders of record. This number does not include beneficial owners whose shares are held by nominees in street name.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Share repurchase activity for the three months ended December 31, 2018 was as follows:
Period
Purchaser
Total
Number of
Shares
Purchased(1)
Average
Price
Paid Per
Share
Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
Approximate
Dollar Value of
Shares That
May Yet Be
Purchased
Under the
Plans or
Programs(1)(2)
October 1, 2018 to October 31, 2018
Tiptree Inc.
—

$
—

—

$
—

November 1, 2018 to November 30, 2018
Tiptree Inc.
—

$
—

—

$
—

December 1, 2018 to December 31, 2018: Open Market Purchases
Tiptree Inc.
66,658

$
5.46

66,658

$
19,636,118

 
Total
66,658

$
5.46

66,658

$
19,636,118


(1)
On December 7, 2018, Tiptree engaged a broker in connection with a share repurchase program for the repurchase of up to $10 million of its outstanding Common Stock. The Company expects the share purchases to be made from time to time in the open market or through privately negotiated transactions, or otherwise, subject to applicable laws and regulations.
(2)
On December 7, 2018, the Board of Directors of Tiptree separately authorized Tiptree to make block repurchases of up to $10 million in the aggregate from time to time in the open market or through privately negotiated transactions, or otherwise, subject to Tiptree’s Executive Committee’s discretion. As of December 31, 2018, Tiptree has $10 million remaining on this authority.



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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, 2018 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)
 
2018(1)
 
2017(1)
 
2016(1)
 
2015(1)(3)
 
2014(1)(2)(3)
Total revenues
 
$
625,826

 
$
581,798

 
$
506,423

 
$
392,331

 
$
51,032

Total expenses
 
645,622

 
595,585

 
477,537

 
388,346

 
72,940

Net income (loss) attributable to consolidated CLOs
 
—

 
10,457

 
20,254

 
(6,889
)
 
19,525

Income (loss) before taxes from continuing operations
 
(19,796
)
 
(3,330
)
 
49,140

 
(2,904
)
 
(2,383
)
Less: provision (benefit) for income taxes
 
(5,909
)
 
(12,562
)
 
12,515

 
(753
)
 
5,317

Net income (loss) from continuing operations
 
(13,887
)
 
9,232

 
36,625

 
(2,151
)
 
(7,700
)
Net income (loss) from discontinued operations
 
43,770

 
(3,998
)
 
(4,287
)
 
10,953

 
12,284

Net income (loss) before non-controlling interests
 
29,883

 
5,234

 
32,338

 
8,802

 
4,584

Less: net income (loss) attributable to non-controlling interests
 
5,950

 
1,630

 
7,018

 
3,023

 
6,294

Net income (loss) attributable to Common Stockholders
 
$
23,933

 
$
3,604

 
$
25,320

 
$
5,779

 
$
(1,710
)
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per Common Share:
 
 
 
 
 
 
 
 
 
 
Basic, continuing operations, net
 
$
(0.38
)
 
$
0.22

 
$
0.88

 
$
(0.01
)
 
$
(0.58
)
Basic, discontinued operations, net
 
1.07

 
(0.10
)
 
(0.09
)
 
0.18

 
0.48

Basic earnings per share
 
0.69

 
0.12

 
0.79

 
0.17

 
(0.10
)
 
 
 
 
 
 
 
 
 
 
 
Diluted, continuing operations, net
 
(0.38
)
 
0.21

 
0.86

 
(0.01
)
 
(0.58
)
Diluted, discontinued operations, net
 
1.07

 
(0.10
)
 
(0.08
)
 
0.18

 
0.48

Diluted earnings per share
 
$
0.69

 
$
0.11

 
$
0.78

 
$
0.17

 
$
(0.10
)
 
 
 
 
 
 
 
 
 
 
 
Weighted average number of Common Shares:
 
 
 
 
 
 
 
 
 
 
Basic
 
34,715,852

 
29,134,190

 
31,721,449

 
33,202,681

 
16,771,980

Diluted
 
34,715,852

 
37,306,632

 
31,766,674

 
33,202,681

 
16,771,980

 
 
 
 
 
 
 
 
 
 
 
Cash dividends paid per common share
 
$
0.135

 
$
0.12

 
$
0.10

 
$
0.10

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31,
Consolidated Balance Sheet Data: (in thousands)
 
2018
 
2017
 
2016
 
2015
 
2014
Total assets (4)
 
$
1,864,918

 
$
1,989,742

 
$
2,890,050

 
$
2,494,970

 
$
8,202,447

Debt, net (5)
 
354,083

 
346,081

 
554,870

 
502,255

 
254,072

Total stockholders’ equity
 
$
399,259

 
$
396,774

 
$
390,144

 
$
397,694

 
$
401,621

Total Tiptree Inc. stockholders’ equity
 
387,101

 
300,077

 
293,431

 
312,840

 
284,462


(1)
Care revenues of $6.5 million, $76.0 million, $60.7 million, $46.1 million, and $29.3 million and net income (loss) of $43.8 million, $(4.0) million, $(4.3) million, $(11.7) million, and $4.3 million for the years ended December 31, 2018, 2017, 2016, 2015, and 2014, 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)
Philadelphia Financial Group, Inc. 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)
Total assets on December 31, 2016, 2015, and 2014 include $989.5 million, $728.8 million, and $1,978.1 million of assets held by consolidated CLO entities, respectively.
(5)
Excludes debt of discontinued operations.


27

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 capabilities. Our principal operating subsidiary is a leading provider of specialty insurance products and related services. We also allocate capital across a broad spectrum of businesses, assets and other investments, which we refer to as Tiptree Capital. When considering capital allocation decisions, we take a diversified approach with a longer-term investment horizon. We evaluate our performance primarily by the comparison of our shareholder’s long-term total return on capital, as measured by Adjusted EBITDA, Operating EBITDA and growth in book value per share plus dividends.

During 2018 and early 2019, we executed on several strategic initiatives:

Overall:
•
Delivered total annual return of 9.6% for 2018, as measured by growth in book value per share plus dividends paid.
•
On April 10, 2018, we completed a corporate reorganization that eliminated Tiptree’s dual class stock structure.
•
In 2018, we returned $19.2 million to investors through $14.2 million of share buy-backs and $5.0 million of dividends paid.
•
As of March 11, 2019, the Company purchased and retired 1,472,730 shares of its Common Stock for $9.1 million through open market purchases and block purchases.

Insurance:
•
Specialty Insurance continued to grow as gross written premiums for 2018 were $868.1 million, up 13.0%. Net written premiums were $466.8 million, up 11.7%, driven by growth in credit and other specialty products.
•
On March 28, 2018, we expanded into Europe with the creation of Fortegra Europe Insurance Company Limited (“FEIC”).

Tiptree Capital:
•
On February 1, 2018, we sold our senior living assets to Invesque in exchange for a net 16.6 million shares of Invesque common stock. Tiptree’s increase to book value was $1.16 per share including a pre-tax $10.7 million earnout gain recognized in December 2018.
•
Consistent with our total return objectives, throughout 2018 we invested $50.0 million in shipping sector at what we believe is a favorable point in the cycle.
•
In 2019, began re-positioning our asset management platform, by agreeing to invest $75 million to seed new investment funds in exchange for management control of and a profit participation in Tricadia.

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”. Generally, our businesses are positively affected by a healthy U.S. consumer, stable to gradually rising interest rates, stable markets and business conditions, and global growth and trade flows. Conversely, rising unemployment, volatile markets, rapidly rising interest rates, changing regulatory requirements and slowing business conditions can have a material adverse effect on our results of operations or financial condition.

Our specialty insurance business generally focuses on products which have low severity but high frequency loss experiences and are short-duration. Our insurance business has historically generated significant fee based revenues. In general, the types of products we offer tend to have limited aggregation risk, and thus, limited exposure to 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.


28

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, real estate and CLOs. 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, both as part of our insurance company investments and separately in Tiptree Capital, as of February 1, 2018, common shares of Invesque 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.

The shipping industry is highly competitive and fragmented. Demand is a function of world economic conditions and the consequent requirement for commodities, production and consumption patterns, as well as events, which interrupt production, trade routes, and consumption. The shipping industry is cyclical with high volatility in charter hire rates and profitability. General market conditions, along with company and industry specific factors, can impact the fair value of our vessels and their operating results.

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.

RESULTS OF OPERATIONS
The following is a summary of our consolidated financial results for the year ended December 31, 2018, 2017 and 2016. In addition to GAAP results, management uses the Non-GAAP measures Operating EBITDA, Adjusted EBITDA and book value per share as measurements of operating performance. Management believes these measures provide supplemental information useful to investors as they are frequently used by the financial community to analyze financial performance, debt service and comparison among companies. Management uses Operating EBITDA as part of its capital allocation process and to assess comparative returns on invested capital. Adjusted EBITDA is also used in determining incentive compensation for the Company’s executive officers. The Company defines Adjusted EBITDA as GAAP net income of the Company adjusted to add (i) corporate interest expense, consolidated income taxes and consolidated depreciation and amortization expense, (ii) adjust for the effect of purchase accounting, (iii) adjust for non-cash fair value adjustments, and (iv) any significant non-recurring expenses. Operating EBITDA represents Adjusted EBITDA plus stock based compensation expense, less realized and unrealized gains and losses and less third party non-controlling interests. Operating EBITDA and Adjusted EBITDA are not measurements of financial performance or liquidity under GAAP and should not be considered as an alternative or substitute for GAAP net income.

Selected Key Metrics
($ in thousands)
Year Ended December 31,
GAAP:
2018

2017

2016
Total revenues
$
625,826

 
$
581,798

 
$
506,423

Net income (loss) before non-controlling interests
29,883

 
5,234

 
32,338

Net income (loss) attributable to Common Stockholders
23,933

 
3,604

 
25,320

Diluted earnings per share
0.69

 
0.11

 
0.78

Cash dividends paid per common share
0.135

 
0.12

 
0.10

 
 
 
 
 
 
Non-GAAP: (1)
 
 
 
 
 
Operating EBITDA
54,943

 
60,872

 
60,547

Adjusted EBITDA
28,759

 
37,988

 
78,916

Book value per share (2)
10.79

 
9.97

 
10.14

(1) For further information relating to the Company’s Operating EBITDA, Adjusted EBITDA and book value per share, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”
(2) For periods prior to April 10, 2018, book value per share assumed full exchange of the limited partners units of TFP for Common Stock.

Revenues

For the year ended December 31, 2018, revenues were $625.8 million, which increased $44.0 million, or 7.6%, over the prior year period. The increase was driven by growth in earned premiums and service and administrative fees. Earned premiums were $427.8 million for the year ended December 31, 2018, up from $371.7 million in the comparable 2017 period driven by growth in net written

29

premiums. The combination of unearned premiums and deferred revenues on the balance sheet grew by $115.0 million, or 20.5%, from December 31, 2017 to December 31, 2018 as a result of an increase in credit protection and other specialty programs written premiums.

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. 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%.

Income (loss) before taxes (from continuing and discontinued operations)

The table below highlights key drivers impacting our consolidated results on a pre-tax basis. Many of our investments are carried at fair value and marked to market through unrealized gains and losses. As a result, we expect our earnings relating to these investments 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. On February 1, 2018, we sold our senior living operations to Invesque in exchange for a net of 16.6 million shares of Invesque common stock which resulted in a pretax gain on sale of $56.9 million. During 2017, we made a strategic decision to decrease our overall exposure to CLO subordinated notes, which resulted in deconsolidation of the CLOs we manage and decreased our earnings from CLO distributions when comparing the year ended December 31, 2018 versus the prior year periods.
($ in thousands)
Year Ended December 31,

2018

2017

2016
Net realized and unrealized gains (losses)(1)
$
(34,817
)

$
(18,592
)

$
18,133

Discontinued operations (Care)(2)
$
57,484


$
(6,222
)

$
(5,824
)
Tiptree Capital - credit investments
$
(628
)

$
10,731


$
20,470

(1) Excludes Mortgage realized and unrealized gains and losses - Performing and NPLs. Includes $20.7 million of unrealized losses attributable to Invesque shares for the year ended December 31, 2018 from the date of the sale (February 1, 2018).
(2) Includes Care for the year ended December 31, 2018, 2017 and 2016. Includes $56.9 million pre-tax gain on sale of Care in 2018.

Net Income (Loss) before non-controlling interests

For the year ended December 31, 2018, net income before non-controlling interests was $29.9 million compared to income of $5.2 million in the 2017 period, an increase of $24.7 million. The increase was primarily driven by improved insurance operating performance and $43.8 million of income from discontinued operations, including the net gain on sale of Care. These factors were partially offset by unrealized mark-to-market losses on Invesque common shares and 2017 results contained a one-time net tax benefit of $15.2 million from 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%.

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 reduced our exposure to CLO subordinated notes throughout 2017 which resulted in less distributions compared to 2016. Those factors were partially offset by decreases in corporate expenses and a net tax benefit of $15.2 million described above.

Net Income (Loss) Available to Common Stockholders

For the year ended December 31, 2018, net income available to Common Stockholders was $23.9 million, an increase of $20.3 million from the prior year period. For the year ended December 31, 2017, net income available to Common Stockholders was $3.6 million, a decrease of $21.7 million from the prior year period. The key drivers of net income available to Common Stockholders were the same factors which impacted the net income before non-controlling interests.

Operating and Adjusted EBITDA - Non-GAAP

Operating EBITDA for the year ended December 31, 2018 was $54.9 million compared to $60.9 million for the 2017 period, a decrease of $6.0 million, or 9.7%. Operating EBITDA for the year ended December 31, 2017 was $60.9 million an increase of $0.3 million, or 0.1%. The key drivers of the change for both periods were driven by increased Operating EBITDA from specialty insurance operations, which were more than offset by lower distributions on credit investments within Tiptree Capital.


30

Adjusted EBITDA includes the impact of realized and unrealized gains and losses, stock based compensation and non-controlling interests. Adjusted EBITDA for the year ended December 31, 2018 was $28.8 million compared to $38.0 million for the 2017 period driven by improved specialty insurance operations, which was offset by unrealized mark-to-market on Invesque common shares and lower investment income and realized gains on credit related investments. 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 from 2016 to 2017 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 in 2017. See “— Non-GAAP Reconciliations” for a reconciliation to GAAP net income.

Book Value per share - Non-GAAP

Total stockholders’ equity was $399.3 million as of December 31, 2018 compared to $396.8 million as of December 31, 2017, primarily driven by 2018 net income, net of share repurchases and dividends paid. Book value per share for the period ended December 31, 2018 was $10.79, an increase from book value per share, as exchanged, of $9.97 as of December 31, 2017. The key drivers of the period-over-period impact were 2018 earnings per share and the purchase of 2.2 million shares at an average 39% discount to book value. Those increases were partially offset by dividends paid of $0.135 per share and officer compensation share issuances. In 2018, Tiptree returned $19.2 million to shareholders through share repurchases and dividends paid.

Total stockholders’ equity was $396.8 million as of December 31, 2017 compared to $390.1 million as of December 31, 2016. 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 dividends paid of $0.12, officer 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. In 2017, Tiptree returned $11.8 million to shareholders through share repurchases and dividends paid.

Results by Segment
Tiptree is a holding company that combines insurance operations with investment management capabilities. Our principal operating subsidiary is a leading provider of specialty insurance products and related services. We also allocate capital across a broad spectrum of businesses, assets and other investments, which we refer to as Tiptree Capital. As such, we classify our business into one reportable segment, specialty insurance, with the remainder of our non-insurance operations aggregated into Tiptree Capital. For the year ended December 31, 2018, Mortgage and Asset Management, which previously were reportable segments, no longer meet the quantitative threshold for disclosure. Those are now reported in Other, which we refer to as Tiptree Capital. Prior year segments have been conformed to the current year presentation. Corporate activities include holding company interest expense, employee compensation and benefits, and other expenses. The following table presents the components of total pre-tax income including continuing and discontinued operations.

Pre-tax Income
($ in thousands)
Year Ended December 31,

2018

2017

2016
Specialty Insurance
$
18,560


$
5,404


$
46,804

Tiptree Capital
(7,805
)

20,336


37,142

Corporate
(30,551
)

(29,070
)

(34,806
)
Pre-tax income (loss) from continuing operations
$
(19,796
)

$
(3,330
)

$
49,140

Pre-tax income (loss) from discontinued operations (1)
$
57,484


$
(6,222
)

$
(5,824
)
(1)
Includes Care for the year ended December 31, 2018, 2017 and 2016. Includes $56.9 million pre-tax gain on sale of Care in 2018.

Invested Capital, Total Capital and Operating 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 equity 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 tables present the components of Invested Capital, Total Capital, Operating EBITDA and Adjusted EBITDA.

31


As of December 31,
($ in thousands)
Invested Capital
 
Total Capital

2018

2017

2016

2018

2017

2016
Specialty Insurance
$
296,346


$
281,317


$
269,690


$
456,346


$
441,317


$
410,190

Tiptree Capital
182,033


161,825


215,262


182,033


161,825


215,262

Corporate
(43,889
)

9,465


(58,108
)

28,201


37,965


393

Total Tiptree
$
434,490


$
452,607


$
426,844


$
666,580


$
641,107


$
625,845


($ in thousands)
Year Ended December 31,

2018

2017

2016
Specialty Insurance
$
64,536


$
53,310


$
49,334

Tiptree Capital (2)
13,726


29,792


41,509

Corporate
(23,319
)

(22,230
)

(30,296
)
Operating EBITDA
$
54,943


$
60,872


$
60,547

Stock-based compensation expense
(6,657
)

(6,559
)

(2,584
)
Vessel depreciation, net of capital expenditures
(898
)

—


—

Realized and unrealized gains (losses) (3)
(18,629
)

(18,592
)

18,133

Third party non-controlling interests (4)
—


2,266


2,820

Adjusted EBITDA
$
28,759


$
37,987


$
78,916

(1)  
For further information relating to the Company’s Invested Capital, Total Capital, Operating EBITDA 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—(3) Dispositions, Assets Held for Sale and Discontinued Operations.”
(3)
Excludes Mortgage realized and unrealized gains and losses - Performing and NPLs.
(4)
Removes the Operating EBITDA associated with third party non-controlling interests. Does not remove the non-controlling interests related to employee based shares.

Specialty Insurance

Our principal operating subsidiary is a provider of specialty insurance products and related services, including credit protection insurance, warranty products, and insurance programs which underwrite niche personal and commercial lines of insurance. We also offer fee-based 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 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 Operating EBITDA. The investment portfolio income consists of investment income, gains and losses and is measured by net portfolio income.

The following tables present the specialty insurance segment results for the year ended December 31, 2018, 2017 and 2016.


32

Operating Results
($ in thousands)
Year Ended December 31,
 
2018

2017

2016
Gross written premiums
$
868,051


$
768,272


$
708,287

Net written premiums
466,820


418,022


337,170

Revenues:
 
 
 
 
 
Net earned premiums
$
427,837

 
$
371,700

 
$
229,436

Service and administrative fees
102,315

 
95,160

 
109,348

Ceding commissions
9,651

 
8,770

 
24,784

Net investment income
19,179

 
16,286


12,981

Net realized and unrealized gains (losses)
(11,664
)
 
(16,503
)
 
14,762

Other income
2,554

 
3,552

 
2,859

Total revenues
$
549,872

 
$
478,965

 
$
394,170

Expenses:
 
 
 
 

Policy and contract benefits
152,095

 
123,959

 
106,784

Commission expense
262,460

 
241,835

 
147,253

Employee compensation and benefits
45,838

 
41,300

 
37,937

Interest expense
18,201

 
15,072

 
9,244

Depreciation and amortization expenses
10,778

 
12,799

 
13,184

Other expenses
41,940

 
38,596

 
32,964

Total expenses
$
531,312

 
$
473,561

 
$
347,366

Pre-tax income (loss)
$
18,560

 
$
5,404

 
$
46,804


Results

Our specialty insurance operations are currently expanding product lines in an effort to increase written premiums, and commensurately grow the insurance portfolio. 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 2018 versus 2017 results. The growth in written premiums, combined with higher retention in select products, has resulted in an increase of unearned premiums and deferred revenue on the balance sheet of 20.5% from $560.2 million as of December 31, 2017 to $675.2 million as of December 31, 2018.

Pre-tax income was $18.6 million for the year ended December 31, 2018, an increase of $13.2 million, over the prior year period. The primary drivers of the increase were lower net realized and unrealized losses of $11.7 million in the 2018 period versus $16.5 million of losses in the 2017 period primarily related to equities and loans held at fair value in the portfolio. Insurance operations results also improved versus the prior year period, driven primarily by increased underwriting margin of $14.4 million, which was partially offset by increased other expenses of $3.3 million primarily associated with increased premium taxes and pursuing acquisition opportunities. Interest expense increased by $3.1 million from the prior year period, primarily associated with the issuance of the Junior Subordinated Notes in late 2017.

Pre-tax income was $5.4 million for the year ended December 31, 2017, a decrease of $41.4 million, over the prior year period. The primary drivers of the decline were 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.

Revenues

Revenues are generated by the sale of the following products: credit protection, warranty, other specialty 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. Other specialty programs are primarily personal and commercial lines and other property-casualty products.

For the year ended December 31, 2018, total revenues were $549.9 million, up $70.9 million, or 14.8%, primarily driven by an increase in earned premiums of $56.1 million and increases in service and administrative fees of $7.2 million. The increase in earned premiums

33

was driven by growth in credit, warranty and other specialty product lines. For the year ended December 31, 2018, revenues on the investment portfolio contributed income of $7.5 million compared to losses of $0.2 million in the 2017 period, an increase of $7.7 million. The improved performance was driven by a combination of higher net investment income of $2.9 million and lower net realized and unrealized investment losses of $4.8 million. See “—Specialty Insurance Investment Portfolio” for further discussion of the investment results.

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. 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. 

Expenses

Total expenses include policy and contract benefits, commissions expense and operating expenses. For the year ended December 31, 2018, total expenses were $531.3 million compared to $473.6 million in the 2017 period. The primary drivers of the increase were policy and contract benefits and commission expense as net written premiums increased over the 2017 period.

There are two types of expenses for claims under insurance and warranty service contracts included in policy and contract benefits which are 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 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 the volume of underwritten contracts, 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, 2018, policy and contract benefits were $152.1 million, up $28.1 million, primarily as a result of growth in earned premiums. Losses as a percentage of underwriting revenues increased over the prior year period which was driven by specialty programs, and offset by reduced commissions paid to our distribution partners.

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 the year ended December 31, 2018 was $262.5 million compared to $241.8 million in the 2017 period. The primary drivers of the increase were the commission expense associated with the growth in written premiums and higher retention rate on our credit protection and warranty products.

Operating expenses include employee compensation and benefits, interest expense, depreciation and amortization expenses and other expenses. For the year ended December 31, 2018, total employee compensation and benefits were $45.8 million, up $4.5 million, driven by increased compensation associated with warranty and program products. Interest expense of $18.2 million in 2017 increased by $3.1 million versus the prior year, primarily from interest expense related to the Junior Subordinated Notes partially offset by reduced asset based borrowings on certain investments within the investment portfolio. Other expenses for the year ended December 31, 2018 were $41.9 million, up $3.3 million from 2017 primarily from a combination of expenses of pursuing acquisition opportunities, and premium taxes, the latter of which increased consistent with growth in written premiums. 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.

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. 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. 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.

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

34

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.

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 written during a reporting period. Net written premiums are gross written premiums less that portion of premiums ceded to third-party reinsurers or PORCs. The amount ceded is based on 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.

Written Premium Metrics
 
Year Ended December 31,
 
Gross Written Premiums
 
Net Written Premiums
Insurance Products:
2018
 
2017
 
2016
 
2018
 
2017
 
2016
Credit protection
$
557,926

 
$
513,681

 
$
488,183

 
$
354,812

 
$
328,938

 
$
257,600

Warranty
123,748

 
110,309

 
62,433

 
61,016

 
60,330

 
46,076

Other specialty programs
186,377

 
144,253

 
157,649

 
50,992

 
28,754

 
33,494

Services and other
—

 
29

 
22

 
—

 
—

 
—

Total
$
868,051


$
768,272


$
708,287

 
$
466,820


$
418,022


$
337,170

Total gross written premiums for the year ended December 31, 2018 were $868.1 million, which represented an increase of $99.8 million, or 13.0%, from the prior year period. The amount of business retained was 53.8%, down slightly from 54.5% in the prior year period. Total net premiums written for 2017 were $466.8 million, up $48.8 million, or 11.7%, driven primarily by growth in credit and specialty programs. We believe our warranty service contracts and light commercial programs provide opportunity for growth through expanded product offerings, new clients and geographic expansion.

Total gross written premiums for the year ended December 31, 2017 were $768.3 million, which represented an increase of $60.0 million, or 8.5%, from the prior year period. The amount of business retained was 54.4%, up from 47.6% in the prior year period. Total net premiums written for 2017 were $418.0 million, up $80.9 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 that were ceded to third party reinsurers prior to 2016. 

Product Underwriting Margin - Non-GAAP

The following table presents product specific revenue and expenses within the specialty insurance segment. We generally limit the underwriting risk we assume using 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 and expenses are often impacted by the PORCs and distribution partners choice as to whether to retain risk, specifically service and administration expenses and ceding commissions, both components of revenue, and 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 - Underwriting Margin.


35

Underwriting Revenues and Underwriting Margin - Non-GAAP(1)
 
Year Ended December 31,
 
Underwriting Revenues
 
Underwriting Margin
Insurance products:
2018
 
2017
 
2016
 
2018

2017

2016
Credit protection
$
384,372

 
$
352,760

 
$
231,938

 
$
77,024

 
$
67,356

 
$
64,769

Warranty(2)
89,597

 
79,628

 
87,928

 
28,570

 
25,710

 
28,504

Other specialty programs
59,674

 
36,880

 
42,001

 
13,086

 
9,841

 
9,095

Services and other(3)
8,714

 
9,914

 
10,612

 
9,122

 
10,481

 
10,022

Total
$
542,357

 
$
479,182

 
$
372,479

 
$
127,802

 
$
113,388

 
$
112,390

(1) For further information relating to the Company’s underwriting margin, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”
(2) For the year ended December 31, 2016, Warranty underwriting margin was higher by $4.7 million due to the impacts of VOBA purchase accounting.
(3) For the year ended December 31, 2018 and 2017, Services and other underwriting margin was higher by $0.9 million and $1.5 million due to the impacts of VOBA purchase accounting.

Underwriting margin for the year ended December 31, 2018 was $127.8 million, up from $113.4 million in 2017. Credit protection underwriting margin was $77.0 million, an increase from 2017 of $9.7 million, or 14.4%. Credit protection products continue to provide opportunities for steady growth through a combination of expanded product offerings and new clients. Underwriting margin for warranty products was $28.6 million for the 2018 period, up $2.9 million, or 11.1%, from 2017. The improvement was driven primarily by growth in furniture, appliances, and auto warranty businesses. Specialty programs underwriting margin for the 2018 period was $13.1 million, up 33.0% from 2017, as new programs take hold. Services and other contributed $9.1 million in 2018, down $1.3 million from 2017 as certain business processing services continue to run-off. We believe our warranty service contracts and light commercial programs provide opportunity for growth through expanded product offerings, new clients and geographic expansion.

Underwriting margin for the year ended December 31, 2017 was $113.4 million, up from $112.4 million in 2016. Credit protection adjusted underwriting margin was $67.4 million, an increase from 2016 results by $2.6 million, or 4.0%. Underwriting margin for warranty products was $25.7 million for 2017, down $0.8 million, from 2016 driven by $5.0 million of VOBA purchase accounting impacts in the 2016 period. The period-over-period declines experienced from our mobile protection products slowed, and was more than offset by growth in furniture, appliances, and auto warranty business. Specialty programs underwriting margin for 2017 was $9.8 million, up 8.2% from 2016, as certain non-standard auto programs were exited over the last year. Services and other contributed $10.5 million in 2017.

Invested Capital, Total Capital, Operating 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. The below table outlines the insurance operating ratios, capital invested and the drivers of Operating EBITDA split between underwriting and investments as management evaluates the return on the investment portfolio separately from the returns from underwriting activities.

Invested Capital, Total Capital, Operating EBITDA and Operating Ratios - Non-GAAP(1) 
($ in thousands)
Year Ended December 31,
 
2018

2017

2016
Invested Capital(1)
$
296,346

 
$
281,317

 
$
269,690

Total Capital(1)
$
456,346

 
$
441,317

 
$
410,190

 
 
 
 
 
 
Operating EBITDA drivers:
 
 
 
 
 
Underwriting
$
45,904

 
$
37,737

 
$
37,046

Investments
18,632

 
15,573

 
12,288

Specialty Insurance Operating EBITDA(1)
$
64,536

 
$
53,310

 
$
49,334

Insurance operating ratios:
 
 
 
 
 
Combined ratio
92.5
%

92.9
%

87.9
%
(1) For further information relating to the Company’s Operating EBITDA, Invested and Total Capital, adjusted combined ratio, and Net Portfolio Income (Loss), including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”


36

The combined ratio was 92.5% for the year ended December 31, 2018, compared to 92.9% for the prior year period. The improvement was a combination of improved product underwriting margins offset partially by expenses associated with the pursuit of acquisitions and stock-based compensation expense in the 2018 period. The combined ratio from 2015-2017 averaged 90.3%. The increase from our three-year average in recent quarters has been driven primarily by our investment in new products and geographies which we believe will result in premium growth in future periods.

For the year ended December 31, 2018, Underwriting Operating EBITDA was $45.9 million, an increase of $8.2 million from the respective prior year period, driven by the same factors discussed above under “Results.” Operating EBITDA from investments was $18.6 million, an increase of $3.1 million over 2017. 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

Our investment portfolio is 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 held at fair value 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)
As of December 31,

2018
 
2017
 
2016
Cash and cash equivalents (1)
$
53,333

 
$
53,904

 
$
31,723

Available for sale securities, at fair value
283,563

 
182,448

 
146,171

Equity securities
29,425

 
25,536

 
48,612

Loans, at fair value (2)
78,440

 
83,869

 
103,937

Real estate, net
10,019

 
35,282

 
23,579

Other investments
8,507

 
15,438

 
3,957

Net investments
$
463,287

 
$
396,477

 
$
357,979

 
 
 
 
 
 
(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,
 
2018
 
2017
 
2016
Net investment income
$
19,179

 
$
16,286

 
$
12,981

Realized gains (losses)
5,600


5,815

 
4,720

Unrealized gains (losses)
(17,264
)

(22,318
)
 
10,042

Interest expense
(4,696
)

(6,625
)
 
(3,155
)
Net portfolio income (loss)
$
2,819


$
(6,842
)
 
$
24,588

Average Annualized Yield % (1)
0.7
%

(1.9
)%
 
8.0
%
(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.

37


Net investments of $463.3 million have grown 16.9% from December 31, 2017 through a combination of organic growth in written premiums and increased retention.

Our net investment income includes interest, dividends and rental income, net of investment expenses, on our invested assets. Our loans, at fair value, are generally floating rate and therefore 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, we report unrealized gains (losses) within net realized gains (losses) on investment on the consolidated statement of income.

For the year ended December 31, 2018, the net investment portfolio income was $2.8 million compared to a loss of $6.8 million in the comparable 2017 period. Net investment income was $19.2 million, up $2.9 million, or 17.8% from 2017 driven primarily by increases in total investments and increases in LIBOR on floating rate loans. For the year ended December 31, 2018, fair market value changes on equities resulted in unrealized and realized losses of $9.5 million ($3.6 million from Invesque common shares) compared to $23.8 million in 2017. The late-year sell-off in the U.S. leveraged loan market drove unrealized losses of $7.0 million compared to $1.0 million of realized gains in 2017. The average annualized yield for the year improved from (1.9)% in 2017 to 0.7% in 2018. The improvement was a result of increased net investment income, lower asset-based interest expense, and reduced realized and unrealized losses compared to the prior year.

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 declined from 8.0% in 2016 to (1.9)% in 2017 as a result of 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.

Tiptree Capital

Tiptree Capital consists of our non-insurance operating businesses and investments. As of December 31, 2018, Tiptree Capital includes our asset management, mortgage and shipping operations, and other investments (including our Invesque shares). We manage Tiptree Capital on a total return basis, balancing current cash flow and long-term value appreciation.

The following table summarizes the total revenues, pre-tax income from continuing and discontinued operations from Tiptree Capital.

Operating Results
($ in thousands)
Year Ended December 31,
 
2018
 
2017
 
2016
Total revenues
$
75,954

 
$
102,833

 
$
112,253

Pre-tax income (loss) from continuing operations
$
(7,805
)
 
$
20,336

 
$
37,142

Pre-tax income (loss) from discontinued operations
$
57,484


$
(6,222
)

$
(5,824
)
 
 
 
 
 
 

38

Drivers of pre-tax income from continuing and discontinued operations
($ in thousands)
Year Ended December 31,
 
2018
 
2017
 
2016
Asset management fees, net
$
2,136

 
$
3,514

 
$
4,794

Credit investments
(628
)
 
10,731

 
20,470

Shipping
(1,724
)
 
—

 
—

Specialty finance and other
321

 
6,091

 
11,878

Senior Living:
 
 
 
 
 
Invesque(1)
(7,910
)
 
—

 
—

Care - discontinued operations(2)
57,484


(6,222
)

(5,824
)
(1) Includes $9.2 million of dividends and $17.1 million of unrealized losses within Tiptree Capital.
(2) Includes discontinued operations related to Care for the year ended December 31, 2018, 2017 and 2016. Includes $56.9 million pre-tax gain on sale of Care in 2018.

Results from Continuing Operations

Tiptree Capital earns revenues from net interest income; mortgage gains and fees; management fees from CLOs under management; distributions, realized and unrealized gains on the Company’s investment holdings (primarily Invesque, and, historically, CLO subordinated notes).

Revenues for the year ended December 31, 2018 were $76.0 million, a decrease of $26.9 million from the prior year period. In the 2018 period, the results from our investment in Invesque shares include dividends received and unrealized gains and losses impacting our financial results. The decline was primarily driven by $17.1 million of unrealized losses on our Invesque equity securities, the loss of income from the sale of our commercial lending business in October 2017 and declines in mortgage gains. This was partially offset by dividends from our ownership of Invesque common shares.

Pre-tax income from continuing operations for the year ended December 31, 2018 was a loss of $7.8 million compared to income of $20.3 million in the 2017 period. For the year ended December 31, 2018, we received $9.2 million of dividends from Invesque. This was more than offset by unrealized losses of $17.1 million, which were a result of a lower Invesque stock price at December 31, 2018 versus the Invesque stock acquisition date of February 1, 2018. During 2017, we reduced exposure to subordinated notes by selling our interests, which contributed a one-time $10.7 million increase in pre-tax income in 2017. Lastly, pre-tax income from our mortgage originator contributed a lower amount of pre-tax income period over period driven by declines in volumes and gain on sale margins.

Results from Discontinued Operations

Discontinued Operations includes the results from Care, previously reported in the Senior Living segment. For the year ended December 31, 2018, the pre-tax income was $57.5 million compared to a loss of $6.2 million in the 2017 period. The increase was driven by a $56.9 million pre-tax gain on sale of Care, including $10.7 million of earnout consideration, which was recognized in December 2018 related to Invesque’s sale of properties previously owned by Care.

Tiptree Capital - Invested Capital and Operating EBITDA - Non-GAAP(1) 
($ in thousands)
Invested Capital(1)
 
Operating EBITDA(1)
 
2018
 
2017
 
2016
 
2018
 
2017
 
2016
Asset management fees, net (2)
$
(565
)
 
$
2,247

 
$
4,308

 
$
2,136

 
$
3,514

 
$
4,794

Credit investments
1,485

 
2,730

 
68,865

 
841

 
6,865

 
17,894

Senior living (Invesque) (3)
105,284

 
119,504

 
100,801

 
9,848

 
9,166

 
9,069

Shipping
48,683

 
—

 
—

 
(826
)
 
—

 
—

Specialty finance and other
27,146

 
37,344

 
41,288

 
1,727

 
10,247

 
9,752

Tiptree Capital
$
182,033

 
$
161,825

 
$
215,262

 
$
13,726

 
$
29,792

 
$
41,509

(1) For further information relating to Invested Capital and Operating 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 “Note—(3) Dispositions, Assets Held for Sale and Discontinued Operations.”

Invested Capital

Invested Capital increased from $161.8 million as of December 31, 2017 to $182.0 million as of December 31, 2018. On February 1, 2018, we completed the sale of Care to Invesque. We received consideration of 16.6 million shares of which 13.7 million shares are held as equity securities in Tiptree Capital, and 2.9 million shares are held in the insurance investment portfolio. Care was classified as held for sale and a discontinued operation as of December 31, 2017. In 2018, we invested approximately $50 million into three

39

unlevered vessels which are reported in other investments. As a result of the investments in Tiptree Capital and capital returned to shareholders in 2018, cash held at Tiptree corporate decreased from $66.1 million as of December 31, 2017 to $27.7 million as of December 31, 2018.

Invested Capital decreased from $215.3 million as of December 31, 2016 to $161.8 million as of December 31, 2017. The primary driver was reduced exposure to subordinated notes which were sold in 2017. Also, in the fourth quarter 2017, we sold our interest in our commercial lending business and signed a definitive agreement to sell our interest in our jumbo mortgage business, currently in assets held for sale.

Operating EBITDA

For the year ended December 31, 2018, Operating EBITDA declined from $29.8 million in the 2017 period to $13.7 million in the 2018 period. From 2016 to 2017, Operating EBITDA declined by $11.7 million. The decline in both periods was primarily driven by reduced credit investment distributions (from CLO subordinated notes) and lower incentive fees on older CLOs under management. Specialty finance and other declined from 2017 to 2018 as a result of the sale of our commercial lending business (including the related $2.0 million gain on sale in 2017), along with reduced Operating EBITDA from our mortgage origination business as margins and volumes declined from the prior year periods. In 2018, we received $9.2 million of dividends from our ownership of Invesque, which was partially offset by losses associated with our shipping investments.

Corporate
($ in thousands)
Year Ended December 31,
 
2018

2017

2016
Employee compensation and benefits
$
6,973

 
$
6,812

 
$
4,714

Employee incentive compensation expense
7,471

 
7,366

 
8,686

Interest expense
5,012

 
4,812


4,730

Depreciation and amortization expenses
248

 
248


248

Other expenses
10,847

 
9,832


16,428

Total expenses
$
30,551

 
$
29,070


$
34,806

Results

Corporate expenses include expenses of the holding company for interest, employee compensation and benefits, and other costs. Corporate employee compensation and benefits 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, including incentive compensation expense, increased $0.2 million for the year ended December 31, 2018 compared to the 2017 period driven by employee benefit expenses. Interest expense for the year ended December 31, 2018 was $5.0 million, an increase of $0.2 million driven by higher LIBOR and increased average borrowings. As of December 31, 2018, the outstanding borrowings were $72.1 million compared to $28.5 million at December 31, 2017. Other expenses were $10.8 million for 2018 as compared to $9.8 million in 2017. The period-over-period increase was driven by increased rent and one-time deal 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. Interest expense remained flat period-over-period as reduced borrowings were partially offset by increases in LIBOR. 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.

Provision for income taxes

Provision for income taxes - Total Operations

The total income tax expense of $7.8 million for the year ended December 31, 2018 and total income tax benefit of $14.8 million for the year ended December 31, 2017 is reflected as a component of net income (loss). For the year ended December 31, 2018, the Company’s effective tax rate was equal to 20.6%, lower than the statutory rate of 21.0% primarily due to the dividends received deduction and other discrete items. For the year ended December 31, 2017, the Company’s effective tax rate was equal to 154.8%, which was significantly higher than the statutory rates due to the revaluation of deferred tax attributes following US federal tax reform.

Provision for income taxes - Continuing Operations

40


The Company had a tax benefit from continuing operations of $5.9 million for the year ended December 31, 2018 as compared to a tax benefit of $12.6 million for the year ended December 31, 2017. The effective tax rate on income from continuing operations for the year ended December 31, 2018 was approximately 29.9% compared to 377.2% for the year ended December 31, 2017. Differences from the U.S. federal statutory income tax rate of 21% for the year ended December 31, 2018 are primarily the result of the dividends received deduction offset by other discrete items.

For the year ended December 31, 2017, the Company’s effective tax rate on income from continuing operations was equal to 377.2%, which does not bear a customary relationship to the U.S. federal statutory income tax rate. The effective tax rate for the year ended December 31, 2017 was higher than the U.S. federal statutory income tax rate of 35.0% due to the revaluation of deferred tax attributes following federal tax reform.

 
 
 
 
 
 
Balance Sheet Information - as of December 31, 2018 compared to the year ended December 31, 2017

Tiptree’s total assets were $1.9 billion as of December 31, 2018, compared to $2.0 billion as of December 31, 2017. The $124.7 million decrease in assets is primarily attributable to the sale of Care on February 1, 2018. Loans at fair value and amortized cost and assets held for sale decreased, partially offset by increases in equity securities, notes and accounts receivable and reinsurance receivable. 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 stockholders’ equity was $399.3 million as of December 31, 2018 compared to $396.8 million as of December 31, 2017, primarily driven by net income offset by the stock repurchases and dividends for the year ended December 31, 2018.

We completed a corporate reorganization in April 2018 that eliminated Tiptree’s dual class stock structure. As of December 31, 2018 there were 35,870,348 shares of Common Stock outstanding as compared to 35,003,004 as of December 31, 2017.

The following table is a summary of certain balance sheet information:
 
As of December 31, 2018
 
 
 
 
 
 
 
 
 
Specialty Insurance
 
Tiptree Capital
 
Corporate
 
Total
Total assets
$
1,514,084

 
$
318,420

 
$
32,414

 
$
1,864,918

 
 
 
 
 
 
 
 
Corporate debt
$
160,000

 
$
—

 
$
72,090

 
$
232,090

Asset based debt
86,092

 
46,091

 
—

 
132,183

 
 
 
 
 
 
 
 
Tiptree Inc. stockholders’ equity
$
249,139

 
$
182,033

 
$
(44,071
)
 
$
387,101

Non-controlling interests - Other
10,086

 
2,072

 
—

 
12,158

Total stockholders’ equity
$
259,225

 
$
184,105

 
$
(44,071
)
 
$
399,259

 
 
 
 
 
 
 
 

NON-GAAP RECONCILIATIONS

Adjusted EBITDA and Operating EBITDA - Non-GAAP

The Company defines Adjusted EBITDA as GAAP net income of the Company adjusted to add (i) corporate interest expense, consolidated income taxes and consolidated depreciation and amortization expense, (ii) adjust for the effect of purchase accounting, (iii) adjust for non-cash fair value adjustments, and (iv) any significant non-recurring expenses. Operating EBITDA represents Adjusted EBITDA plus stock based compensation expense, less realized and unrealized gains and losses and less third party non-controlling interests. Operating EBITDA and Adjusted EBITDA are not measurements of financial performance or liquidity under GAAP and should not be considered as an alternative or substitute for GAAP net income.
($ in thousands)
Year Ended December 31,

2018

2017

2016
Net income (loss) attributable to Common Stockholders
$
23,933


$
3,604


$
25,320

Add: net (loss) income attributable to noncontrolling interests
5,950


1,630


7,018

Less: net income from discontinued operations
43,770


(3,998
)

(4,287
)
Income (loss) from continuing operations
$
(13,887
)

$
9,232


$
36,625


41

($ in thousands)
Year Ended December 31,

2018

2017

2016
Corporate Debt related interest expense(1)
18,162


12,838


10,518

Consolidated income tax expense (benefit)
(5,909
)

(12,562
)

12,515

Depreciation and amortization expense(2)
11,614


12,408


9,248

Non-cash fair value adjustments(3)
(391
)

3,547


1,277

Non-recurring expenses(4)
2,358


1,944


(1,736
)
Adjusted EBITDA from continuing operations
$
11,947


$
27,407


$
68,447

Add: Stock-based compensation expense
6,657


6,559


2,584

Add: Vessel depreciation, net of capital expenditures
898

 
—

 
—

Less: Realized and unrealized gain (loss)(5)
(34,817
)

(18,591
)

18,133

Less: Third party non-controlling interests(6)
—


851


1,420

Operating EBITDA from continuing operations
$
54,319


$
51,706


$
51,478







Income (loss) from discontinued operations
$
43,770


$
(3,998
)

$
(4,287
)
Consolidated income tax expense (benefit)
13,714


(2,224
)

(1,537
)
Consolidated depreciation and amortization expense
—


15,645


14,166

Non-cash fair value adjustments (3)
(40,672
)

—


—

Non-recurring expenses (4)
—


1,158


2,127

Adjusted EBITDA from discontinued operations
$
16,812


$
10,581


$
10,469

Less: Realized and unrealized gain (loss) (5)
16,188


—


—

Less: Third party non-controlling interests(6)
—


1,415


1,400

Operating EBITDA from discontinued operations
$
624


$
9,166


$
9,069

Total Adjusted EBITDA
$
28,759


$
37,988


$
78,916

Total Operating EBITDA
$
54,943


$
60,872


$
60,547

_______________________________
(1)
Corporate Debt interest expense includes Secured corporate credit agreements, junior subordinated notes and preferred trust securities. Interest expense associated with asset-specific debt in specialty insurance, asset management, mortgage and other operations is not added-back for Adjusted EBITDA and Operating EBITDA.
(2)
Represents total depreciation and amortization expense less purchase accounting amortization related adjustments at the Insurance Company. 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 our Insurance company increased EBITDA above what the historical basis of accounting would have generated.
(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. For Care (Discontinued Operations), the reduction in EBITDA is related to accumulated depreciation and amortization, and certain operating expenses, which were previously included in Adjusted EBITDA in prior periods.
(4)
Acquisition, start-up and disposition costs including legal, taxes, banker fees and other costs. Includes payments pursuant to a separation agreement, dated November 10, 2015.
(5)
Adjustment excludes Mortgage realized and unrealized gains and losses - Performing and NPLs as those are recurring in nature and align with those business models.
(6)
Removes the Operating EBITDA associated with third party non-controlling interests. Does not remove the non-controlling interests related to employee based shares.


42

Adjusted EBITDA and Operating EBITDA - Non-GAAP

The tables below present Adjusted EBITDA and Operating EBITDA by business component.

Year Ended December 31, 2018
($ in thousands)
Specialty Insurance

Tiptree Capital (1)

Corporate Expenses

Total
Pre-tax income/(loss) from continuing ops
$
18,560


$
(7,805
)

$
(30,551
)

$
(19,796
)
Pre-tax income/(loss) from discontinued ops
—


57,484


—


57,484

Adjustments:







Corporate Debt related interest expense(2)
13,149

 
—

 
5,013

 
18,162

Depreciation and amortization expenses(3)
9,796


1,570


248


11,614

Non-cash fair value adjustments(4)
66


(41,129
)

—


(41,063
)
Non-recurring expenses(5)
3,159


—


(801
)

2,358

Adjusted EBITDA
$
44,730


$
10,120


$
(26,091
)

$
28,759

Add: Stock-based compensation expense
3,759


126


2,772


6,657

Add: Vessel depreciation, net of capital expenditures
—


898


—


898

Less: Realized and unrealized gain (loss)(6)
(16,047
)

(2,582
)

—


(18,629
)
Less: Third party non-controlling interests(7)
—


—


—


—

Operating EBITDA
$
64,536


$
13,726


$
(23,319
)

$
54,943


Year Ended December 31, 2017
($ in thousands)
Specialty Insurance

Tiptree Capital (1)

Corporate Expenses

Total
Pre-tax income/(loss) from continuing ops
$
5,404