Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
 
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly period ended March 31, 2020
OR
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from            to            
Commission File Number: 001-33549
Tiptree Inc.
(Exact name of Registrant as Specified in Its Charter)
Maryland
 
38-3754322
(State or Other Jurisdiction of
 
(IRS Employer
Incorporation of Organization)
 
Identification No.)
 
 
 
 
 
 
299 Park Avenue, 13th Floor, New York, New York
 
10171
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (212) 446-1400
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
common stock, par value $0.001 per share
TIPT
Nasdaq Capital Market
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨                    Accelerated filer x
Non-accelerated filer ¨                    Smaller reporting company ¨
Emerging growth company ¨
If an emerging company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No  x

As of May 1, 2020, there were 34,321,211 shares, par value $0.001, of the registrant’s common stock outstanding.



Tiptree Inc.
Quarterly Report on Form 10-Q
March 31, 2020

Table of Contents
ITEM
 
Page Number
 
Item 1. Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
(6) Investments
 
 
 
(9) Goodwill and Intangible Assets, net
 
 
 
 
 
 
(15) Other Assets and Other Liabilities and Accrued Expenses
 
 
 
 
(19) Stock Based Compensation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1A. Risk Factors
 
 
 
 
 
 
 



PART I. FINANCIAL INFORMATION
Forward-Looking Statements

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

Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, many of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those described in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, in this Quarterly Report on Form 10-Q and in our other public filings with the SEC.
 
The factors described herein are not necessarily all of the important factors that could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements.  Other unknown or unpredictable factors also could affect our forward-looking statements. Consequently, our actual performance could be materially different from the results described or anticipated by our forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by the applicable law, we undertake no obligation to update any forward-looking statements.

Market and Industry Data

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

Note to Reader

In reading this Quarterly Report on Form 10-Q, references to:
“A.M. Best” means A.M. Best Company, Inc.
“CLOs” means collateralized loan obligations.
“Corvid Peak” means collectively: Corvid Peak Holdings, L.P., Corvid Peak Capital Management, LLC, Corvid Peak GP Holdings, LLC and Corvid Peak Holdings GP, LLC, formerly known as “Tricadia”.
“EBITDA” means earnings before interest, taxes, depreciation and amortization.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Fortress” means Fortress Credit Corp., as administrative agent, collateral agent and lead arranger, and affiliates of Fortress that are lenders under the Credit Agreement among the Company, Fortress and the lenders party thereto.
“Fortegra” means Fortegra Financial Corporation.
“GAAP” means U.S. generally accepted accounting principles.
“Invesque” means Invesque Inc.
“Luxury” means Luxury Mortgage Corp.
“NAIC” means the National Association of Insurance Commissioners.
“NPL” means nonperforming residential real estate mortgage loans.
“Operating Company” means Tiptree Operating Company, LLC.
“Reliance” means Reliance First Capital, LLC.
“SEC” means the U.S. Securities and Exchange Commission.
“Securities Act” means the Securities Act of 1933, as amended.
“Smart AutoCare” means the following entities and their subsidiaries operating under the Smart AutoCare brand: SAC Holdings, Inc., Freedom Insurance Company, Ltd., Dealer Motor Services, Inc., Independent Dealer Group, Inc., Ownershield, Inc. and Accelerated Service Enterprise, LLC.
“Tax Act” means Public Law no. 115-97, commonly referred to as the Tax Cuts and Jobs Act.

F- 1


“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 Amended and Restated Transition Services Agreement between Corvid Peak and Tiptree Inc., effective as of January 1, 2019.
“Tricadia” means collectively, Tricadia Holdings, L.P., Tricadia Capital Management, LLC, Tricadia Holdings GP, LLC, Tricadia Holdings and Tricadia GP Holdings LLC.

F- 2

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

Item 1. Financial Statements (Unaudited)

 
As of
 
March 31, 2020
 
December 31, 2019
Assets:
 
 
 
Investments:
 
 
 
Available for sale securities, at fair value, net of allowance for credit losses
$
333,703

 
$
335,192

Loans, at fair value
79,177

 
108,894

Equity securities
129,022

 
155,378

Other investments
182,877

 
137,472

Total investments
724,779

 
736,936

Cash and cash equivalents
108,785

 
133,117

Restricted cash
45,416

 
11,473

Notes and accounts receivable, net
322,793

 
286,968

Reinsurance receivables
581,717

 
539,833

Deferred acquisition costs
176,821

 
166,493

Goodwill
163,623

 
99,147

Intangible assets, net
139,429

 
47,974

Other assets
74,346

 
68,510

Assets held for sale
84,963

 
107,835

Total assets
$
2,422,672

 
$
2,198,286


 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Debt, net
$
433,136

 
$
374,454

Unearned premiums
728,519

 
754,993

Policy liabilities and unpaid claims
195,464

 
144,384

Deferred revenue
304,622

 
94,601

Reinsurance payable
147,513

 
143,869

Other liabilities and accrued expenses
189,174

 
172,140

Liabilities held for sale
79,908

 
102,430

Total liabilities
$
2,078,336

 
$
1,786,871


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

 
$

Common stock: $0.001 par value, 200,000,000 shares authorized, 34,302,131 and 34,562,553 shares issued and outstanding, respectively
34

 
35

Additional paid-in capital
323,064

 
326,140

Accumulated other comprehensive income (loss), net of tax
2,030

 
1,698

Retained earnings
8,725

 
70,189

Total Tiptree Inc. stockholders’ equity
333,853

 
398,062

Non-controlling interests
10,483

 
13,353

Total stockholders’ equity
344,336

 
411,415

Total liabilities and stockholders’ equity
$
2,422,672

 
$
2,198,286













See accompanying notes to condensed consolidated financial statements.

F- 3

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


 
Three Months Ended 
 March 31,
 
2020
 
2019
Revenues:
 
 
 
Earned premiums, net
$
121,321

 
$
118,973

Service and administrative fees
43,724

 
25,895

Ceding commissions
6,525

 
2,504

Net investment income
3,488

 
4,301

Net realized and unrealized gains (losses)
(62,441
)
 
20,111

Other revenue
17,054

 
12,119

Total revenues
129,671

 
183,903

Expenses:
 
 
 
Policy and contract benefits
60,876

 
40,841

Commission expense
70,401

 
74,903

Employee compensation and benefits
38,501

 
29,153

Interest expense
7,551

 
6,920

Depreciation and amortization
3,863

 
3,094

Other expenses
30,230

 
23,837

Total expenses
211,422

 
178,748

Income (loss) before taxes
(81,751
)
 
5,155

Less: provision (benefit) for income taxes
(21,181
)
 
854

Net income (loss) before non-controlling interests
(60,570
)
 
4,301

Less: net income (loss) attributable to non-controlling interests
(563
)
 
376

Net income (loss) attributable to common stockholders
$
(60,007
)
 
$
3,925

 
 
 
 
Net income (loss) per common share:
 
 
 
Basic earnings per share
$
(1.74
)
 
$
0.11

Diluted earnings per share
$
(1.74
)
 
$
0.11

 
 
 
 
Weighted average number of common shares:
 
 
 
Basic
34,566,330

 
34,673,054

Diluted
34,566,330

 
34,673,054

 
 
 
 
Dividends declared per common share
$
0.04

 
$
0.04






















See accompanying notes to condensed consolidated financial statements.

F- 4

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



 
Three Months Ended 
 March 31,
 
2020
 
2019
Net income (loss) before non-controlling interests
$
(60,570
)
 
$
4,301

 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
Unrealized gains (losses) on available for sale securities:
 
 
 
Unrealized holding gains (losses) arising during the period
359

 
3,128

Related tax (expense) benefit
(58
)
 
(713
)
Reclassification of (gains) losses included in net income
(4
)
 
5

Related tax expense (benefit)
1

 
(1
)
Unrealized gains (losses) on available for sale securities, net of tax
298

 
2,419

 
 
 
 
Other comprehensive income (loss), net of tax
298

 
2,419

Comprehensive income (loss)
(60,272
)
 
6,720

Less: Comprehensive income (loss) attributable to non-controlling interests
(555
)
 
387

Comprehensive income (loss) attributable to common stockholders
$
(59,717
)
 
$
6,333








































See accompanying notes to condensed consolidated financial statements.

F- 5

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


 
 
Common stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of shares
 
Par value
 
Additional paid-in capital
 
Accumulated other comprehensive income (loss)
 
Retained earnings
 
Total
Tiptree Inc. stockholders’ equity
 
Non-controlling interests
 
Total stockholders' equity
Balance at December 31, 2018
35,870,348

 
$
36

 
$
331,892

 
$
(2,058
)
 
$
57,231

 
$
387,101

 
$
12,158

 
$
399,259

Adoption of accounting standard (1)

 

 

 
(99
)
 
99

 

 

 

Amortization of share-based incentive compensation

 

 
670

 

 

 
670

 
661

 
1,331

Vesting of share-based incentive compensation (1)
108,163

 

 
(144
)
 

 

 
(144
)
 
(2,236
)
 
(2,380
)
Shares purchased under stock purchase plan
(1,472,730
)
 
(1
)
 
(9,084
)
 

 

 
(9,085
)
 

 
(9,085
)
Non-controlling interest contributions

 

 

 

 

 

 
50

 
50

Dividends declared

 

 

 

 
(1,240
)
 
(1,240
)
 

 
(1,240
)
Other comprehensive income, net of tax

 

 

 
2,408

 

 
2,408

 
11

 
2,419

Net income (loss)

 

 

 

 
3,925

 
3,925

 
376

 
4,301

Balance at March 31, 2019
34,505,781

 
$
35

 
$
323,334

 
$
251

 
$
60,015

 
$
383,635

 
$
11,020

 
$
394,655

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2019
34,562,553

 
$
35

 
$
326,140

 
$
1,698

 
$
70,189

 
$
398,062

 
$
13,353

 
$
411,415

Adoption of accounting standard (2)

 

 

 
42

 
(42
)
 

 

 

Amortization of share-based incentive compensation

 

 
1,200

 

 

 
1,200

 
343

 
1,543

Vesting of share-based incentive compensation (3)
322,709

 

 
(332
)
 

 

 
(332
)
 
(1,866
)
 
(2,198
)
Shares purchased under stock purchase plan
(583,131
)
 
(1
)
 
(3,944
)
 

 

 
(3,945
)
 

 
(3,945
)
Non-controlling interest distributions (3)

 

 

 

 

 

 
(792
)
 
(792
)
Dividends declared

 

 

 

 
(1,415
)
 
(1,415
)
 

 
(1,415
)
Other comprehensive income, net of tax

 

 

 
290

 

 
290

 
8

 
298

Net income (loss)

 

 

 

 
(60,007
)
 
(60,007
)
 
(563
)
 
(60,570
)
Balance at March 31, 2020
34,302,131

 
$
34

 
$
323,064

 
$
2,030

 
$
8,725

 
$
333,853

 
$
10,483

 
$
344,336

(1) 
Amounts reclassified due to adoption of ASU 2018-02. See Note (2) Summary of Significant Accounting Policies.
(2) 
Amounts reclassified due to adoption of ASU 2016-13. See Note (2) Summary of Significant Accounting Policies.
(3) 
Includes subsidiary RSU exchanges. See Note (19) Stock Based Compensation.

 
 









See accompanying notes to condensed consolidated financial statements.

F- 6

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


 
Three Months Ended 
 March 31,
 
2020
 
2019
Operating Activities:
 
 
 
Net income (loss) attributable to common stockholders
$
(60,007
)
 
$
3,925

Net income (loss) attributable to non-controlling interests
(563
)
 
376

Net income (loss)
(60,570
)
 
4,301

Adjustments to reconcile net income to net cash provided by (used in) operating activities
 
 
 
Net realized and unrealized (gains) losses
62,441

 
(20,111
)
Non-cash compensation expense
1,616

 
1,408

Amortization/accretion of premiums and discounts
424

 
308

Depreciation and amortization expense
3,863

 
3,094

Non-cash lease expense
2,133

 
1,890

Bad debt expense
60

 
80

Amortization of deferred financing costs
169

 
240

Loss on extinguishment of debt
353

 
1,241

Deferred tax expense (benefit)
(17,929
)
 
727

Changes in operating assets and liabilities:
 
 
 
Mortgage loans originated for sale
(539,970
)
 
(350,220
)
Proceeds from the sale of mortgage loans originated for sale
609,125

 
366,121

(Increase) decrease in notes and accounts receivable
(17,467
)
 
(5,020
)
(Increase) decrease in reinsurance receivables
30,217

 
(645
)
(Increase) decrease in deferred acquisition costs
(10,328
)
 
(664
)
(Increase) decrease in other assets
(5,201
)
 
271

Increase (decrease) in unearned premiums
(26,474
)
 
(10,370
)
Increase (decrease) in policy liabilities and unpaid claims
(206
)
 
(1,026
)
Increase (decrease) in deferred revenue
27,453

 
(478
)
Increase (decrease) in reinsurance payable
(23,431
)
 
(2,568
)
Increase (decrease) in other liabilities and accrued expenses
(11,066
)
 
3,261

Net cash provided by (used in) operating activities
25,212

 
(8,160
)
Investing Activities:
 
 
 
Purchases of investments
(168,125
)
 
(30,725
)
Proceeds from sales and maturities of investments
114,881

 
120,309

Proceeds from the sale of real estate
389

 
2,555

Purchases of property, plant and equipment
(1,455
)
 
(3,231
)
Proceeds from the sale of businesses
125

 
9,676

Proceeds from notes receivable
7,739

 
7,711

Issuance of notes receivable
(20,996
)
 
(11,629
)
Business and asset acquisitions, net of cash and deposits (1)
20,136

 

Net cash provided by (used in) investing activities
(47,306
)
 
94,666

Financing Activities:
 
 
 
Dividends paid
(1,415
)
 

Non-controlling interest contributions

 
50

Non-controlling interest distributions
(792
)
 

Payment of debt issuance costs
(1,441
)
 
(37
)
Proceeds from borrowings and mortgage notes payable
750,861

 
382,506

Principal paydowns of borrowings and mortgage notes payable
(713,607
)
 
(455,414
)
Repurchases of common stock
(3,945
)
 
(9,085
)
Net cash provided by (used in) financing activities
29,661

 
(81,980
)
Net increase (decrease) in cash, cash equivalents and restricted cash
7,567

 
4,526

Cash, cash equivalents and restricted cash – beginning of period
144,590

 
96,524

Cash, cash equivalents and restricted cash – beginning of period - held for sale
7,137

 
2,860

Cash, cash equivalents and restricted cash – end of period (2)
159,294

 
103,910

Less: Reclassification of cash to assets held for sale
5,093

 
2,769

Cash, cash equivalents and restricted cash – end of period
$
154,201

 
$
101,141

Supplemental Schedule of Non-Cash Investing and Financing Activities:
 
 
 
Right-of-use asset obtained in exchange for lease liability
$
513

 
$
33,558

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

 
$
1,958

 
As of
Reconciliation of cash, cash equivalents and restricted cash shown in the statement of cash flows
March 31,
2020
 
December 31, 2019
Cash and cash equivalents
$
108,785

 
$
133,117

Restricted cash
45,416

 
11,473

Total cash, cash equivalents and restricted cash shown in the statement of cash flows
$
154,201

 
$
144,590

(1) 
Changes in balance sheet balances due to the acquisition of Smart AutoCare have been netted down in the respective line items for the three months ended March 31, 2020. See Note (3) Acquisitions for additional information.
(2) 
Includes cash in assets held for sale.
See accompanying notes to condensed consolidated financial statements.

F- 7

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2020
(in thousands, except share data)



(1) Organization

Tiptree Inc. (together with its consolidated subsidiaries, collectively, Tiptree, the Company, or we) is a Maryland Corporation that was incorporated on March 19, 2007. Tiptree’s common stock trades on the Nasdaq Capital Market under the symbol “TIPT”. Tiptree is a holding company that combines specialty insurance operations with investment management capabilities. We allocate our capital across our insurance operations and other investments. We classify our business into one reportable segment: Tiptree Insurance. We refer to our non-insurance operations, assets and other investments, which is comprised of our non-reportable segments and other business activities, as Tiptree Capital.

(2) Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements of Tiptree have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) and include the accounts of the Company and its subsidiaries. The condensed consolidated financial statements are presented in U.S. dollars, the main operating currency of the Company. The unaudited condensed consolidated financial statements presented herein should be read in conjunction with the annual audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. In the opinion of management, the accompanying unaudited interim financial information reflects all adjustments, including normal recurring adjustments necessary to present fairly the Company’s financial position, results of operations, comprehensive income and cash flows for each of the interim periods presented. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the full year ending on December 31, 2020.

As a result of changes in presentation made in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, certain prior period amounts have been reclassified to conform to the current presentation. These reclassifications had no effect on the reported results of operations.

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

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

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

Business Combination Accounting

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

In certain instances, the Company may acquire less than 100% ownership of an entity, resulting in the recording of a non-controlling interest. The measurement of assets and liabilities acquired and non-controlling interest is initially established at a

F- 8

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2020
(in thousands, except share data)


preliminary estimate of fair value, which may be adjusted during the measurement period, primarily due to the results of valuation studies applicable to the business combination.

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

Use of Estimates

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

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

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

Fair Value Measurement

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

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

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

Level 2 – Significant inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability. The types of financial assets and liabilities carried at Level 2 are valued based on one or more of the following:

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

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

Fair Value Option


F- 9

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2020
(in thousands, except share data)


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

Recent Accounting Standards

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 supersedes the previous leases standard, Leases (Topic 840). The standard was effective on January 1, 2019, with early adoption permitted. The Company adopted the standard in the first quarter of 2019 under the modified retrospective approach without restating prior comparative periods. The adoption of the updated guidance resulted in the Company recognizing a right of use asset of $32,052 as part of other assets and a lease liability of $33,558 as part of other liabilities and accrued expenses in the condensed consolidated balance sheets, as well as de-recognizing the liability for deferred rent that was required under the previous guidance for its operating lease agreements at January 1, 2019. We elected the practical expedient to not separate lease components and non-lease components, and leases with an initial term of 12 months or less are not recorded on the balance sheet. The cumulative effect adjustment to the opening balance of retained earnings was zero.

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

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends the guidance on hedge accounting. The amendment will make more financial and nonfinancial hedging strategies eligible for hedge accounting and amend the presentation and disclosure requirements. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. ASU 2017-12 can be adopted immediately in any interim or annual period. The mandatory effective date for calendar year-end public companies was January 1, 2019. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI), which permits companies to reclassify stranded tax effects caused by Public Law no. 115-97, commonly referred to as the Tax Cuts and Jobs Act (Tax Act), from AOCI to retained earnings. Deferred tax assets (DTA) on unrealized gains and losses related to available for sale (AFS) securities that were revalued as of December 31, 2017 created stranded tax effects in AOCI due to the enactment of the Tax Act, due to the nature of existing GAAP requiring recognition of tax rate change effects on the DTA revaluation related to AFS securities as an adjustment to the provision for income taxes. Specifically, ASU 2018-02 permits a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Act. Additionally, the ASU requires new disclosures by all companies, whether they opt to do the reclassification or not. The amendments in ASU 2018-02 were effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company adopted the standard effective January 1, 2019 and reclassified the stranded tax effects caused by the Tax Act from

F- 10

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2020
(in thousands, except share data)


AOCI to retained earnings. The standard was applied in the period of adoption, and the impact to the Company’s condensed consolidated financial statements in the period of adoption was not material. The Company’s accounting policy for the release of stranded tax effects in AOCI is the aggregate portfolio approach.

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

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

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements in Topic 820. The modifications include the removal of certain requirements, modifications to existing requirements and additional requirements. The amendments in ASU 2018-13 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

Recently Issued Accounting Pronouncements, Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the application of Topic 740 while maintaining or improving the usefulness of the information provided to users of financial statements. The modifications include the removal of certain exceptions and simplification to existing requirements. The amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the effect on its condensed consolidated financial statements.

(3) Acquisitions

On January 3, 2020, a subsidiary of the Company acquired (the Acquisition) all of the equity interests of Accelerated Service Enterprise LLC, SAC Holdings Inc., Dealer Motor Services, Inc., Independent Dealer Group, Inc., Ownershield, Inc., Freedom Insurance Company, Ltd., SAC Admin, Inc., SAC Insurance Company, Inc., Smart AutoCare, Inc. and Smart AutoCare Administration Solutions, Inc. (together Smart AutoCare), pursuant to the Equity Interest Purchase Agreement (the Purchase Agreement) between Tiptree Warranty Holdings, LLC (Buyer) and Peter Masi (Seller), dated as of December 16, 2019. Concurrent with the Acquisition, Freedom Insurance Company, Ltd, (Freedom) terminated reinsurance agreements with affiliates of Seller (the Commutation Transaction).

F- 11

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2020
(in thousands, except share data)



Tiptree paid Seller $111,804, net of working capital true-ups, in cash at closing, $8,250 of which will be held in an escrow account for 18 months to satisfy indemnity claims. Simultaneously, pursuant to the Commutation Transaction, affiliates of Seller paid Freedom $102,000 in cash. The Purchase Agreement also provides for an earn out of up to $50,000 in cash based on Smart AutoCare achieving specified performance metrics measured on the third and fifth anniversary of closing (Reserve Based Earn-Out Amount) and an additional earn out of up to $30,000 payable in cash or Tiptree common stock based on Smart AutoCare achieving other certain specified performance metrics measured on the fourth and fifth anniversary of closing (Profits Based Earn-Out Amount). In addition, the purchase price will be subject to a true-up following the fifth anniversary of the closing (Underwriting Profitability True-Up) based on the adequacy of certain legacy reserves, offset by certain earnings on new business. Tiptree may hold back all or a portion of any Reserve Based Earn-Out Amounts until final determination of the legacy reserves used to calculate the Underwriting Profitability True-Up if in Tiptree’s reasonable opinion such amount may be needed to offset a deficiency in such legacy reserves. In addition, if the deficiency in the legacy reserves used to calculate the Underwriting Profitability True-Up is greater than the aggregate amount owing to Seller for the Reserve-Based Earn-Out Amount and Profits-Based Earn-Out Amount, Seller shall pay Tiptree an amount equal to the lesser of such difference and $10,000.

Smart AutoCare’s results will be included in the Company’s Tiptree Insurance segment. The financial results of SmartAutoCare have been included in the Company's results as of the acquisition date. For the period from the Acquisition until March 31, 2020, Smart AutoCare total revenue was $14,608 and the loss before taxes was $960.

The preliminary purchase price allocation below has been developed based on preliminary estimates of fair value using the historical financial statements of Smart AutoCare as of the acquisition date. In addition, the allocation of the purchase price to intangible assets is based on preliminary fair value estimates and subject to the completion of management’s final analysis.

Management’s preliminary allocation of the purchase price to the net assets acquired resulted in the recording of intangible assets. Because valuations of acquired assets and liabilities are still in process, information may become available within the measurement period about facts and circumstances that existed as of the acquisition date which may or may not change these valuations and, accordingly, the purchase price allocation is subject to adjustment. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period. The Company will reflect measurement period adjustments, if any, in the period in which the adjustments are determined. The residual amount of the purchase price after preliminary allocation to net assets acquired and identifiable intangibles has been allocated to goodwill. This goodwill is included in the Tiptree Insurance segment.

The following table presents the preliminary determination of the acquisition date fair value amounts for the identifiable assets acquired, liabilities assumed, and goodwill recorded in connection with the Acquisition, in accordance with the acquisition method of accounting:

F- 12

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2020
(in thousands, except share data)



 
As of
January 3,
2020
Assets:
 
Investments:
 
Available for sale securities, at fair value
$
110

Total investments
110

Cash and cash equivalents
120,934

Notes and accounts receivable, net
6,214

Reinsurance receivables
72,101

Intangible assets, net
93,700

Other assets
28,558

Total assets
$
321,617

 
 
Liabilities:
 
Policy liabilities and unpaid claims
$
51,286

Deferred revenue
182,568

Reinsurance payable
27,075

Other liabilities and accrued expenses
13,360

Total liabilities
274,289

Net assets acquired
47,328

Goodwill
64,476

 
$
111,804

 
 
Acquisition costs
$
3,539


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

The following table shows the values recorded by the Company, as of the acquisition date, for finite-lived intangible assets and the range of their estimated amortization period:

Intangible Assets
Weighted Average Amortization Period
(in Years)
 
Value as of acquisition date
Customer relationships
7.2
 
$
86,000

Software licensing
5.0
 
600

Trade names
13.5
 
7,100

Total acquired finite-lived intangible assets
7.7
 
$
93,700


(4) Assets Held for Sale

The Company has entered into a definitive agreement to sell Luxury, and it is classified as held for sale at March 31, 2020 and December 31, 2019. The following table presents detail of Luxury’s assets and liabilities held for sale in the condensed consolidated balance sheets for the following periods:

F- 13

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2020
(in thousands, except share data)


 
As of
 
March 31, 2020
 
December 31, 2019
Assets:
 
 
 
Investments:
 
 
 
Loans, at fair value
$
75,568

 
$
98,272

Other investments
1,784

 
1,019

Total investments
77,352

 
99,291

Cash and cash equivalents
5,093

 
7,137

Notes and accounts receivable, net
1,294

 
238

Other assets
1,224

 
1,169

Assets held for sale
$
84,963

 
$
107,835

 
 
 
 
Liabilities:
 
 
 
Debt, net
$
76,167

 
$
97,822

Other liabilities and accrued expenses
3,741

 
4,608

Liabilities held for sale
$
79,908

 
$
102,430

 
 
 
 
 
 
As of March 31, 2020 and December 31, 2019, the Company did not record any impairments with respect to assets held for sale.
 
 
 
 
 
 
(5) Operating Segment Data

Tiptree is a holding company that allocates capital across a broad spectrum of businesses, assets and other investments. Tiptree’s principal operating subsidiary and primary source of earnings, Tiptree Insurance, along with its subsidiaries, is a leading provider of specialty insurance, warranty products and related administration services. We classify our business into one reportable segment – Tiptree Insurance. We refer to our non-insurance operations, assets and other investments, which is comprised of our non-reportable operating segments and other business activities, as Tiptree Capital. Corporate activities include holding company interest expense, employee compensation and benefits, and other expenses.

Our reportable segment’s income or loss is reported before income taxes and non-controlling interests. Segment results incorporate the revenues and expenses of these subsidiaries since they commenced operations or were acquired. Intercompany transactions are eliminated.

Descriptions of our reportable segment and of Tiptree Capital are as follows:

Tiptree Insurance operations are conducted through Tiptree Insurance, which includes Fortegra Financial Corporation (Fortegra), an insurance holding company incorporated in 1981, and Tiptree Warranty. Fortegra underwrites and administers specialty insurance programs and products, and is a leading provider of credit and asset protection products and administration services. Fortegra’s programs are provided across a diverse range of products and services including credit protection insurance, warranty and service contract products, premium finance, and niche personal and commercial lines of insurance. On January 3, 2020, Tiptree Warranty acquired Smart AutoCare, a vehicle warranty solutions provider in the United States. See Note (3) Acquisitions.

Tiptree Capital includes our asset management, mortgage and shipping operations, and other investments (including our Invesque shares).


F- 14

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2020
(in thousands, except share data)


The tables below present the components of revenue, expense, pre-tax income (loss), and assets for our reportable segment as well as Tiptree Capital for the following periods:
 
Three Months Ended March 31,
 
2020
 
2019
 
Tiptree Insurance
 
Tiptree Capital
 
Total
 
Tiptree Insurance
 
Tiptree Capital
 
Total
Total revenues
$
143,340

 
$
(13,669
)
 
$
129,671

 
$
154,628

 
$
29,275

 
$
183,903

Total expenses
(170,457
)
 
(32,662
)
 
(203,119
)
 
(146,490
)
 
(23,357
)
 
(169,847
)
Corporate expenses

 

 
(8,303
)
 

 

 
(8,901
)
Income (loss) before taxes
$
(27,117
)
 
$
(46,331
)
 
$
(81,751
)
 
$
8,138

 
$
5,918

 
$
5,155

Less: provision (benefit) for income taxes
 
 
 
 
(21,181
)
 
 
 
 
 
854

Net income (loss) before non-controlling interests
 
 
 
 
$
(60,570
)
 
 
 
 
 
$
4,301

Less: net income (loss) attributable to non-controlling interests
 
 
 
 
(563
)
 
 
 
 
 
376

Net income (loss) attributable to common stockholders
 
 
 
 
$
(60,007
)
 
 
 
 
 
$
3,925

 
 
 
 
 
 
 
 
 
 
 
 
 
 
The following table presents sources of revenue from Tiptree Capital:
 
Three Months Ended 
 March 31,
 
2020
 
2019
Net realized and unrealized gains (losses) (1)
$
(28,838
)
 
$
17,997

Other investment income (2)
15,064

 
9,881

Management fee income

 
1,267

Other
105

 
130

Total revenues
$
(13,669
)
 
$
29,275

(1) 
See Note (6) Investments for the components of Net realized and unrealized gains (losses) related to Tiptree Capital.
(2) 
See Note (6) Investments for the components of Other investment income.

The following table presents the reportable segment and Tiptree Capital assets for the following periods:
 
As of March 31, 2020
 
As of December 31, 2019
 
Tiptree Insurance
 
Tiptree Capital
 
Corporate
 
Total
 
Tiptree Insurance
 
Tiptree Capital
 
Corporate
 
Total
Total assets
$
2,023,197

 
$
362,400

 
$
37,075

 
$
2,422,672

 
$
1,721,669

 
$
451,249

 
$
25,368

 
$
2,198,286


(6) Investments

The following table presents the Company's investments related to insurance operations (Tiptree Insurance) and investments from other Tiptree investing activities (Tiptree Capital), measured at fair value as of the following periods:
 
As of March 31, 2020
 
As of December 31, 2019
 
Tiptree Insurance
 
Tiptree Capital
 
Total
 
Tiptree Insurance
 
Tiptree Capital
 
Total
Available for sale securities, at fair value, net of allowance for credit losses
$
333,703

 
$

 
$
333,703

 
$
335,192

 
$

 
$
335,192

Loans, at fair value
6,310

 
72,867

 
79,177

 
10,174

 
98,720

 
108,894

Equity securities
85,010

 
44,012

 
129,022

 
62,816

 
92,562

 
155,378

Other investments
84,738

 
98,139

 
182,877

 
42,452

 
95,020

 
137,472

Total investments
$
509,761

 
$
215,018

 
$
724,779

 
$
450,634

 
$
286,302

 
$
736,936



F- 15

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2020
(in thousands, except share data)


Available for Sale Securities, at fair value, net of allowance for credit losses

All of the Company’s investments in Available for Sale Securities, at fair value, net of allowance for credit losses (AFS securities) as of March 31, 2020 and December 31, 2019 are held by subsidiaries in the insurance business. The following tables present the Company's investments in AFS securities:
 
As of March 31, 2020
 
Amortized cost
 
Allowance for Credit Losses (1)
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
189,538

 
$

 
$
5,907

 
$
(109
)
 
$
195,336

Obligations of state and political subdivisions
39,512

 

 
972

 
(1
)
 
40,483

Corporate securities
55,034

 
(19
)
 
729

 
(280
)
 
55,464

Asset backed securities
44,762

 

 
117

 
(4,758
)
 
40,121

Certificates of deposit
855

 

 

 

 
855

Obligations of foreign governments
1,409

 

 
35

 

 
1,444

Total
$
331,110

 
$
(19
)
 
$
7,760

 
$
(5,148
)
 
$
333,703

 
 
 
 
 
 
 
 
 
 
(1) - Represents the amount of impairment that has resulted from credit-related factors, and therefore was recognized in the condensed consolidated statements of operations (as a credit loss on AFS securities). Amount excludes unrealized losses relating to non-credit factors.
 
 
 
 
 
 
 
As of December 31, 2019
 
 
 
Amortized cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
U.S. Treasury securities and obligations of U.S. government authorities and agencies
 
 
$
189,596

 
$
2,138

 
$
(144
)
 
$
191,590

Obligations of state and political subdivisions
 
 
45,249

 
1,104

 
(15
)
 
46,338

Corporate securities
 
 
50,514

 
719

 
(2
)
 
51,231

Asset backed securities
 
 
45,634

 
89

 
(1,705
)
 
44,018

Certificates of deposit
 
 
896

 

 

 
896

Obligations of foreign governments
 
 
1,099

 
20

 

 
1,119

Total
 
 
$
332,988

 
$
4,070

 
$
(1,866
)
 
$
335,192


The amortized cost and fair values of AFS securities, by contractual maturity date, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
As of
 
March 31, 2020
 
December 31, 2019
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
7,976

 
$
8,010

 
$
9,584

 
$
9,602

Due after one year through five years
136,636

 
139,172

 
130,223

 
131,952

Due after five years through ten years
17,947

 
18,750

 
19,508

 
20,125

Due after ten years
123,789

 
127,650

 
128,039

 
129,495

Asset backed securities
44,762

 
40,121

 
45,634

 
44,018

Total
$
331,110

 
$
333,703

 
$
332,988

 
$
335,192



F- 16

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2020
(in thousands, except share data)


The following tables present the gross unrealized losses on AFS securities by length of time that individual AFS securities have been in a continuous unrealized loss position for less than twelve months, and twelve months or greater and do not have an allowance for credit losses:
 
As of March 31, 2020
 
Less Than or Equal to One Year
 
More Than One Year
 
Fair value
 
Gross
unrealized losses
 
# of Securities
 
Fair value
 
Gross unrealized losses
 
# of Securities
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
10,545

 
$
(107
)
 
38

 
$
113

 
$
(2
)
 
12

Obligations of state and political subdivisions
1,880

 
(1
)
 
13

 

 

 

Corporate securities
17,960

 
(280
)
 
80

 

 

 

Asset backed securities
14,671

 
(371
)
 
33

 
16,773

 
(4,387
)
 
8

Total
$
45,056

 
$
(759
)
 
164

 
$
16,886

 
$
(4,389
)
 
20

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2019
 
Less Than or Equal to One Year
 
More Than One Year
 
Fair value
 
Gross
unrealized losses
 
# of Securities
 
Fair value
 
Gross unrealized losses
 
# of Securities
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
31,416

 
$
(132
)
 
75

 
$
3,888

 
$
(12
)
 
38

Obligations of state and political subdivisions
3,774

 
(15
)
 
20

 

 

 

Corporate securities
2,820

 
(2
)
 
12

 
742

 

 
7

Asset backed securities
3,878

 
(11
)
 
17

 
19,480

 
(1,694
)
 
11

Obligations of foreign governments

 

 

 

 

 

Total
$
41,888

 
$
(160
)
 
124

 
$
24,110

 
$
(1,706
)
 
56

Management believes that it is more likely than not that the Company will be able to hold the fixed maturity AFS securities that were in an unrealized loss position as of March 31, 2020 until full recovery of their amortized cost basis.

The table below presents a roll-forward of the activity in the allowance for credit losses on AFS securities by type as of March 31, 2020:
 
Obligations of state and political subdivisions
 
Corporate securities
 
Asset-backed securities
 
Total
Increase in the allowance for the initial adoption of ASU 2016-13
$
(1
)
 
$
(50
)
 
$
(2
)
 
$
(53
)
Recoveries of amounts previously written off during the year
1

 
31

 
2

 
34

Ending balance of the allowance for credit losses on AFS securities
$

 
$
(19
)
 
$

 
$
(19
)

The Company uses a discounted cash flow model in determining its lifetime expected credit losses on AFS securities. This includes determining the present value of expected future cash flows discounted at the book yield of the security. The expected cash flow assumptions used to calculate the CECL allowance are based on model outputs provided to the Company for discounting by the investment management company. All assumptions are reviewed by the Company and represent management’s best estimates of reasonable and supportable assumptions and projections.

The table below presents the amount of credit losses (gains from recoveries) on AFS securities recorded by the Company for the following period:
 
Three Months Ended 
 March 31, 2020
Credit losses (gains from recoveries) on AFS securities
$
(34
)

Pursuant to certain reinsurance agreements and statutory licensing requirements, the Company has deposited invested assets in

F- 17

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2020
(in thousands, except share data)


custody accounts or insurance department safekeeping accounts. The Company cannot remove or replace investments in regulatory deposit accounts without prior approval of the contractual party or regulatory authority, as applicable. The following table presents the Company's restricted investments included in the Company's AFS securities:
 
As of
 
March 31, 2020
 
December 31, 2019
Fair value of restricted investments for special deposits required by state insurance departments
$
7,312

 
$
6,275

Fair value of restricted investments in trust pursuant to reinsurance agreements
39,922

 
33,478

Total fair value of restricted investments
$
47,234

 
$
39,753


The following table presents additional information on the Company’s AFS securities:
 
Three Months Ended 
 March 31,
 
2020
 
2019
Purchases of AFS securities
$
23,580

 
$
29,861

 
 
 
 
Proceeds from maturities, calls and prepayments of AFS securities
$
19,660

 
$
11,144

 
 
 
 
Gains (losses) realized on maturities, calls and prepayments of AFS securities
$

 
$

 
 
 
 
Gross proceeds from sales of AFS securities
$
5,560

 
$
21,168

 
 
 
 
Gains (losses) realized on sales of AFS securities
$
4

 
$
(4
)

Loans, at fair value

The following tables present the Company’s investments in loans measured at fair value and the Company’s investments in loans measured at fair value pledged as collateral:
 
As of March 31, 2020
 
As of December 31, 2019
 
Fair value
 
Unpaid principal balance (UPB)
 
Fair value exceeds / (below) UPB
 
Pledged as Collateral
 
Fair value
 
Unpaid principal balance (UPB)
 
Fair value exceeds / (below) UPB
 
Pledged as Collateral
Tiptree Insurance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate loans (1)
$
6,310

 
$
10,519

 
$
(4,209
)
 
$

 
$
9,787

 
$
12,006

 
$
(2,219
)
 
$

Non-performing loans (2)

 

 

 

 
387

 
409

 
(22
)
 

Tiptree Capital:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans held for sale (3)
72,867

 
69,659

 
3,208

 
72,393

 
98,720

 
95,680

 
3,040

 
98,086

Total loans, at fair value
$
79,177

 
$
80,178

 
$
(1,001
)
 
$
72,393

 
$
108,894

 
$
108,095

 
$
799

 
$
98,086

(1) 
The UPB of these loans approximates cost basis.
(2) 
The cost basis of NPLs was approximately $0 and $282 at March 31, 2020 and December 31, 2019, respectively.
(3) 
As of March 31, 2020 and December 31, 2019, there were two mortgage loans and one mortgage loan held for sale that was 90 days or more past due, respectively, with a fair value of $337 and $198, respectively.

Equity securities

Equity securities represents the carrying amount of the Company's basis in equity investments. Included within the equity securities balance are 16.6 million shares of Invesque for which the Company has elected to apply the fair value option. The following table presents the Company’s equity securities related to insurance operations and other Tiptree investing activity as of the following periods:
 
As of March 31, 2020
 
As of December 31, 2019
 
Tiptree Insurance
 
Tiptree Capital
 
Total
 
Tiptree Insurance
 
Tiptree Capital
 
Total
Invesque
$
9,212

 
$
44,012

 
$
53,224

 
$
19,376

 
$
92,562

 
$
111,938

Fixed income exchange traded fund
53,656

 

 
53,656

 
25,039

 

 
25,039

Other equity securities
22,142

 

 
22,142

 
18,401

 

 
18,401

Total equity securities
$
85,010

 
$
44,012

 
$
129,022

 
$
62,816

 
$
92,562

 
$
155,378


F- 18

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2020
(in thousands, except share data)



Other Investments

The following table contains information regarding the Company’s other investments as of the following periods:
 
As of March 31, 2020
 
As of December 31, 2019
 
Tiptree Insurance
 
Tiptree Capital
 
Total
 
Tiptree Insurance
 
Tiptree Capital
 
Total
Vessels, net (1)
$

 
$
85,066

 
$
85,066

 
$

 
$
85,991

 
$
85,991

Corporate bonds, at fair value
63,574

 

 
63,574

 
20,705

 

 
20,705

Other
21,164

 
13,073

 
34,237

 
21,747

 
9,029

 
30,776

Total other investments
$
84,738

 
$
98,139

 
$
182,877

 
$
42,452

 
$
95,020

 
$
137,472

(1) 
Net of accumulated depreciation of $4,941 and $3,817 as of March 31, 2020 and December 31, 2019, respectively.

Net Investment Income - Tiptree Insurance

Net investment income represents investment income and expense from investments related to insurance operations as disclosed within net investment income on the condensed consolidated statements of operations. The following tables present the components of net investment income by source of income:
 
Three Months Ended 
 March 31,
 
2020
 
2019
Interest:
 
 
 
AFS securities
$
2,281

 
$
2,127

Loans, at fair value
173

 
1,831

Other investments
855

 
104

Dividends from equity securities
591

 
574

Subtotal
3,900

 
4,636

Less: investment expenses
412

 
335

Net investment income
$
3,488

 
$
4,301


Other Investment Income - Tiptree Capital

Other investment income represents other income from other Tiptree non-insurance activities as disclosed within other revenue on the condensed consolidated statements of operations, see Note (16) Other Revenue and Other Expenses. The following tables present the components of other investment income by type:

 
Three Months Ended 
 March 31,
 
2020
 
2019
Interest income:
 
 
 
Loans, at fair value
$
1,731

 
$
1,360

Other

 
130

Dividends from equity securities
2,533

 
2,533

Loan fee income
3,554

 
2,239

Vessel related revenue
7,246

 
3,619

Other investment income
$
15,064

 
$
9,881



F- 19

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2020
(in thousands, except share data)


Net realized and unrealized gains (losses)

The following table presents the components of net realized and unrealized gains (losses) recorded on the condensed consolidated statements of operations. Net unrealized gains (losses) on AFS securities are included within other comprehensive income, and as such, are not included in this table. Net realized and unrealized gains (losses) on non-investment financial assets and liabilities are included below:
 
Three Months Ended 
 March 31,
 
2020
 
2019
Net realized gains (losses)
 
 
 
Tiptree Insurance:
 
 
 
Gains from recoveries (credit losses) on AFS securities
$
34

 
$

Net realized gains (losses) on loans
(1,518
)
 
(278
)
Net realized gains (losses) on equity securities
(16,564
)
 
482

Other
742

 
(5
)
Tiptree Capital:
 
 
 
Net realized gains (losses) on loans
22,630

 
13,587

Total net realized gains (losses)
5,324

 
13,786

 
 
 
 
Net unrealized gains (losses)
 
 
 
Tiptree Insurance:
 
 
 
Net change in unrealized gains (losses) on loans
(2,160
)
 
224

Net unrealized gains (losses) on equity securities held at period end
(25,770
)
 
1,760

Reclass of unrealized (gains) losses from prior periods for equity securities sold
16,252

 
(403
)
Other
(4,619
)
 
334

Tiptree Capital:
 
 
 
Net change in unrealized gains (losses) on loans
(653
)
 
23

Net unrealized gains (losses) on equity securities held at period end
(48,551
)
 
2,061

Other
(2,264
)
 
2,326

Total net unrealized gains (losses)
(67,765
)
 
6,325

Total net realized and unrealized gains (losses)
$
(62,441
)
 
$
20,111


(7) Notes and Accounts Receivable, net

The following table presents the total notes and accounts receivable, net:
 
As of
 
March 31, 2020
 
December 31, 2019
Notes receivable, net - premium financing program
$
55,400

 
$
42,192

Accounts and premiums receivable, net
71,360

 
50,712

Retrospective commissions receivable
118,518

 
105,387

Trust receivables
49,626

 
63,925

Other receivables
27,889

 
24,752

Total notes and accounts receivable, net
$
322,793

 
$
286,968


The following table presents the total valuation allowance and bad debt expense for the following periods:
 
Valuation allowance
 
Bad debt expense
 
As of
March 31,
2020
 
As of
December 31,
2019
 
Three Months Ended 
 March 31,
 
 
2020
 
2019
Notes receivable, net - premium financing program (1)
$
101

 
$
95

 
$
49

 
$
69

 
 
 
 
 
 
 
 
Accounts and premiums receivable, net
$
150

 
$
109

 
$
8

 
$
11

(1) 
As of March 31, 2020 and December 31, 2019, there were $200 and $93 in balances classified as 90 days plus past due, respectively.

F- 20

TIPTREE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2020
(in thousands, except share data)



(8) Reinsurance Receivables

The following table presents the effect of reinsurance on premiums written and earned by our insurance business for the following periods:
 
Direct amount
 
Ceded to other companies
 
Assumed from other companies
 
Net amount
 
Percentage of amount - assumed to net
For the Three Months Ended March 31, 2020
 
 
 
 
 
 
 
 
 
Premiums written:
 
 
 
 
 
 
 
 
 
Life insurance
$
16,574

 
$
8,744

 
$
362

 
$
8,192

 
4.4
%
Accident and health insurance
29,850

 
19,056

 
3,521

 
14,315

 
24.6
%
Property and liability insurance
197,725

 
116,550

 
28,800

 
109,975

 
26.2
%
Total premiums written
244,149

 
144,350

 
32,683

 
132,482