CLOs and Consolidated Variable Interest Entities

Telos Asset Management LLC (Telos), a subsidiary of the Company acquired in 2012, is a collateralized loan obligation (“CLO”) manager of five CLOs; namely Telos CLO 2014-5, Ltd. (Telos 5), Telos CLO 2013-4, Ltd. (Telos 4), Telos CLO 2013-3, Ltd. (Telos 3), Telos CLO 2007‑2, Ltd. (Telos 2) and Telos CLO 2006-1, Ltd. (Telos 1). Prior to the acquisition of Tiptree Asset Management Company, LLC (TAMCO), in June 2012, the Company did not consolidate the then existing CLOs (Telos 1 and Telos 2) as it only held a residual interest which was recorded at fair value. The Company met the requirement to consolidate when it acquired the management rights of the CLOs in June 2012.

The term CLO generally refers to a special purpose vehicle that owns a portfolio of investments and issues various tranches of debt and subordinated debt obligations to finance the purchase of those investments. The investment activities of a CLO are governed by extensive investment guidelines, generally contained within a CLO’s “indenture” and other governing documents which limit, among other things, the CLO’s exposure to any single industry or obligor and provide that the CLO’s assets satisfy certain ratings requirements. Most CLOs have a defined investment period during which they are allowed to make investments and reinvest capital as it becomes available.

The assets of each of the CLOs are held solely as collateral to satisfy the obligations of the CLOs. The Company does not own and has no right to the benefits from, nor does it bear the risks associated with, the assets held by the CLOs, beyond its direct investments in, and investment advisory fees generated from, the CLOs. If the Company were to liquidate, the assets of the CLOs would not be available to its general creditors, and as a result, the Company does not consider them assets available for the benefit of its investors. Additionally, the investors in the CLOs have no recourse to the Company’s general assets for the debt issued by the CLOs. Therefore, this debt is not the Company’s obligation. For this reason the difference between the fair value of the assets and liabilities at initial consolidation and subsequent results attributable to the Variable Interest Entities (“VIE”) subordinated noteholders is reflected as appropriated retained earnings.

The Company’s percentage ownerships of the subordinated notes of the CLOs as of June 30, 2014 are as follows: 7.11% (Telos 1), 95.45% (Telos 2), 0.00% (Telos 3), 71.08% (Telos 4) and 70.51% (Telos 5).

As of June 30, 2014 and December 31, 2013, the Company’s maximum exposure to loss related to the CLOs is limited to its investment in the CLOs of $56,976 and $38,459, respectively, as well as the management fees receivable of $3,112 and $3,616 as of June 30, 2014 and December 31, 2013, respectively. Both the carrying values of the Company’s investment in the CLOs and management fees receivable are eliminated upon consolidation.

On May 21, 2014, Telos entered into a new $100,000 warehouse agreement with Telos 2014-6, Ltd. (Telos 6). As of June 30, 2014, $118,983 is carried as investments in loans at fair value and $23,400 as debt on the consolidated balance sheet of Tiptree. The Company’s exposure in Telos 6 is limited to its equity investment of $25,000. In July 2014, the Company further contributed $10,000 to the warehouse. In August 2014, the Company contributed an additional $10,000 to the warehouse.

The table below represents the assets and liabilities of the consolidated CLOs that are included in the Company’s consolidated balance sheet as of the dates indicated. Subordinated debt obligations owned by Tiptree are not included in these tables as these amounts are eliminated in consolidation.



	June 30, 2014		December 31, 2013
Assets:
Restricted cash	$	140,862	$	67,604
Investment in loans	1,565,916		1,298,155
Investment in trading securities	21,472		19,366
Due from brokers	14,640		15,945
Accrued interest receivable	3,963		4,108
Deferred debt issuance costs	11,844		9,261
Other assets	212		177
Total assets of consolidated CLOs	$	1,758,909	$	1,414,616

Liabilities:
Notes payable	$	1,459,153	$	1,154,097
Due to brokers	53,337		11,479
Accrued interest payable	9,138		9,745
Other liabilities	465		285
Total liabilities of consolidated CLOs	$	1,522,093	$	1,175,606

The following table represents revenue and expenses of the consolidated CLOs included in the Company’s consolidated statements of operations for the periods indicated:



	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
Income:
Realized loss	$	(5,377	)	$	(5,502	)	$	(12,332	)	$	(6,165	)
Unrealized gain loans	(1,695		)	(6,685		)	(1,477		)	(3,569		)
Interest income	19,921			17,843			38,644			31,953
Total income attributable to consolidated CLOs	$	12,849		$	5,656		$	24,835		$	22,219

Expenses:
Interest expense	$	14,882		$	11,109		$	28,344		$	20,720
Other expense	115			308			645			518
Total expenses attributable to consolidated CLOs	$	14,997		$	11,417		$	28,989		$	21,238

The tables below summarize the debt obligations of the CLOs consolidated by the Company as of June 30, 2014 and December 31, 2013. Subordinated debt obligations owned by Tiptree are not included in these tables as these amounts are eliminated in consolidation:



	June 30, 2014
	Aggregate principal amount		Spread over three months LIBOR			Unamortized discount		Carrying amount
Description
Telos 5 (maturity April 2025)
Class A	$	252,000	1.55	%		$	251	$	251,749
Class B-1	39,000		N/A		⁽¹⁾	349		38,651
Class B-2	7,500		2.15	%		70		7,430
Class C	32,750		3.00	%		531		32,219
Class D	19,750		3.65	%		1,097		18,653
Class E	18,000		5.00	%		1,691		16,309
Class F	7,750		5.50	%		1,066		6,684
Subordinated	10,500		N/A			1,028		9,472

Telos 4 (maturity July 2024)
Class A	$	214,000	1.30	%		$	918	$	213,082
Class B	46,500		1.80	%		1,975		44,525
Class C	29,000		2.75	%		1,343		27,657
Class D	19,250		3.50	%		1,501		17,749
Class E	16,000		5.00	%		1,906		14,094
Class X	2,800		0.95	%		—		2,800
Subordinated	10,700		N/A			493		10,207




Telos 3 (maturity October 2024)
Class A	$	225,000	1.42	%	$	—	$	225,000
Class B	36,500		2.25	%	—		36,500
Class C	26,500		3.00	%	547		25,953
Class D	18,000		4.25	%	790		17,210
Class E	15,000		5.50	%	1,460		13,540
Class F	6,000		5.50	%	718		5,282
Subordinated	34,350		N/A		1,349		33,001

Telos 2 (maturity April 2022)
Class A-1	$	161,470	0.26	%	$	19,377	$	142,093
Class A-2	40,000		0.40	%	8,263		31,737
Class B	27,500		0.55	%	7,157		20,343
Class C	22,000		0.95	%	9,069		12,931
Class D	22,000		2.20	%	11,490		10,510
Class E	16,000		5.00	%	13,028		2,972
Subordinated	2,000		N/A		1,614		386

Telos 1 (maturity October 2021)
Class A-1D	$	24,666	0.27	%	$	2,870	$	21,796
Class A-1R	9,250		0.29	%	1,077		8,173
Class A-1T	33,915		0.27	%	3,946		29,969
Class A-2	60,000		0.40	%	12,068		47,932
Class B	27,200		0.49	%	6,887		20,313
Class C	22,000		0.85	%	8,831		13,169
Class D	22,000		1.70	%	11,094		10,906
Class E	16,000		4.25	%	12,676		3,324
Subordinated	40,223		N/A		25,391		14,832
	$	1,633,074			$	173,921	$	1,459,153

(1) Tranche B-1 Notes in Telos 5 have a fixed rate of 4.45% over the life of the CLO.



	December 31, 2013
	Aggregate principal amount		Spread over three months LIBOR		Unamortized discount		Carrying amount
Description
Telos 4 (maturity July 2024)
Class A	$	214,000	1.30	%	$	962	$	213,038
Class B	46,500		1.80	%	2,066		44,434
Class C	29,000		2.75	%	1,401		27,599
Class D	19,250		3.50	%	1,562		17,688
Class E	16,000		5.00	%	1,976		14,024
Class X	3,500		0.95	%	—		3,500
Subordinated	10,700		N/A		516		10,184

Telos 3 (maturity October 2024)
Class A	$	225,000	1.42	%	$	—	$	225,000
Class B	36,500		2.25	%	—		36,500
Class C	26,500		3.00	%	570		25,930
Class D	18,000		4.25	%	822		17,178
Class E	15,000		5.50	%	1,512		13,488
Class F	6,000		5.50	%	743		5,257
Subordinated	29,000		N/A		1,322		27,678

Telos 2 (maturity April 2022)
Class A-1	$	221,836	0.26	%	$	28,216	$	193,620
Class A-2	40,000		0.40	%	8,717		31,283
Class B	27,500		0.55	%	7,532		19,968
Class C	22,000		0.95	%	9,473		12,527
Class D	22,000		2.20	%	11,900		10,100
Class E	16,000		5.00	%	13,155		2,845
Subordinated	2,000		N/A		1,654		346

Telos 1 (maturity October 2021)
Class A-1D	$	39,270	0.27	%	$	4,867	$	34,403
Class A-1R	14,726		0.29	%	1,826		12,900
Class A-1T	53,996		0.27	%	6,693		47,303
Class A-2	60,000		0.40	%	12,781		47,219
Class B	27,200		0.49	%	7,277		19,923
Class C	22,000		0.85	%	9,261		12,739
Class D	22,000		1.70	%	11,548		10,452
Class E	16,000		4.25	%	12,861		3,139
Subordinated	40,223		N/A		26,391		13,832
	$	1,341,701			$	187,604	$	1,154,097