Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☒

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly period ended June 30, 2020

☐

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.)

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 ☒

As of August 1, 2020, there were 33,698,153 shares, par value $0.001, of the registrant’s common stock outstanding.

Tiptree Inc.

Quarterly Report on Form 10-Q

June 30, 2020

Table of Contents



ITEM		Page Number
PART I. Financial Information		F- 1
Item 1. Financial Statements (Unaudited)		F- 3
Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019		F- 3
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019		F- 4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2020 and 2019		F- 5
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the periods ended June 30, 2020 and 2019		F- 6
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019		F- 8
Notes to Condensed Consolidated Financial Statements		F- 9
(1) Organization		F- 9
(2) Summary of Significant Accounting Policies		F- 9
(3) Acquisitions		F- 12
(4) Dispositions and Assets Held for Sale		F- 14
(5) Operating Segment Data		F- 15
(6) Investments		F- 16
(7) Notes and Accounts Receivable, net		F- 22
(8) Reinsurance Receivables		F- 23
(9) Goodwill and Intangible Assets, net		F- 25
(10) Derivative Financial Instruments and Hedging		F- 27
(11) Debt, net		F- 28
(12) Fair Value of Financial Instruments		F- 30
(13) Liability for Unpaid Claims and Claim Adjustment Expenses		F- 35
(14) Revenue from Contracts with Customers		F- 36
(15) Other Assets and Other Liabilities and Accrued Expenses		F- 37
(16) Other Revenue and Other Expenses		F- 38
(17) Stockholders’ Equity		F- 39
(18) Accumulated Other Comprehensive Income (Loss)		F- 40
(19) Stock Based Compensation		F- 41
(20) Income Taxes		F- 43
(21) Commitments and Contingencies		F- 44
(22) Earnings Per Share		F- 45
(23) Related Party Transactions		F- 45
(24) Subsequent Events		F- 46
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		1
Item 3. Quantitative and Qualitative Disclosures About Market Risk		19
Item 4. Controls and Procedures		19

PART II. Other Information		20
Item 1. Legal Proceedings		20
Item 1A. Risk Factors		20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		21
Item 3. Defaults Upon Senior Securities		21
Item 4. Mine Safety Disclosures		21
Item 5. Other Information		21
Item 6. Exhibits, Financial Statement Schedules		22
Signatures		23

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.

“CARES Act” means the Coronavirus Aid, Relief, and Economic Security Act.

“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.

F- 1

“Tax Act” means Public Law no. 115-97, commonly referred to as the Tax Cuts and Jobs Act.

“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
	June 30, 2020		December 31, 2019
Assets:
Investments:
Available for sale securities, at fair value, net of allowance for credit losses	$	345,718	$	335,192
Loans, at fair value	86,271		108,894
Equity securities	118,328		155,378
Other investments	207,524		137,472
Total investments	757,841		736,936
Cash and cash equivalents	80,604		133,117
Restricted cash	77,307		11,473
Notes and accounts receivable, net	324,617		286,968
Reinsurance receivables	591,034		539,833
Deferred acquisition costs	181,367		166,493
Goodwill	163,366		99,147
Intangible assets, net	136,525		47,974
Other assets	86,775		68,510
Assets held for sale	81,065		107,835
Total assets	$	2,480,501	$	2,198,286

Liabilities and Stockholders’ Equity
Liabilities:
Debt, net	$	402,282	$	374,454
Unearned premiums	712,592		754,993
Policy liabilities and unpaid claims	195,780		144,384
Deferred revenue	320,024		94,601
Reinsurance payable	169,297		143,869
Other liabilities and accrued expenses	258,192		172,140
Liabilities held for sale	75,145		102,430
Total liabilities	$	2,133,312	$	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, 33,676,183 and 34,562,553 shares issued and outstanding, respectively	34		35
Additional paid-in capital	318,817		326,140
Accumulated other comprehensive income (loss), net of tax	5,827		1,698
Retained earnings	11,143		70,189
Total Tiptree Inc. stockholders’ equity	335,821		398,062
Non-controlling interests	11,368		13,353
Total stockholders’ equity	347,189		411,415
Total liabilities and stockholders’ equity	$	2,480,501	$	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 June 30,					Six Months Ended June 30,
	2020			2019		2020			2019
Revenues:
Earned premiums, net	$	107,255		$	116,576	$	228,576		$	235,549
Service and administrative fees	42,865			26,728		86,589			52,623
Ceding commissions	4,535			3,048		11,060			5,552
Net investment income	2,292			3,428		5,780			7,729
Net realized and unrealized gains (losses)	30,110			23,333		(32,331		)	43,444
Other revenue	12,137			17,959		29,191			30,078
Total revenues	199,194			191,072		328,865			374,975
Expenses:
Policy and contract benefits	49,147			39,422		110,023			80,263
Commission expense	67,903			72,737		138,304			147,640
Employee compensation and benefits	40,678			30,969		79,179			60,122
Interest expense	7,646			6,532		15,197			13,452
Depreciation and amortization	4,371			3,291		8,234			6,385
Other expenses	25,015			22,416		55,245			46,253
Total expenses	194,760			175,367		406,182			354,115
Income (loss) before taxes	4,434			15,705		(77,317		)	20,860
Less: provision (benefit) for income taxes	(5		)	3,501		(21,186		)	4,355
Net income (loss) before non-controlling interests	4,439			12,204		(56,131		)	16,505
Less: net income (loss) attributable to non-controlling interests	623			458		60			834
Net income (loss) attributable to common stockholders	$	3,816		$	11,746	$	(56,191	)	$	15,671

Net income (loss) per common share:
Basic earnings per share	$	0.11		$	0.33	$	(1.64	)	$	0.44
Diluted earnings per share	$	0.10		$	0.32	$	(1.64	)	$	0.43

Weighted average number of common shares:
Basic	33,984,195			34,527,230		34,269,096			34,599,739
Diluted	33,984,195			34,527,230		34,269,096			34,599,739

Dividends declared per common share	$	0.04		$	0.04	$	0.08		$	0.08

See accompanying notes to condensed consolidated financial statements.

F- 4

TIPTREE INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(in thousands)



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net income (loss) before non-controlling interests	$	4,439		$	12,204		$	(56,131	)	$	16,505

Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available for sale securities:
Unrealized holding gains (losses) arising during the period	4,998			2,531			5,357			5,659
Related tax (expense) benefit	(1,121		)	(561		)	(1,179		)	(1,274		)
Reclassification of (gains) losses included in net income	(87		)	(1,046		)	(91		)	(1,041		)
Related tax expense (benefit)	20			222			21			221
Unrealized gains (losses) on available for sale securities, net of tax	3,810			1,146			4,108			3,565

Other comprehensive income (loss), net of tax	3,810			1,146			4,108			3,565
Comprehensive income (loss)	8,249			13,350			(52,023		)	20,070
Less: Comprehensive income (loss) attributable to non-controlling interests	636			466			81			853
Comprehensive income (loss) attributable to common stockholders	$	7,613		$	12,884		$	(52,104	)	$	19,217

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, 2019	34,562,553		$	35		$	326,140		$	1,698	$	70,189		$	398,062		$	13,353		$	411,415
Adoption of accounting standard ⁽¹⁾	—		—			—			42		(42		)	—			—			—
Amortization of share-based incentive compensation	—		—			1,941			—		—			1,941			1,522			3,463
Vesting of share-based incentive compensation ⁽²⁾	455,798		—			(178		)	—		—			(178		)	(1,868		)	(2,046		)
Shares purchased under stock purchase plan	(1,342,168	)	(1		)	(8,499		)	—		—			(8,500		)	—			(8,500		)
Non-controlling interest distributions ⁽²⁾	—		—			(587		)	—		—			(587		)	(1,220		)	(1,807		)
Net change in non-controlling interests	—		—			—			—		—			—			(500		)	(500		)
Dividends declared	—		—			—			—		(2,813		)	(2,813		)	—			(2,813		)
Other comprehensive income (loss), net of tax	—		—			—			4,087		—			4,087			21			4,108
Net income (loss)	—		—			—			—		(56,191		)	(56,191		)	60			(56,131		)
Balance at June 30, 2020	33,676,183		$	34		$	318,817		$	5,827	$	11,143		$	335,821		$	11,368		$	347,189

Balance at March 31, 2020	34,302,131		$	34		$	323,064		$	2,030	$	8,725		$	333,853		$	10,483		$	344,336
Amortization of share-based incentive compensation	—		—			741			—		—			741			1,179			1,920
Vesting of share-based incentive compensation	133,089		—			154			—		—			154			(2		)	152
Shares purchased under stock purchase plan	(759,037	)	—			(4,555		)	—		—			(4,555		)	—			(4,555		)
Non-controlling interest distributions⁽²⁾	—		—			(587		)	—		—			(587		)	(428		)	(1,015		)
Net change in non-controlling interests	—		—			—			—		—			—			(500		)	(500		)
Dividends declared	—		—			—			—		(1,398		)	(1,398		)	—			(1,398		)
Other comprehensive income (loss), net of tax	—		—			—			3,797		—			3,797			13			3,810
Net income (loss)	—		—			—			—		3,816			3,816			623			4,439
Balance at June 30, 2020	33,676,183		$	34		$	318,817		$	5,827	$	11,143		$	335,821		$	11,368		$	347,189


⁽¹⁾	Amounts reclassified due to adoption of ASU 2016-13. See Note (2) Summary of Significant Accounting Policies.


⁽²⁾	Includes subsidiary RSU exchanges. See Note (19) Stock Based Compensation.

F- 6

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	—		—			1,533			—			—			1,533			1,313			2,846
Vesting of share-based incentive compensation ⁽²⁾	142,814		—			(20		)	—			—			(20		)	(2,236		)	(2,256		)
Shares purchased under stock purchase plan	(1,472,730	)	(1		)	(9,084		)	—			—			(9,085		)	—			(9,085		)
Non-controlling interest contributions	—		—			—			—			—			—			50			50
Non-controlling interest distributions	—		—			—			—			—			—			(1,185		)	(1,185		)
Dividends declared	—		—			—			—			(2,661		)	(2,661		)	—			(2,661		)
Other comprehensive income (loss), net of tax	—		—			—			3,546			—			3,546			19			3,565
Net income (loss)	—		—			—			—			15,671			15,671			834			16,505
Balance at June 30, 2019	34,540,432		$	35		$	324,321		$	1,389		$	70,340		$	396,085		$	10,953		$	407,038

Balance at March 31, 2019	34,505,781		$	35		$	323,334		$	251		$	60,015		$	383,635		$	11,020		$	394,655
Amortization of share-based incentive compensation	—		—			863			—			—			863			652			1,515
Vesting of share-based incentive compensation ⁽²⁾	34,651		—			124			—			—			124			—			124
Non-controlling interest distributions	—		—			—			—			—			—			(1,185		)	(1,185		)
Dividends declared	—		—			—			—			(1,421		)	(1,421		)	—			(1,421		)
Other comprehensive income (loss), net of tax	—		—			—			1,138			—			1,138			8			1,146
Net income (loss)	—		—			—			—			11,746			11,746			458			12,204
Balance at June 30, 2019	34,540,432		$	35		$	324,321		$	1,389		$	70,340		$	396,085		$	10,953		$	407,038


⁽¹⁾	Amounts reclassified due to adoption of ASU 2018-02. See Note (2) Summary of Significant Accounting Policies.


⁽²⁾	Includes subsidiary RSU exchanges. See Note (19) Stock Based Compensation.

See accompanying notes to condensed consolidated financial statements.

F- 7

TIPTREE INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)



	Six Months Ended June 30,
	2020			2019
Operating Activities:
Net income (loss) attributable to common stockholders	$	(56,191	)	$	15,671
Net income (loss) attributable to non-controlling interests	60			834
Net income (loss)	(56,131		)	16,505
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Net realized and unrealized (gains) losses	32,331			(43,444		)
Net (gain) on sale of businesses	—			(7,598		)
Non-cash compensation expense	3,669			2,998
Amortization/accretion of premiums and discounts	994			508
Depreciation and amortization expense	8,234			6,385
Non-cash lease expense	4,237			3,700
Dividend reinvestment plan income	(953		)	—
Bad debt expense	127			57
Amortization of deferred financing costs	333			392
Loss on extinguishment of debt	353			1,241
Deferred tax expense (benefit)	(13,214		)	3,943
Changes in operating assets and liabilities:
Mortgage loans originated for sale	(1,233,528		)	(807,184		)
Proceeds from the sale of mortgage loans originated for sale	1,337,392			816,933
(Increase) decrease in notes and accounts receivable	(13,856		)	(2,574		)
(Increase) decrease in reinsurance receivables	20,136			(7,064		)
(Increase) decrease in deferred acquisition costs	(14,874		)	(22,620		)
(Increase) decrease in other assets	(17,826		)	3,759
Increase (decrease) in unearned premiums	(42,401		)	46,665
Increase (decrease) in policy liabilities and unpaid claims	110			(2,921		)
Increase (decrease) in deferred revenue	42,855			4,347
Increase (decrease) in reinsurance payable	(1,647		)	6,074
Increase (decrease) in other liabilities and accrued expenses	3,974			(18,261		)
Net cash provided by (used in) operating activities	60,315			1,841
Investing Activities:
Purchases of investments	(687,938		)	(146,773		)
Proceeds from sales and maturities of investments	651,214			292,713
Proceeds from the sale of real estate	499			6,201
Purchases of property, plant and equipment	(3,083		)	(6,035		)
Proceeds from the sale of businesses	250			18,079
Proceeds from notes receivable	15,893			15,902
Issuance of notes receivable	(33,804		)	(23,826		)
Business and asset acquisitions, net of cash, restricted cash and deposits ⁽¹⁾	20,900			—
Net cash provided by (used in) investing activities	(36,069		)	156,261
Financing Activities:
Dividends paid	(2,813		)	(2,661		)
Non-controlling interest contributions	—			50
Non-controlling interest distributions	(1,807		)	(1,185		)
Payment of debt issuance costs	(1,634		)	(79		)
Proceeds from borrowings and mortgage notes payable	1,486,297			874,999
Principal paydowns of borrowings and mortgage notes payable	(1,485,302		)	(926,572		)
Repurchases of common stock	(8,500		)	(9,085		)
Net cash provided by (used in) financing activities	(13,759		)	(64,533		)
Net increase (decrease) in cash, cash equivalents and restricted cash	10,487			93,569
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⁾	162,214			192,953
Less: Reclassification of cash to assets held for sale	4,303			3,587
Cash, cash equivalents and restricted cash – end of period	$	157,911		$	189,366
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Right-of-use asset obtained in exchange for lease liability	$	513		$	33,558
Equity securities acquired as part of a dividend reinvestment plan	$	953		$	—
Acquired real estate properties through, or in lieu of, foreclosure of the related loan	$	—		$	2,596
	As of
Reconciliation of cash, cash equivalents and restricted cash shown in the statement of cash flows	June 30, 2020			December 31, 2019
Cash and cash equivalents	$	80,604		$	133,117
Restricted cash	77,307			11,473
Total cash, cash equivalents and restricted cash shown in the statement of cash flows	$	157,911		$	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 six months ended June 30, 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- 8

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 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 and six months ended June 30, 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 at 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- 9

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 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- 10

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 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 was 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- 11

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 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 were 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, available for sale 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- 12

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 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 3-year and 5-year 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 4-year and 5-year anniversary of closing (Profits Based Earn-Out Amount). In addition, the purchase price will be subject to a true-up following the 5-year 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 are 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 June 30, 2020, Smart AutoCare total revenue was $29,867 and the loss before taxes was $137.

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- 13

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 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
Restricted cash	764
Notes and accounts receivable, net	6,214
Reinsurance receivables	71,337
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) Dispositions and Assets Held for Sale

On April 10, 2019, the Company completed the sale of the management contracts and related assets for the CLOs managed by Telos Asset Management, LLC (Telos). The pre-tax gain on sale for the three months ended June 30, 2019 was $7,598, which is included in other revenue. See Note (16) Other Revenue and Other Expenses. The sale did not meet the requirements to be classified as a discontinued operation.

The sale agreement also contains a provision which provides for contingent consideration if the Telos business achieves specific performance metrics. This contingent consideration represents a gain contingency, and the Company will not recognize any additional gain unless such consideration is realized.

The Company has entered into a definitive agreement to sell Luxury, and it is classified as held for sale at June 30, 2020 and

F- 14

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

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:



	As of
	June 30, 2020		December 31, 2019
Assets:
Investments:
Loans, at fair value	$	70,150	$	98,272
Other investments	3,059		1,019
Total investments	73,209		99,291
Cash and cash equivalents	4,108		7,137
Restricted cash	195		—
Notes and accounts receivable, net	447		238
Other assets	3,106		1,169
Assets held for sale	$	81,065	$	107,835

Liabilities:
Debt, net	$	71,083	$	97,822
Other liabilities and accrued expenses	4,062		4,608
Liabilities held for sale	$	75,145	$	102,430

As of June 30, 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) 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- 15

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 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 June 30,
	2020									2019
	Tiptree Insurance			Tiptree Capital			Total			Tiptree Insurance			Tiptree Capital			Total
Total revenues	$	164,954		$	34,240		$	199,194		$	154,349		$	36,723		$	191,072
Total expenses	(150,866		)	(36,023		)	(186,889		)	(142,439		)	(25,024		)	(167,463		)
Corporate expenses	—			—			(7,871		)	—			—			(7,904		)
Income (loss) before taxes	$	14,088		$	(1,783	)	$	4,434		$	11,910		$	11,699		$	15,705
Less: provision (benefit) for income taxes							(5		)							3,501
Net income (loss) before non-controlling interests							$	4,439								$	12,204
Less: net income (loss) attributable to non-controlling interests							623									458
Net income (loss) attributable to common stockholders							$	3,816								$	11,746



	Six Months Ended June 30,
	2020									2019
	Tiptree Insurance			Tiptree Capital			Total			Tiptree Insurance			Tiptree Capital			Total
Total revenues	$	308,294		$	20,571		$	328,865		$	308,977		$	65,998		$	374,975
Total expenses	(321,323		)	(68,685		)	(390,008		)	(288,929		)	(48,381		)	(337,310		)
Corporate expenses	—			—			(16,174		)	—			—			(16,805		)
Income (loss) before taxes	$	(13,029	)	$	(48,114	)	$	(77,317	)	$	20,048		$	17,617		$	20,860
Less: provision (benefit) for income taxes							(21,186		)							4,355
Net income (loss) before non-controlling interests							$	(56,131	)							$	16,505
Less: net income (loss) attributable to non-controlling interests							60									834
Net income (loss) attributable to common stockholders							$	(56,191	)							$	15,671

The following table presents sources of revenue from Tiptree Capital:



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020			2019
Net realized and unrealized gains (losses) ⁽¹⁾	$	24,476	$	19,688	$	(4,362	)	$	37,685
Other investment income ⁽²⁾	9,683		9,274		24,747			19,155
Gain on sale of businesses ⁽³⁾	—		7,598		—			7,598
Management fee income	—		—		—			1,267
Other	81		163		186			293
Total revenues	$	34,240	$	36,723	$	20,571		$	65,998


⁽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.


⁽³⁾	Related to the sale of Telos. See Note (4) Dispositions and Assets Held for Sale.

The following table presents the reportable segment and Tiptree Capital assets for the following periods:



	As of June 30, 2020								As of December 31, 2019
	Tiptree Insurance		Tiptree Capital		Corporate		Total		Tiptree Insurance		Tiptree Capital		Corporate		Total
Total assets	$	2,084,676	$	363,949	$	31,876	$	2,480,501	$	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

F- 16

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

from other Tiptree investing activities (Tiptree Capital), measured at fair value as of the following periods:



	As of June 30, 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	$	345,718	$	—	$	345,718	$	335,192	$	—	$	335,192
Loans, at fair value	6,813		79,458		86,271		10,174		98,720		108,894
Equity securities	83,348		34,980		118,328		62,816		92,562		155,378
Other investments	111,497		96,027		207,524		42,452		95,020		137,472
Total investments	$	547,376	$	210,465	$	757,841	$	450,634	$	286,302	$	736,936

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 June 30, 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 June 30, 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	$	185,891	$	—		$	6,415	$	(19	)	$	192,287
Obligations of state and political subdivisions	38,887		—			1,653		(1		)	40,539
Corporate securities	68,208		(2		)	2,282		(16		)	70,472
Asset backed securities	41,365		—			326		(3,160		)	38,531
Certificates of deposit	854		—			—		—			854
Obligations of foreign governments	2,992		—			43		—			3,035
Total	$	338,197	$	(2	)	$	10,719	$	(3,196	)	$	345,718

⁽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

F- 17

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

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
	June 30, 2020				December 31, 2019
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	10,559	$	10,672	$	9,584	$	9,602
Due after one year through five years	143,823		148,325		130,223		131,952
Due after five years through ten years	19,874		21,056		19,508		20,125
Due after ten years	122,576		127,134		128,039		129,495
Asset backed securities	41,365		38,531		45,634		44,018
Total	$	338,197	$	345,718	$	332,988	$	335,192

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 June 30, 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	$	11,496	$	(19	)	30	$	16	$	—		6
Obligations of state and political subdivisions	865		(1		)	6	—		—			—
Corporate securities	3,547		(16		)	14	—		—			—
Asset backed securities	8,031		(85		)	6	18,022		(3,075		)	8
Obligations of foreign governments	—		—			—	—		—			—
Total	$	23,939	$	(121	)	56	$	18,038	$	(3,075	)	14

	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 June 30, 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 June 30, 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			48			2			51
Ending balance of the allowance for credit losses on AFS securities	$	—		$	(2	)	$	—		$	(2	)

F- 18

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

The Company applies a discounted cash flow model, based on assumptions and model outputs provided by an investment management company, 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 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 June 30, 2020			Six Months Ended June 30, 2020
Credit losses (gains from recoveries) on AFS securities	$	(17	)	$	(51	)

Pursuant to certain reinsurance agreements and statutory licensing requirements, the Company has deposited invested assets in 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
	June 30, 2020		December 31, 2019
Fair value of restricted investments for special deposits required by state insurance departments	$	7,812	$	6,275
Fair value of restricted investments in trust pursuant to reinsurance agreements	42,677		33,478
Total fair value of restricted investments	$	50,489	$	39,753

The following table presents additional information on the Company’s AFS securities:



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Purchases of AFS securities	$	38,415	$	109,714	$	61,995	$	139,575

Proceeds from maturities, calls and prepayments of AFS securities	$	24,189	$	6,135	$	43,849	$	17,279

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

Gross proceeds from sales of AFS securities	$	6,816	$	120,747	$	12,376	$	141,915

Gains (losses) realized on sales of AFS securities	$	92	$	1,056	$	96	$	1,052

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 June 30, 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⁾	$	6,813	$	11,054	$	(4,241	)	$	—	$	9,787	$	12,006	$	(2,219	)	$	—
Non-performing loans ⁽²⁾	—		—		—			—		387		409		(22		)	—
Tiptree Capital:
Mortgage loans held for sale ⁽³⁾	79,458		75,295		4,163			77,808		98,720		95,680		3,040			98,086
Total loans, at fair value	$	86,271	$	86,349	$	(78	)	$	77,808	$	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 June 30, 2020 and December 31, 2019, respectively.


⁽³⁾	As of June 30, 2020 and December 31, 2019, there were two mortgage loans and one mortgage loan held for sale that were 90 days or more past due, respectively, with a fair value of $337 and $198, respectively.

F- 19

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

Equity securities

Equity securities represents the carrying amount of the Company's basis in equity investments. Included within the equity securities balance are 17.0 million shares of Invesque as of June 30, 2020, and 16.6 million as of December 31, 2019, 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 June 30, 2020						As of December 31, 2019
	Tiptree Insurance		Tiptree Capital		Total		Tiptree Insurance		Tiptree Capital		Total
Invesque	$	7,306	$	34,980	$	42,286	$	19,376	$	92,562	$	111,938
Fixed income exchange traded fund	54,851		—		54,851		25,039		—		25,039
Other equity securities	21,191		—		21,191		18,401		—		18,401
Total equity securities	$	83,348	$	34,980	$	118,328	$	62,816	$	92,562	$	155,378

Other Investments

The following table contains information regarding the Company’s other investments as of the following periods:



	As of June 30, 2020						As of December 31, 2019
	Tiptree Insurance		Tiptree Capital		Total		Tiptree Insurance		Tiptree Capital		Total
Vessels, net ⁽¹⁾	$	—	$	84,319	$	84,319	$	—	$	85,991	$	85,991
Corporate bonds, at fair value	91,521		—		91,521		20,705		—		20,705
Other	19,976		11,708		31,684		21,747		9,029		30,776
Total other investments	$	111,497	$	96,027	$	207,524	$	42,452	$	95,020	$	137,472


⁽¹⁾	Net of accumulated depreciation of $6,071 and $3,817 as of June 30, 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 June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Interest:
AFS securities	$	1,974	$	2,084	$	4,255	$	4,211
Loans, at fair value	223		777		396		2,608
Other investments	295		106		1,150		210
Dividends from equity securities	477		855		1,068		1,429
Subtotal	2,969		3,822		6,869		8,458
Less: investment expenses	677		394		1,089		729
Net investment income	$	2,292	$	3,428	$	5,780	$	7,729

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:

F- 20

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Interest income:
Loans, at fair value	$	956	$	1,517	$	2,687	$	2,877
Other	—		—		—		130
Dividends from equity securities	—		2,533		2,533		5,066
Loan fee income	4,272		2,892		7,826		5,131
Vessel related revenue	4,455		2,332		11,701		5,951
Other investment income	$	9,683	$	9,274	$	24,747	$	19,155

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 June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net realized gains (losses)
Tiptree Insurance:
Reclass of unrealized gains (losses) on AFS securities from OCI	$	87		$	1,046		$	91		$	1,041
Gains from recoveries (credit losses) on AFS securities	17			—			51			—
Net realized gains (losses) on loans	11			2,294			(1,507		)	2,016
Net realized gains (losses) on equity securities	(4,325		)	—			(20,889		)	482
Other	2,574			—			3,312			—
Tiptree Capital:
Net realized gains (losses) on loans	28,379			16,861			51,009			30,448
Total net realized gains (losses)	26,743			20,201			32,067			33,987

Net unrealized gains (losses)
Tiptree Insurance:
Net change in unrealized gains (losses) on loans	(60		)	(3,632		)	(2,220		)	(3,408		)
Net unrealized gains (losses) on equity securities held at period end	1,030			3,531			(24,740		)	5,291
Reclass of unrealized (gains) losses from prior periods for equity securities sold	757			—			17,009			(403		)
Other	5,543			406			924			740
Tiptree Capital:
Net change in unrealized gains (losses) on loans	1,628			872			975			895
Net unrealized gains (losses) on equity securities held at period end	(9,833		)	3,047			(58,384		)	5,108
Other	4,302			(1,092		)	2,038			1,234
Total net unrealized gains (losses)	3,367			3,132			(64,398		)	9,457
Total net realized and unrealized gains (losses)	$	30,110		$	23,333		$	(32,331	)	$	43,444

F- 21

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

(7) Notes and Accounts Receivable, net

The following table presents the total notes and accounts receivable, net:



	As of
	June 30, 2020		December 31, 2019
Notes receivable, net - premium financing program	$	59,993	$	42,192
Accounts and premiums receivable, net	63,214		50,712
Retrospective commissions receivable	128,125		105,387
Trust receivables	48,401		63,925
Other receivables	24,884		24,752
Total notes and accounts receivable, net	$	324,617	$	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				Three Months Ended June 30,				Six Months Ended June 30,
	June 30, 2020		December 31, 2019		Three Months Ended June 30,				Six Months Ended June 30,
	June 30, 2020		December 31, 2019		2020		2019		2020		2019
Notes receivable, net - premium financing program ⁽¹⁾	$	112	$	95	$	62	$	47	$	111	$	116

Accounts and premiums receivable, net	$	165	$	109	$	5	$	9	$	13	$	20


⁽¹⁾	As of June 30, 2020 and December 31, 2019, there were $370 and $93 in balances classified as 90 days plus past due, respectively.

F- 22

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 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 June 30, 2020
Premiums written:
Life insurance	$	10,853	$	5,610	$	328	$	5,571	5.9	%
Accident and health insurance	18,307		11,643		4,720		11,384		41.5	%
Property and liability insurance	159,583		94,957		18,928		83,554		22.7	%
Total premiums written	188,743		112,210		23,976		100,509		23.9	%

Premiums earned:
Life insurance	16,682		8,935		358		8,105		4.4	%
Accident and health insurance	28,336		18,579		3,053		12,810		23.8	%
Property and liability insurance	158,646		88,965		16,659		86,340		19.3	%
Total premiums earned	$	203,664	$	116,479	$	20,070	$	107,255	18.7	%

For the Three Months Ended June 30, 2019
Premiums written:
Life insurance	$	18,924	$	10,353	$	444	$	9,015	4.9	%
Accident and health insurance	32,361		21,105		819		12,075		6.8	%
Property and liability insurance	191,868		77,451		18,157		132,574		13.7	%
Total premiums written	243,153		108,909		19,420		153,664		12.6	%

Premiums earned:
Life insurance	16,654		8,736		404		8,322		4.9	%
Accident and health insurance	29,677		19,742		794		10,729		7.4	%
Property and liability insurance	143,611		59,732		13,646		97,525		14.0	%
Total premiums earned	$	189,942	$	88,210	$	14,844	$	116,576	12.7	%

For the Six Months Ended June 30, 2020
Premiums written:
Life insurance	$	27,427	$	14,354	$	690	$	13,763	5.0	%
Accident and health insurance	48,157		30,699		8,241		25,699		32.1	%
Property and liability insurance	357,307		211,507		47,728		193,528		24.7	%
Total premiums written	432,891		256,560		56,659		232,990		24.3	%

Premiums earned:
Life insurance	34,290		18,296		739		16,733		4.4	%
Accident and health insurance	60,506		40,097		6,595		27,004		24.4	%
Property and liability insurance	331,501		189,915		43,253		184,839		23.4	%
Total premiums earned	$	426,297	$	248,308	$	50,587	$	228,576	22.1	%

For the Six Months Ended June 30, 2019
Premiums written:
Life insurance	$	33,835	$	18,056	$	835	$	16,614	5.0	%
Accident and health insurance	60,160		39,080		1,566		22,646		6.9	%
Property and liability insurance	329,471		129,270		35,160		235,361		14.9	%
Total premiums written	423,466		186,406		37,561		274,621		13.7	%

Premiums earned:
Life insurance	33,103		17,262		820		16,661		4.9	%
Accident and health insurance	60,290		40,365		1,588		21,513		7.4	%
Property and liability insurance	288,605		120,542		29,312		197,375		14.9	%
Total premiums earned	$	381,998	$	178,169	$	31,720	$	235,549	13.5	%

F- 23

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

The following table presents the components of policy and contract benefits, including the effect of reinsurance on losses and loss adjustment expenses (LAE) incurred:



	Direct amount		Ceded to other companies		Assumed from other companies			Net amount		Percentage of amount - assumed to net
For the Three Months Ended June 30, 2020
Losses Incurred
Life insurance	$	10,563	$	6,314	$	160		$	4,409	3.6	%
Accident and health insurance	3,918		3,261		1,809			2,466		73.4	%
Property and liability insurance	59,442		36,064		6,205			29,583		21.0	%
Total losses incurred	73,923		45,639		8,174			36,458		22.4	%

	Member benefit claims ⁽¹⁾							12,689
	Total policy and contract benefits							$	49,147

For the Three Months Ended June 30, 2019
Losses Incurred
Life insurance	$	9,483	$	5,615	$	194		$	4,062	4.8	%
Accident and health insurance	3,601		2,789		(81		)	731		(11.1	)%
Property and liability insurance	53,641		35,175		11,065			29,531		37.5	%
Total losses incurred	66,725		43,579		11,178			34,324		32.6	%

	Member benefit claims ⁽¹⁾							5,098
	Total policy and contract benefits							$	39,422

For the Six Months Ended June 30, 2020
Losses and LAE Incurred
Life insurance	$	20,654	$	11,988	$	281		$	8,947	3.1	%
Accident and health insurance	7,617		6,303		4,022			5,336		75.4	%
Property and liability insurance	126,712		77,298		18,737			68,151		27.5	%
Total losses and LAE incurred	154,983		95,589		23,040			82,434		27.9	%

	Member benefit claims ⁽¹⁾							27,589
	Total policy and contract benefits							$	110,023

For the Six Months Ended June 30, 2019
Losses and LAE Incurred
Life insurance	$	19,441	$	11,519	$	186		$	8,108	2.3	%
Accident and health insurance	6,931		5,274		140			1,797		7.8	%
Property and liability insurance	109,559		70,753		21,406			60,212		35.6	%
Total losses and LAE incurred	135,931		87,546		21,732			70,117		31.0	%

	Member benefit claims ⁽¹⁾							10,146
	Total policy and contract benefits							$	80,263


⁽¹⁾	Member benefit claims are not covered by reinsurance.

The following table presents the components of the reinsurance receivables:

F- 24

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)



	As of
	June 30, 2020		December 31, 2019
Prepaid reinsurance premiums:
Life ⁽¹⁾	$	67,026	$	72,675
Accident and health ⁽¹⁾	56,995		66,393
Property	327,350		286,411
Total	451,371		425,479

Ceded claim reserves:
Life	3,262		3,350
Accident and health	9,963		11,065
Property	73,343		74,384
Total ceded claim reserves recoverable	86,568		88,799
Other reinsurance settlements recoverable	53,095		25,555
Reinsurance receivables ⁽²⁾	$	591,034	$	539,833


⁽¹⁾	Including policyholder account balances ceded.


⁽²⁾	Includes $71,337 from the acquired balance sheet of Smart AutoCare. See Note (3) Acquisitions.

The following table presents the aggregate amount included in reinsurance receivables that is comprised of the three largest receivable balances from non-affiliated reinsurers:



	As of
	June 30, 2020
Total of the three largest receivable balances from non-affiliated reinsurers	$	152,803

As of June 30, 2020, the non-affiliated reinsurers from whom our insurance business has the largest receivable balances were: MFI Insurance Company, LTD (A. M. Best Rating: Not rated), Frandisco Property and Casualty Company (A. M. Best Rating: Not rated) and London Life International Reinsurance Corporation (A. M. Best Rating: Not rated). The related receivables of these reinsurers are collateralized by assets on hand, assets held in trust accounts and letters of credit. As of June 30, 2020, the Company does not believe there is a risk of loss due to the concentration of credit risk in the reinsurance program given the collateralization.

(9) Goodwill and Intangible Assets, net

The following table presents identifiable finite and indefinite-lived intangible assets, accumulated amortization, and goodwill by operating segment and/or reporting unit, as appropriate:



	As of June 30, 2020									As of December 31, 2019
	Tiptree Insurance			Other ⁽¹⁾			Total			Tiptree Insurance			Other ⁽¹⁾			Total
Customer relationships	$	139,500		$	—		$	139,500		$	53,500		$	—		$	53,500
Accumulated amortization	(28,375		)	—			(28,375		)	(24,318		)	—			(24,318		)
Trade names	13,850			800			14,650			6,750			800			7,550
Accumulated amortization	(3,833		)	(400		)	(4,233		)	(3,273		)	(360		)	(3,633		)
Software licensing	9,300			640			9,940			8,500			640			9,140
Accumulated amortization	(8,580		)	(457		)	(9,037		)	(8,500		)	(411		)	(8,911		)
Insurance policies and contracts acquired	36,500			—			36,500			36,500			—			36,500
Accumulated amortization	(36,181		)	—			(36,181		)	(36,115		)	—			(36,115		)
Insurance licensing agreements⁽²⁾	13,761			—			13,761			14,261			—			14,261
Intangible assets, net	135,942			583			136,525			47,305			669			47,974
Goodwill	161,658			1,708			163,366			97,439			1,708			99,147
Total goodwill and intangible assets, net	$	297,600		$	2,291		$	299,891		$	144,744		$	2,377		$	147,121


⁽¹⁾	Other is primarily comprised of mortgage operations.


⁽²⁾	Represents intangible assets with an indefinite useful life. Impairment tests are performed at least annually on these assets.

Goodwill

F- 25

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

The following table presents the activity in goodwill, by operating segment and/or reporting unit, as appropriate, and includes the adjustments made to the balance of goodwill to reflect the effect of the final valuation adjustments made for acquisitions, as well as the reduction to any goodwill attributable to impairment related charges:



	Tiptree Insurance			Other		Total
Balance at December 31, 2019	$	97,439		$	1,708	$	99,147
Goodwill acquired ⁽¹⁾	64,476			—		64,476
Purchase accounting adjustment⁽²⁾	(257		)	—		(257		)
Balance at June 30, 2020	$	161,658		$	1,708	$	163,366

Accumulated impairments	$	—		$	699	$	699


⁽¹⁾	Relates to an acquisition in our insurance business as of January 3, 2020 based on the initial valuation, and may be adjusted during the measurement period as permitted under ASC 805. See Note (3) Acquisitions.


⁽²⁾	Relates to adjustments during the measurement period as permitted under ASC 805 for the final valuation of acquisition in our insurance business as of July 1, 2019.

The Company conducts annual impairment tests of its goodwill as of October 1. For the three and six months ended June 30, 2020 and 2019, respectively, no impairment was recorded on the Company’s goodwill or intangibles.

Intangible Assets, net

The following table presents the activity, by operating segment and/or reporting unit, as appropriate, in finite and indefinite-lived other intangible assets and includes the adjustments made to the balance to reflect the effect of any final valuation adjustments made for acquisitions, as well as any reduction attributable to impairment-related charges:



	Tiptree Insurance			Other			Total
Balance at December 31, 2019	$	47,305		$	669		$	47,974
Intangible assets acquired ⁽¹⁾	93,700			—			93,700
Purchase accounting adjustment⁽²⁾	(300		)	—			(300		)
Less: amortization expense	(4,763		)	(86		)	(4,849		)
Balance at June 30, 2020	$	135,942		$	583		$	136,525


⁽¹⁾	Relates to an acquisition in our insurance business as of January 3, 2020 based on the initial valuation, and may be adjusted during the measurement period as permitted under ASC 805. See Note (3) Acquisitions.


⁽²⁾	Relates to adjustments during the measurement period as permitted under ASC 805 for the final valuation of acquisition in our insurance business as of July 1, 2019.

The following table presents the amortization expense on finite-lived intangible assets for the following periods:



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Amortization expense on intangible assets	$	2,604	$	2,014	$	4,849	$	4,037

The following table presents the amortization expense on finite-lived intangible assets for the next five years by operating segment and/or reporting unit, as appropriate:



	As of June 30, 2020
	Tiptree Insurance		Other		Total
Remainder of 2020	$	4,563	$	85	$	4,648
2021	12,953		171		13,124
2022	14,459		127		14,586
2023	14,198		80		14,278
2024	12,811		80		12,891
2025 and thereafter	63,197		40		63,237
Total	$	122,181	$	583	$	122,764

F- 26

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

(10) Derivative Financial Instruments and Hedging

The Company utilizes derivative financial instruments as part of its overall investment and hedging activities. Derivative contracts are subject to additional risk that can result in a loss of all or part of an investment. The Company’s derivative activities are primarily classified by underlying credit risk and interest rate risk. In addition, the Company is also subject to additional counterparty risk should its counterparties fail to meet the contract terms. The derivative financial instruments are reported in other investments. Derivative liabilities are reported within other liabilities and accrued expenses.

Derivatives, at fair value

Interest Rate Lock Commitments

The Company enters into interest rate lock commitments (IRLCs) with customers in connection with its mortgage banking activities to fund residential mortgage loans with certain terms at specified times in the future. IRLCs that relate to the origination of mortgage loans that will be classified as held-for-sale are considered derivative instruments under applicable accounting guidance. As such, these IRLCs are recorded at fair value with changes in fair value typically resulting in recognition of a gain when the Company enters into IRLCs. In estimating the fair value of an IRLC, the Company assigns a probability that the loan commitment will be exercised and the loan will be funded (“pull through”). The fair value of the commitments is derived from the fair value of related mortgage loans, net of estimated costs to complete. Outstanding IRLCs expose the Company to the risk that the price of the loans underlying the commitments might decline from inception of the rate lock to funding of the loan. To manage this risk, the Company utilizes forward delivery contracts and to be announced (TBA) mortgage backed securities to economically hedge the risk of potential changes in the value of the loans that would result from the commitments.

Forward Delivery Contracts and TBA Mortgage Backed Securities

The Company enters into forward delivery contracts with loan aggregators and other investors as one of the tools to manage the interest rate risk associated with IRLCs and loans held for sale. In addition, the Company enters into TBA mortgage backed securities which facilitate hedging and funding by allowing the Company to prearrange prices for mortgages that are in the process of originating. The Company utilizes these hedging instruments for Agency (Fannie Mae and Freddie Mac) and FHA/VA (Ginnie Mae) eligible IRLCs.

The following table presents the gross notional and fair value amounts of derivatives (on a gross basis) categorized by underlying risk:



	As of June 30, 2020						As of December 31, 2019
	Notional values		Asset derivatives		Liability derivatives		Notional values		Asset derivatives		Liability derivatives
Interest rate lock commitments	$	224,628	$	10,147	$	—	$	279,048	$	7,336	$	—
Forward delivery contracts	57,661		17		—		87,773		36		—
TBA mortgage backed securities	235,000		147		958		235,000		118		428
Other	3,805		746		5		10,360		—		3,330
Total	$	521,094	$	11,057	$	963	$	612,181	$	7,490	$	3,758

F- 27

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

(11) Debt, net

The following table presents the balance of the Company’s debt obligations, net of discounts and deferred financing costs.



		Stated interest rate or range of rates		Maximum borrowing capacity as of		As of
Debt Type	Stated maturity date	Stated interest rate or range of rates		June 30, 2020		June 30, 2020			December 31, 2019
Corporate debt
Secured revolving credit agreements	October 2020	LIBOR +	1.20%	$	75,000	$	17,640		$	25,000
Secured term credit agreements	February 2025	LIBOR +	6.75%	123,438		123,438			68,210
Preferred trust securities	June 2037	LIBOR +	4.10%	35,000		35,000			35,000
Junior subordinated notes	October 2057	8.50%		125,000		125,000			125,000
Total corporate debt						301,078			253,210
Asset based debt ⁽¹⁾
Asset based revolving financing	April 2021	LIBOR +	2.40%	40,000		27,331			21,576
Residential mortgage warehouse borrowings ⁽²⁾	August 2020 -	LIBOR +	2.00%	111,000		68,383			90,673
Residential mortgage warehouse borrowings ⁽²⁾	April 2021	to LIBOR +	3.00%	111,000		68,383			90,673
Vessel backed term loan	November 2024	LIBOR +	4.75%	16,900		16,900			18,000
Total asset based debt						112,614			130,249
Total debt, face value						413,692			383,459
Unamortized discount, net						(2,329		)	(198		)
Unamortized deferred financing costs						(9,081		)	(8,807		)
Total debt, net						$	402,282		$	374,454


⁽¹⁾	Asset based debt is generally recourse only to specific assets and related cash flows.


⁽²⁾	The weighted average coupon rate for residential mortgage warehouse borrowings was 2.67% and 3.83% at June 30, 2020 and December 31, 2019, respectively.

The following table presents the amount of interest expense the Company incurred on its debt for the following periods:



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Interest expense - corporate debt	$	5,902	$	4,933	$	11,168	$	9,927
Interest expense - asset based debt	1,744		1,599		4,029		3,525
Interest expense on debt	$	7,646	$	6,532	$	15,197	$	13,452

The following table presents the future maturities of the unpaid principal balance on the Company’s debt for the following period:



	As of
	June 30, 2020
Remainder of 2020	$	62,728
2021	50,626
2022	—
2023	—
2024	16,900
2025 and thereafter	283,438
Total	$	413,692

The following narrative is a summary of certain terms of our debt agreements for the period ended June 30, 2020:

Corporate Debt

Secured Revolving Credit Agreement

As of June 30, 2020 and December 31, 2019, a total of $17,640 and $25,000, respectively, was outstanding under the revolving line of credit in our insurance business. In March 2020, the maturity date of this borrowing was extended to July 2020, and in

F- 28

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

July 2020 the maturity date was extended to October 2020.

Secured Term Credit Agreement

On February 21, 2020, the Operating Company borrowed $125,000 under a new credit agreement (Credit Agreement) with Fortress Credit Corp. (Fortress). The proceeds were used to repay the Company’s prior credit agreement with Fortress, with a balance of $68,210 as of December 31, 2019, and for working capital and general corporate purposes. The Credit Agreement will mature on February 21, 2025, with principal amounts of the loans to be repaid in consecutive quarterly installments. Loans under the Credit Agreement bear interest at a variable rate per annum equal to LIBOR (with a minimum LIBOR rate of 1.00%), plus a margin of 6.75% per annum. The obligations under the Credit Agreement are secured by liens on substantially all of the assets of the Operating Company and guaranteed by the Company and Operating Company’s direct wholly owned first tier subsidiaries (Guarantors).

The Credit Agreement contains various customary affirmative and negative covenants of the Company, Operating Company and the other Guarantors (subject to customary exceptions), including, but not limited to, limitations on indebtedness, liens, investments and acquisitions, negative pledges, junior payments, conduct of business, transactions with affiliates, dispositions of assets, prepayment of certain indebtedness and limits on guarantees by subsidiaries of Operating Company’s and the Guarantors’ indebtedness. The Credit Agreement also contains a financial covenant which provides that Tiptree will not permit its Corporate Leverage Ratio (as defined in the Credit Agreement) as of the last day of any fiscal quarter to be greater than 450% in 2020 and 2021, 425% after March 31, 2022, 400% after March 31, 2023 and 375% after March 31, 2024.

The Credit Agreement also contains customary mandatory repayment provisions (subject to customary exceptions) and requires that net cash proceeds from the sale by Tiptree and certain of its subsidiaries of capital stock of Invesque be applied to prepay loans until the outstanding principal amount of loans is $62,500, with remaining proceeds subject to reinvestment rights. Prepayments, whether mandatory or voluntary, reduce future scheduled amortization payments in the order they come due. The Credit Agreement also requires the payment of a prepayment fee upon a repricing transaction or equity issuance consummated after the closing date, or the sale of Tiptree Insurance, or any of its material subsidiaries. As of June 30, 2020, a total of $123,438 was outstanding under this agreement.

Pursuant to an Amendment, Assumption and Consent Agreement, dated July 17, 2020 by and among Tiptree, certain of its subsidiaries and Fortress, Tiptree Holdings LLC became the borrower under the Credit Agreement in connection with the Reorganization described in Note (24) Subsequent Events.

Asset Based Debt

Asset Backed Revolving Financing

As of June 30, 2020 and December 31, 2019, a total of $11,460 and $9,840, respectively, was outstanding under the borrowing related to our premium finance business in our insurance business.

As of June 30, 2020 and December 31, 2019, a total of $15,871 and $11,736, respectively, was outstanding under the borrowing related to our warranty service contract finance business in our insurance business.

Residential Mortgage Warehouse Borrowings

In April 2020, a subsidiary in our mortgage business renewed a $60,000 warehouse line of credit, extending the maturity date to April 2021 and establishing a LIBOR floor of 1.0%. Additionally, during March 2020, another warehouse line maturing in August 2020 temporarily raised the maximum borrowing capacity to $65,000, returning to a maximum borrowing capacity of $50,000 in May 2020 and establishing a LIBOR floor of 0.50%. As of June 30, 2020 and December 31, 2019, a total of $68,383 and $90,673, respectively, was outstanding under such financing agreements.

As of June 30, 2020, the Company is in compliance with the representations and covenants for outstanding borrowings or has obtained waivers for any events of non-compliance.

F- 29

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

(12) Fair Value of Financial Instruments

The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs to the extent possible to measure a financial instrument’s fair value. Observable inputs reflect the assumptions market participants would use in pricing an asset or liability, and are affected by the type of product, whether the product is traded on an active exchange or in the secondary market, as well as current market conditions. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Fair value is estimated by applying the hierarchy discussed in Note (2) Summary of Significant Accounting Policies which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized within Level 3 of the fair value hierarchy.

The Company’s fair value measurement is based primarily on a market approach, which utilizes prices and other relevant information generated by market transactions involving identical or comparable financial instruments. Sources of inputs to the market approach include third party pricing services, independent broker quotations and pricing matrices. Management analyzes the third party valuation methodologies and its related inputs to perform assessments to determine the appropriate level within the fair value hierarchy and to assess reliability of values. Further, management has a process in place to review all changes in fair value that occurred during each measurement period. Any discrepancies or unusual observations are followed through to resolution through the source of the pricing as well as utilizing comparisons, if applicable, to alternate pricing sources.

The Company utilizes observable and unobservable inputs within its valuation methodologies. Observable inputs may include: benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. In addition, specific issuer information and other market data is used. Broker quotes are obtained from sources recognized to be market participants. Unobservable inputs may include: expected cash flow streams, default rates, supply and demand considerations and market volatility.

Available for Sale Securities, at fair value

The fair values of available for sale securities are based on prices provided by an independent pricing service and a third party investment manager. The Company obtains an understanding of the methods, models and inputs used by the independent pricing service and the third party investment manager by analyzing the investment manager-provided pricing report.

The following details the methods and assumptions used to estimate the fair value of each class of AFS securities and the applicable level each security falls within the fair value hierarchy:

U.S Treasury Securities, Obligations of U.S. Government Authorities and Agencies, Obligations of State and Political Subdivisions, Corporate Securities, Asset Backed Securities, and Obligations of Foreign Governments: Fair values were obtained from an independent pricing service and a third party investment manager. The prices provided by the independent pricing service and third party investment manager are based on quoted market prices, when available, non-binding broker quotes, or matrix pricing and fall under Level 2 or Level 3 in the fair value hierarchy.

Certificates of Deposit: The estimated fair value of certificates of deposit approximate carrying value and fall under Level 1 of the fair value hierarchy.

Equity Securities

The fair values of publicly traded common and preferred stocks are obtained from market value quotations provided by an independent pricing service and fall under Level 1 in the fair value hierarchy. The fair values of non-publicly traded common and preferred stocks are based on prices obtained from an independent pricing service using unobservable inputs and fall under Level 3 in the fair value hierarchy.

Loans, at fair value

F- 30

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

Corporate Loans: These loans are comprised of a diversified portfolio of middle market and broadly syndicated leveraged loans and are generally classified under either Level 2 or Level 3 in the fair value hierarchy. To determine fair value, the Company uses quoted prices which include those provided from pricing vendors, where available. We perform internal price verification procedures to ensure that the prices and quotes provided from the independent pricing vendors are reasonable. Such verification procedures include comparison of pricing sources and analysis of variances among pricing sources. The Company has evaluated each loan’s respective liquidity and has additionally performed valuation benchmarking. The key characteristics which were evaluated as part of this determination were liquidity ratings, price changes to index benchmarks, depth of quotes, credit ratings and industry trends.

Mortgage Loans Held for Sale: Mortgage loans held for sale are generally classified under Level 2 in the fair value hierarchy and fair value is based upon forward sales contracts with third party investors, including estimated loan costs.

Derivative Assets and Liabilities

Derivatives are primarily comprised of IRLCs, forward delivery contracts and TBA mortgage backed securities. The fair value of these instruments is based upon valuation pricing models, which represent the amount the Company would expect to receive or pay at the balance sheet date to exit the position. Our mortgage origination subsidiaries issue IRLCs to their customers, which are carried at estimated fair value on the Company’s condensed consolidated balance sheet. The estimated fair values of these commitments are generally calculated by reference to the value of the underlying loan associated with the IRLC net of costs to produce and an expected pull through assumption. The fair values of these commitments generally fall under Level 3 in the fair value hierarchy. Our mortgage origination subsidiaries manage their exposure by entering into forward delivery commitments with loan investors. For loans not locked with investors under a forward delivery commitment, the Company enters into hedge instruments, primarily TBAs, to protect against movements in interest rates. The fair values of TBA mortgage backed securities and forward delivery contracts generally fall under Level 2 in the fair value hierarchy.

Corporate Bonds

Corporate bonds are generally classified under Level 2 in the fair value hierarchy and fair value is provided by a third party investment manager, based on quoted market prices. We perform internal price verification procedures to ensure that the prices provided are reasonable.

Securities Sold, Not Yet Purchased

Securities sold, not yet purchased are generally classified under Level 1 or Level 2 in the fair value hierarchy, based on the leveling of the securities sold short, and fair value is provided by a third party investment manager, based on quoted market prices. We perform internal price verification procedures to ensure that the prices provided are reasonable.

Mortgage Servicing Rights

Mortgage servicing rights are classified under Level 3 in the fair value hierarchy and fair value is provided by a third party valuation service. Various observable and unobservable inputs are used to determine fair value, including discount rate, cost to service and weighted average prepayment speed.

The following tables present the Company’s fair value hierarchies for financial assets and liabilities, measured on a recurring basis:



	As of June 30, 2020
	Quoted prices in active markets Level 1		Other significant observable inputs Level 2		Significant unobservable inputs Level 3		Fair value
Assets:
Available for sale securities, at fair value:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	—	$	192,287	$	—	$	192,287
Obligations of state and political subdivisions	—		40,539		—		40,539

F- 31

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)



	As of June 30, 2020
	Quoted prices in active markets Level 1		Other significant observable inputs Level 2		Significant unobservable inputs Level 3		Fair value
Obligations of foreign governments	—		3,035		—		3,035
Certificates of deposit	854		—		—		854
Asset backed securities	—		38,027		504		38,531
Corporate securities	—		70,472		—		70,472
Total available for sale securities, at fair value	854		344,360		504		345,718

Loans, at fair value:
Corporate loans	—		—		6,813		6,813
Mortgage loans held for sale	—		79,458		—		79,458
Total loans, at fair value	—		79,458		6,813		86,271

Equity securities	118,293		—		35		118,328

Other investments, at fair value:
Corporate bonds	—		91,521		—		91,521
Derivative assets	—		910		10,147		11,057
CLOs	—		—		1,516		1,516
Total other investments, at fair value	—		92,431		11,663		104,094

Mortgage servicing rights (included in other assets)	—		—		9,830		9,830

Total	$	119,147	$	516,249	$	28,845	$	664,241

Liabilities:
Derivative liabilities ⁽¹⁾	$	—	$	963	$	—	$	963
Securities sold, not yet purchased ⁽¹⁾	4,181		45,246		—		49,427
Contingent consideration payable ⁽¹⁾	—		—		200		200

Total	$	4,181	$	46,209	$	200	$	50,590


⁽¹⁾	Included in other liabilities and accrued expenses.

F- 32

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)



	As of December 31, 2019
	Quoted prices in active markets Level 1		Other significant observable inputs Level 2		Significant unobservable inputs Level 3		Fair value
Assets:
Available for sale securities, at fair value:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	—	$	191,590	$	—	$	191,590
Obligations of state and political subdivisions	—		46,338		—		46,338
Obligations of foreign governments	—		1,119		—		1,119
Certificates of deposit	896		—		—		896
Asset backed securities	—		42,833		1,185		44,018
Corporate securities	—		51,231		—		51,231
Total available for sale securities, at fair value	896		333,111		1,185		335,192

Loans, at fair value:
Corporate loans	—		—		9,787		9,787
Mortgage loans held for sale	—		98,720		—		98,720
Non-performing loans	—		—		387		387
Total loans, at fair value	—		98,720		10,174		108,894

Equity securities	155,135		—		243		155,378

Other investments, at fair value:
Corporate bonds	—		20,705		—		20,705
Derivative assets	—		154		7,336		7,490
CLOs	—		—		4,768		4,768
Total other investments, at fair value	—		20,859		12,104		32,963

Mortgage servicing rights (included in other assets)	—		—		8,764		8,764

Total	$	156,031	$	452,690	$	32,470	$	641,191

Liabilities:
Derivative liabilities (included in other liabilities and accrued expenses)	$	—	$	3,758	$	—	$	3,758
Total	$	—	$	3,758	$	—	$	3,758

The following table presents additional information about assets that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value for the following periods:



	Six Months Ended June 30,
	2020 ⁽¹⁾			2019 ⁽¹⁾
Balance at January 1,	$	32,470		$	152,845
Net realized gains (losses)	4,028			5,603
Net unrealized gains (losses)	(8,064		)	(3,973		)
Origination of IRLC	58,529			32,438
Purchases	610			73
Sales	(3,010		)	(111,431		)
Issuances	—			100
Transfers into Level 3 ⁽¹⁾	—			1,544
Conversions to real estate owned	—			(2,596		)
Conversions to mortgage loans held for sale	(55,718		)	(29,560		)
Balance at June 30,	$	28,845		$	45,043

Changes in unrealized gains (losses) included in earnings related to assets still held at period end	$	(6,600	)	$	897


⁽¹⁾	Transfers between Level 2 and 3 were a result of subjecting third party pricing on assets to various liquidity, depth, bid-ask spread and benchmarking criteria as well as assessing the availability of observable inputs affecting their fair valuation.

F- 33

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

The following is quantitative information about Level 3 assets and liabilities with significant unobservable inputs used in fair valuation.



	Fair Value as of						Actual or Range (Weighted average)
Assets	June 30, 2020		December 31, 2019		Valuation technique	Unobservable input(s)	June 30, 2020						December 31, 2019
IRLCs	$	10,147	$	7,336	Internal model	Pull through rate	50		%	to	95%		50		%	to	95%
Mortgage servicing rights	9,830		8,764		External model	Discount rate	10		%	to	13%		10		%	to	13%
						Cost to service		$75		to	$90			$75		to	$90
						Weighted average prepayment speed	10		%	to	58%		7		%	to	50%
Total	$	19,977	$	16,100

Liabilities
Contingent consideration payable - Smart AutoCare	$	200	$	—	Cash Flow Model	Forecast Cash EBITDA	$20,000			to	$	30,000	N/A
Contingent consideration payable - Smart AutoCare	$	200	$	—	Actuarial Analysis	Assumed Claim Liabilities	$51,000						N/A
Total	$	200	$	—

The following table presents the carrying amounts and estimated fair values of financial assets and liabilities that are not recorded at fair value and their respective levels within the fair value hierarchy:



	As of June 30, 2020					As of December 31, 2019
	Level within fair value hierarchy	Fair value		Carrying value		Level within fair value hierarchy	Fair value		Carrying value
Assets:
Debentures ⁽¹⁾	2	$	16,474	$	16,474	2	$	15,423	$	15,423
Notes and accounts receivable, net	2	59,993		59,993		2	42,192		42,192
Total assets		$	76,467	$	76,467		$	57,615	$	57,615

Liabilities:
Debt, net	3	$	419,488	$	411,363	3	$	396,699	$	383,261
Total liabilities		$	419,488	$	411,363		$	396,699	$	383,261


⁽¹⁾	Included in other investments.

Debentures: Since interest rates on debentures are at current market rates for similar credit risks, the carrying amount approximates fair value. These values are net of allowance for doubtful accounts.

Notes and Accounts Receivable: To the extent that carrying amounts differ from fair value, fair value is determined based on contractual cash flows discounted at market rates for similar credits. Categorized under Level 2 in the fair value hierarchy.

Debt: The carrying value, which approximates fair value of LIBOR based debt, represents the total debt balance at face value excluding the unamortized discount. The fair value of the Junior subordinated notes is determined based on dealer quotes. Categorized under Level 3 in the fair value hierarchy.

Additionally, the following financial assets and liabilities on the condensed consolidated balance sheets are not carried at fair value, but whose carrying amounts approximate their fair value:

Cash and Cash Equivalents: The carrying amounts of cash and cash equivalents are carried at cost which approximates fair value. Categorized under Level 1 in the fair value hierarchy.

Accounts and Premiums Receivable, net, Retrospective Commissions Receivable and Other Receivables: The carrying amounts approximate fair value since no interest rate is charged on these short duration assets. Categorized under Level 2 in the fair value hierarchy. See Note (7) Notes and Accounts Receivable, net.

F- 34

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

Due from Brokers, Dealers, and Trustees and Due to Brokers, Dealers and Trustees: The carrying amounts are included in other assets and other liabilities and accrued expenses and approximate their fair value due to their short term nature. Categorized under Level 2 in the fair value hierarchy.

(13) Liability for Unpaid Claims and Claim Adjustment Expenses

Roll forward of Claim Liability

The following table presents the activity in the net liability for unpaid losses and allocated loss adjustment expenses of short duration contracts for the following periods:



	Six Months Ended June 30,
	2020			2019
Policy liabilities and unpaid claims balance as of January 1,	$	144,384		$	131,611
Less: liabilities of policy-holder accounts balances, gross	(11,589		)	(13,659		)
Less: non-insurance warranty benefit claim liabilities	(85		)	(94		)
Gross liabilities for unpaid losses and loss adjustment expenses	132,710			117,858
Less: reinsurance recoverable on unpaid losses - short duration	(88,599		)	(90,016		)
Less: other lines, gross	(230		)	(227		)
Net balance as of January 1, short duration	43,881			27,615

Incurred (short duration) related to:
Current year	73,240			66,225
Prior years	9,104			3,194
Total incurred	82,344			69,419

Paid (short duration) related to:
Current year	40,489			58,876
Prior years	6,528			7,769
Total paid	47,017			66,645

Net balance as of June 30, short duration	79,208			30,389
Plus: reinsurance recoverable on unpaid losses - short duration	66,532			85,377
Plus: other lines, gross	242			247
Gross liabilities for unpaid losses and loss adjustment expenses	145,982			116,013
Plus: liabilities of policy-holder accounts balances, gross	9,274			12,618
Plus: non-insurance warranty benefit claim liabilities ⁽¹⁾	40,524			59
Policy liabilities and unpaid claims balance as of June 30,	$	195,780		$	128,690


⁽¹⁾	Primarily relates to Smart AutoCare which was acquired on January 3, 2020. See Note (3) Acquisitions for more information.

The following schedule reconciles the total short duration contracts per the table above to the amount of total losses incurred as presented in the condensed consolidated statement of operations, excluding the amount for member benefit claims:



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Short duration incurred	$	36,451	$	33,921	$	82,344	$	69,419
Other lines incurred	—		191		—		191
Unallocated loss adjustment expense	7		212		90		507
Total losses incurred	$	36,458	$	34,324	$	82,434	$	70,117

For the six months ended June 30, 2020, the Company’s insurance business experienced an increase in prior year case development of $9,104, primarily from its non-standard auto, light commercial and collateral protection lines of business.

For the six months ended June 30, 2019, the Company’s insurance business experienced an increase in prior year case development of $3,194, primarily from its non-standard auto business.

F- 35

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

(14) Revenue from Contracts with Customers

Revenue from contracts with customers is primarily comprised of asset management fee income included as a part of other revenue, vessel related revenue included as a part of other revenue, and warranty coverage, motor club and other revenues included as a part of service and administrative fees in our insurance business. The following table presents the disaggregated amounts of revenue from contracts with customers by product type for the following periods:



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Motor club revenue	$	9,028	$	8,844	$	18,763	$	17,545
Warranty coverage revenue	21,212		7,122		42,430		13,944
Vessel related revenue	4,455		2,332		11,701		5,951
Management fee income	—		—		—		1,267
Other	1,390		2,020		3,091		3,728
Revenue from contracts with customers	$	36,085	$	20,318	$	75,985	$	42,435

Service and Administrative Fees

Service fee revenue is recognized as the services are performed. These services include fulfillment, software development, and claims handling for our customers. Management reviews the financial results under each significant contract on a monthly basis. Any losses that may occur due to a specific contract would be recognized in the period in which the loss is determined probable.

Administrative fee revenue includes the administration of premium associated with our producers and their producer owned reinsurance companies (PORCs). In addition, we also earn fee revenue from debt cancellation programs, motor club programs, and warranty programs. Related administrative fee revenue is recognized consistent with the earnings recognition pattern of the underlying insurance policies, debt cancellation contracts and motor club memberships being administered, using Rule of 78's, modified Rule of 78's, pro rata, or other methods as appropriate for the contract. Management selects the appropriate method based on available information, and periodically reviews the selections as additional information becomes available.

Information on Remaining Performance Obligations

We do not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligations with an original expected duration exceeding one year was not material at June 30, 2020.

Contract Balances

The timing of our revenue recognition may differ from the timing of payment by our customers. We record a receivable when revenue is recognized prior to payment and we have an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, we record deferred revenue until the performance obligations are satisfied.

Charter Revenue

The Company generates its revenues from charterers for the charter hire of its vessels. Vessels are chartered under time or voyage charters, where a contract is entered into for the use of a vessel for a specific voyage or a specific period of time and at a specified daily charter rate. Charter revenues are recognized as earned on the straight-line basis over the term of the charter as service is provided.

Revenue is recognized when a charter agreement exists, the vessel is made available to the charterer and collection of the related revenue is reasonably assured. Unearned revenue includes revenue received prior to the balance sheet date relating to services to be rendered after the balance sheet date.

F- 36

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

Management Fees

The Company earned management fee income in the form of base management fees and incentive fees from the CLOs it managed. These base management fees were billed as the services were provided and paid periodically in accordance with the terms of the individual management agreements for as long as the Company managed the funds. Base management fees typically consisted of fees based on the amount of assets held in the CLOs. Base management fees were recognized as revenue when earned. The Company did not recognize incentive fees until all contractual contingencies were removed.

The following table presents the activity in the significant deferred assets and liabilities related to revenue from contracts with customers for the six months ended June 30, 2020.



	January 1, 2020						June 30, 2020
	Beginning balance		Additions		Amortizations		Ending balance
Deferred acquisition costs

Motor club revenue	$	13,700	$	10,996	$	14,334	$	10,362
Warranty coverage revenue	1,027		25,532		3,417		23,142
Total	$	14,727	$	36,528	$	17,751	$	33,504



Deferred revenue
Motor club revenue	$	17,910	$	14,489	$	18,763	$	13,636
Warranty coverage revenue ⁽¹⁾	49,368		271,072		42,430		$	278,010
Total	$	67,278	$	285,561	$	61,193	$	291,646


⁽¹⁾	Additions include $182,568 from the acquired balance sheet of Smart AutoCare. See Note (3) Acquisitions.

Write-offs were not material for any period presented.

(15) Other Assets and Other Liabilities and Accrued Expenses

Other Assets

The following table presents the components of other assets as reported in the condensed consolidated balance sheets:



	As of
	June 30, 2020		December 31, 2019
Right of use asset - Operating leases⁽¹⁾	$	21,545	$	23,832
Furniture, fixtures and equipment, net	13,960		12,305
Income tax receivable	10,547		817
Mortgage servicing rights	9,830		8,764
Prepaid expenses	8,695		8,461
Other	22,198		14,331
Total other assets	$	86,775	$	68,510


⁽¹⁾	See Note (21) Commitments and Contingencies for additional information.

The following table presents the depreciation expense related to furniture, fixtures and equipment for the following periods:



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Depreciation expense related to furniture, fixtures and equipment	$	759	$	680	$	1,511	$	1,159

F- 37

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

Other Liabilities and Accrued Expenses

The following table presents the components of other liabilities and accrued expenses as reported in the condensed consolidated balance sheets:



	As of
	June 30, 2020		December 31, 2019
Accounts payable and accrued expenses	$	74,369	$	68,829
Operating lease liability⁽¹⁾	27,384		29,491
Deferred tax liabilities, net	5,071		32,306
Securities sold, not yet purchased	49,427		—
Due to brokers	48,933		1,140
Commissions payable	14,636		9,179
Other	38,372		31,195
Total other liabilities and accrued expenses	$	258,192	$	172,140


⁽¹⁾	See Note (21) Commitments and Contingencies for additional information.

(16) Other Revenue and Other Expenses

Other Revenue

The following table presents the components of other revenue as reported in the condensed consolidated statement of operations. Other revenue is primarily generated by Tiptree Capital’s non-insurance activities except as noted in the footnote to the table.



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Other investment income ⁽¹⁾	$	9,683	$	9,274	$	24,747	$	19,155
Gain on sale of businesses ⁽²⁾	—		7,598		—		7,598
Management fee income	—		—		—		1,267
Other ⁽³⁾	2,454		1,087		4,444		2,058
Total other revenue	$	12,137	$	17,959	$	29,191	$	30,078


⁽¹⁾	See Note (6) Investments for the components of Other investment income.


⁽²⁾	Related to the sale of Telos. See Note (4) Dispositions and Assets Held for Sale.


⁽³⁾	Includes $2,373 and $924 for the three months ended June 30, 2020 and 2019, respectively, and $4,258 and $1,765 for the six months ended June 30, 2020 and 2019, respectively, related to Tiptree Insurance.

Other Expenses

The following table presents the components of other expenses as reported in the condensed consolidated statement of operations:



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Professional fees	$	4,663	$	3,662	$	11,872	$	7,838
General and administrative	5,515		5,259		10,853		10,243
Premium taxes	3,747		3,788		7,545		7,112
Mortgage origination expenses	3,562		3,080		7,138		5,558
Rent and related	3,316		2,942		6,797		6,219
Operating expenses from vessels	2,804		1,408		6,908		3,622
Loss on extinguishment of debt	—		—		353		1,241
Other	1,408		2,277		3,779		4,420
Total other expenses	$	25,015	$	22,416	$	55,245	$	46,253

F- 38

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

(17) Stockholders’ Equity

Stock Repurchases

The Board of Directors authorized the Company to make repurchases of up to $20,000 of shares of the Company’s outstanding common stock in the aggregate, at the discretion of the Company's Executive Committee. The following table presents the Company’s stock repurchase activity and remaining authorization.



	Six Months Ended June 30, 2020
	Number of shares purchased	Average price per share
Share repurchase plan	842,168	$	5.94
Block repurchase plan	500,000	7.00
Total	1,342,168	$	6.33

Remaining repurchase authorization		$	11,466

Dividends

The Company declared cash dividends per share for the following periods presented below:



	Dividends per share for the
	Six Months Ended June 30,
	2020		2019
First quarter	$	0.04	$	0.04
Second quarter ⁽¹⁾	0.04		0.04
Total cash dividends declared	$	0.08	$	0.08


⁽¹⁾	See Note (24) Subsequent Events for when dividend was declared.

Statutory Reporting and Insurance Company Subsidiaries Dividend Restrictions

The Company’s U.S. insurance subsidiaries prepare financial statements in accordance with Statutory Accounting Principles (SAP) prescribed or permitted by the insurance departments of their states of domicile. Prescribed SAP includes the Accounting Practices and Procedures Manual of the National Association of Insurance Commissioners (the NAIC) as well as state laws, regulations and administrative rules.

Statutory Capital and Surplus

The Company’s insurance company subsidiaries must maintain minimum amounts of statutory capital and surplus as required by regulatory authorities, including the NAIC; their capital and surplus levels exceeded respective minimum requirements as of June 30, 2020 and December 31, 2019.

Statutory Dividends

The Company’s U.S. domiciled insurance company subsidiaries may pay dividends to the Company, subject to statutory restrictions. Payments in excess of statutory restrictions (extraordinary dividends) to the Company are permitted only with prior approval of the insurance department of the applicable state of domicile. The Company eliminates all dividends from its subsidiaries in the condensed consolidated financial statements. The following table presents the dividends paid to the Company by its U.S domiciled insurance company subsidiaries and the combined amount available for ordinary dividends of the Company's U.S. domiciled insurance company subsidiaries for the following periods:

F- 39

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Ordinary dividends	—		—		$	—	$	9,001
Extraordinary dividends	—		—		—		1,188
Total dividends	$	—	$	—	$	—	$	10,189

					As of
					June 30, 2020		December 31, 2019
Amount available for ordinary dividends of the Company's insurance company subsidiaries					$	13,418	$	4,527

At June 30, 2020, the maximum amount of dividends that our U.S. domiciled regulated insurance company subsidiaries could pay under applicable laws and regulations without regulatory approval was approximately $13,418. The Company may seek regulatory approval to pay dividends in excess of this permitted amount, but there can be no assurance that the Company would receive regulatory approval if sought.

(18) Accumulated Other Comprehensive Income (Loss)

The following table presents the activity in accumulated other comprehensive income (loss) (AOCI), net of tax, for the following periods:



	Total AOCI (loss) related to Unrealized gains (losses) on AFS securities			Amount attributable to non-controlling interests			Total AOCI (loss) to Tiptree Inc.
Balance at December 31, 2018	$	(2,069	)	$	11		$	(2,058	)
Other comprehensive income (losses) before reclassifications	4,385			(19		)	4,366
Amounts reclassified from AOCI	(820		)	—			(820		)
Period change	3,565			(19		)	3,546
Adoption of accounting standard⁽¹⁾	(99		)	—			(99		)
Balance at June 30, 2019	$	1,397		$	(8	)	$	1,389

Balance at December 31, 2019	$	1,711		$	(13	)	$	1,698
Other comprehensive income (losses) before reclassifications	4,178			(21		)	4,157
Amounts reclassified from AOCI	(70		)	—			(70		)
Period change	4,108			(21		)	4,087
Adoption of accounting standard⁽¹⁾	42			—			42
Balance at June 30, 2020	$	5,861		$	(34	)	$	5,827


⁽¹⁾	Due to adoption of 2018-02 and 2016-13, respectively. See Note (2) Summary of Significant Accounting Policies.

The following table presents the reclassification adjustments out of AOCI included in net income and the impacted line items on the condensed consolidated statement of operations for the following periods:



	Three Months Ended June 30,						Six Months Ended June 30,						Affected line item in condensed consolidated statement of operations
Components of AOCI	2020			2019			2020			2019
Unrealized gains (losses) on available for sale securities	$	87		$	1,046		$	91		$	1,041		Net realized and unrealized gains (losses)
Related tax (expense) benefit	(20		)	(222		)	(21		)	(221		)	Provision for income tax
Net of tax	$	67		$	824		$	70		$	820

F- 40

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

(19) Stock Based Compensation

Equity Plans

2017 Omnibus Incentive Plan

The Company adopted the Tiptree 2017 Omnibus Incentive Plan (2017 Equity Plan) on June 6, 2017, which permits the grant of stock units, stock, and stock options up to a maximum of 6,100,000 shares of common stock. The general purpose of the 2017 Equity Plan is to attract, motivate and retain selected employees and directors for the Company and its subsidiaries, to provide them with incentives and rewards for performance and to better align their interests with the interests of the Company’s stockholders. Unless otherwise extended, the 2017 Equity Plan terminates automatically on June 6, 2027. The table below summarizes changes to the issuances under the Company’s 2017 Equity Plan for the periods indicated, excluding awards granted under the Company’s subsidiary incentive plans that are exchangeable for Tiptree common stock:



2017 Equity Plan	Number of shares ⁽¹⁾
Available for issuance as of December 31, 2019	4,765,863
RSU and option awards granted	(929,049	)
Available for issuance as of June 30, 2020	3,836,814


⁽¹⁾	Excludes awards granted under the Company’s subsidiary incentive plans that are exchangeable for Tiptree common stock.

Restricted Stock Units (RSUs)

Tiptree Corporate Incentive Plans

The Company values RSUs at their grant-date fair value as measured by Tiptree’s common stock price. Generally, the Tiptree RSUs vest and become nonforfeitable with respect to one-third of Tiptree shares granted on each of the one, two and three year anniversaries of the date of the grant, and expensed using the straight-line method over the requisite service period.

The following table presents changes to the issuances of RSUs under the 2017 Equity Plan for the periods indicated:



	Number of shares issuable		Weighted average grant date fair value
Unvested units as of December 31, 2019	958,610		$	6.23
Granted ⁽¹⁾	503,772		7.16
Vested	(509,236	)	6.61
Unvested units as of June 30, 2020	953,146		$	6.52


⁽¹⁾	Includes grants of 34,515 shares of common stock to directors for the six months ended June 30, 2020.

The following tables present the detail of the granted and vested RSUs for the periods indicated:



Granted	Three Months Ended June 30, 2020	Six Months Ended June 30, 2020	Vested	Three Months Ended June 30, 2020		Six Months Ended June 30, 2020
Directors	25,283	34,515	Directors	25,283		34,515
Employees ⁽¹⁾	—	469,257	Employees	109,737		474,721
Total Granted	25,283	503,772	Total Vested	135,020		509,236
			Taxes	(1,931	)	(53,438	)
			Exchanged	—		—
			Net Vested	133,089		455,798


⁽¹⁾	Includes 256,619 shares that vest ratably over three years and 212,638 shares that cliff vest in February 2021.

Subsidiary Incentive Plans

Certain of the Company’s subsidiaries have established incentive plans under which they are authorized to issue equity of those subsidiaries to certain of their employees. Such awards are accounted for as equity. These awards are subject to performance-vesting criteria based on the performance of the subsidiary (performance vesting awards) and time-vesting subject to continued employment (time vesting awards). Following the service period, such vested awards may be exchanged at fair market value,

F- 41

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

at the option of the holder, for Tiptree common stock under the 2017 Equity Plan. The service period for certain grants has been achieved and those vested subsidiary awards are currently eligible for exchange. The Company has the option, but not the obligation to settle the exchange right in cash.

The following table presents changes to the issuances of subsidiary awards under the subsidiary incentive plans for the periods indicated:



	Grant date fair value of equity shares issuable
Unvested balance as of December 31, 2019	$	4,279
Granted	1,110
Vested	(4,230		)
Performance assumption adjustment	1,811
Unvested balance as of June 30, 2020	$	2,970

The net vested and unvested balance of subsidiary awards (assuming full vesting) translates to an aggregate of 2,643,187 shares of common stock if converted as of June 30, 2020, of which 1,157,399 are vested and eligible for exchange as of June 30, 2020.

Stock Options - Tiptree Corporate

Option awards have been granted to the Executive Committee with an exercise price equal to the fair market value of our common stock on the date of grant. The option awards have a 10-year term and are subject the recipient’s continuous service, a market requirement, and vest one third on each of the three, four and five year anniversaries of the grant date. The market requirement is a book value per share target that can be met at any time before the option expires and it only needs to be met once for the option to remain exercisable for the remainder of its term. If the service condition is met, the full amount of the compensation expense will be recognized over the appropriate vesting period whether the market requirement is met or not. The options granted after 2017 include a retirement provision and are amortized over the lesser of the service condition or expected retirement date. Book value targets for grants in 2020, 2019, 2018, 2017 and 2016 are $11.52, $10.79, $9.97, $10.14 and $8.96, respectively.

The fair value option grants are estimated on the date of grant using a Black-Scholes-Merton option pricing formula embedded within a Monte Carlo model used to simulate the future stock prices of the Company, which assumes that the market requirement is achieved. Historical volatility was computed based on historical daily returns of the Company’s stock between the grant date and July 1, 2013, the date of the business combination through which Tiptree became a public company. The valuation is done under a risk-neutral framework using the 10-year zero-coupon risk-free interest rate derived from the Treasury Constant Maturities yield curve on the grant date. The current quarterly dividend rates in effect as of the date of the grant are used to calculate a spot dividend yield as of the date of grant for use in the model.

The following table presents the assumptions used to estimate the fair values of the stock options granted for the following periods:



	Six Months Ended June 30,
Valuation Input	2020		2019
	Assumption	Average	Assumption	Average
Historical volatility	27.60%	N/A	27.69%	N/A
Risk-free rate	1.51%	N/A	2.62%	N/A
Dividend yield	2.20%	N/A	2.21%	N/A
Expected term (years)		7.0		6.5

F- 42

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

The following table presents the Company's stock option activity for the current period:



	Options outstanding	Weighted average exercise price (in dollars per stock option)		Weighted average grant date value (in dollars per stock option)		Options exercisable
Balance, December 31, 2019	1,290,342	$	6.24	$	2.45	—
Granted	425,277	7.25		1.83		—
Balance, June 30, 2020	1,715,619	$	6.49	$	2.29	—

Weighted average remaining contractual term at June 30, 2020 (in years)	7.6

Stock Based Compensation Expense

The following table presents total stock based compensation expense and the related income tax benefit recognized on the condensed consolidated statements of operations:



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Employee compensation and benefits	$	1,920		$	1,515		$	3,463		$	2,846
Director compensation	133			75			206			152
Income tax benefit	(443		)	(344		)	(792		)	(648		)
Net stock based compensation expense	$	1,610		$	1,246		$	2,877		$	2,350

Additional information on total non-vested stock based compensation is as follows:



	As of
	June 30, 2020
	Stock options		Restricted stock awards and RSUs
Unrecognized compensation cost related to non-vested awards	$	756	$	7,076
Weighted - average recognition period (in years)	2.32		2.07

(20) Income Taxes

The following table presents the Company’s provision (benefit) for income taxes reflected as a component of income (loss):



	Three Months Ended June 30,									Six Months Ended June 30,
	2020					2019				2020					2019
Total income tax expense (benefit)	$	(5			)	$	3,501			$	(21,186			)	$	4,355

Effective tax rate (ETR)	(0.1		)%	⁽¹⁾		22.3		%	⁽²⁾	27.4		%	⁽³⁾		20.9		%	⁽⁴⁾


⁽¹⁾	Lower than the U.S. federal statutory income tax rate of 21% due to the effect of discrete items, including expected refunds arising from the CARES Act.


⁽²⁾	Higher than the U.S. federal statutory income tax rate of 21% due to the effect of state taxes and the impact of foreign operations, partially offset by the dividends received deduction and other discrete items.


⁽³⁾	Higher than the U.S. federal statutory income tax rate of 21% due to the effect of state rates and other discrete items.


⁽⁴⁾	Slightly lower than the U.S. federal statutory income tax rate of21% due to the effect of state income taxes and the impact of foreign operations, largely offset by the dividends received deduction and other discrete items.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted, implementing numerous changes to tax law including temporary changes regarding the prior and future utilization of net operating losses. During the six months ended June 30, 2020, the Company recorded a $2,402 tax benefit related to the ability to carryback net operating losses to prior periods under the CARES Act, resulting in a decrease of our deferred tax asset of $5,770 and an increase to our current receivable of $8,172. The Company continues to assess the potential tax impacts of this legislation on its financial position and results of operations.

F- 43

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

(21) Commitments and Contingencies

Operating Leases

All leases are office space leases and are classified as operating leases that expire through 2028. Some of our office leases include the option to extend for up to 5 years or less at management’s discretion. Such extension options were not included in the measurement of the lease liability. Below is a summary of our right of use asset and lease liability as of June 30, 2020:



	As of
	June 30, 2020
Right of use asset - Operating leases	$	21,545

Operating lease liability	$	27,384

Weighted-average remaining lease term (years)	6.2

Weighted-average discount rate ⁽¹⁾	7.2		%


⁽¹⁾	Discount rate was determined by applying available market rates to lease obligations based upon their term.

As of June 30, 2020, the approximate aggregate minimum future lease payments required for our lease liability over the remaining lease periods are as follows:



	June 30, 2020
Remainder of 2020	$	3,694
2021	7,208
2022	5,969
2023	5,324
2024	4,691
2025 and thereafter	11,796
Total minimum payments	38,682
Less: liabilities held for sale	(256		)
Less: present value adjustment	(11,042		)
Total	$	27,384

The following table presents rent expense for the Company’s office leases recorded on the condensed consolidated statements of operations for the following periods:



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Rent expense for office leases	$	2,104	$	2,065	$	4,237	$	4,414

Litigation

The Company 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 the Company’s motion to decertify the class, which was upheld on appeal. Following a February 2017 hearing, the court denied the Company’s Motion for Summary Judgment as to certain disability insurance policies. In January 2018, the court vacated its November 2017 order granting Company’s Motion for Summary Judgment as to the life certificates at issue with leave to refile. No trial or additional hearings are currently scheduled.

The Company considers such litigation customary in the insurance industry. In management's opinion, based on information

F- 44

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

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 the Company. 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.

The Company and its subsidiaries are parties to other legal proceedings in the ordinary course of business. Although the Company’s legal and financial liability with respect to such proceedings cannot be estimated with certainty, the Company does not believe that these proceedings, either individually or in the aggregate, are likely to have a material adverse effect on the Company’s financial position.

(22) Earnings Per Share

The Company calculates basic net income per share of common stock (common share) based on the weighted average number

of common shares outstanding, which includes vested corporate restricted share units. Unvested corporate restricted share units have a non-forfeitable right to participate in dividends declared and paid on the Company’s common stock on an as vested basis and are therefore considered a participating security. The Company calculates basic earnings per share using the “two-class” method under which the income available to common stockholders is allocated to the unvested corporate restricted stock units.

Diluted net income attributable to Common Stockholders includes the effect of unvested subsidiaries’ RSUs, when dilutive. The assumed exercise of all potentially dilutive instruments are included in the diluted net income per common share calculation, if dilutive.

The following table presents a reconciliation of basic and diluted net income per common share for the following periods:



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net income (loss) before non-controlling interests	$	4,439		$	12,204		$	(56,131	)	$	16,505
Less:
Net income (loss) attributable to non-controlling interests	623			458			60			834
Net income allocated to participating securities	104			318			—			384
Net income (loss) attributable to common shares	3,712			11,428			(56,191		)	15,287

Effect of Dilutive Securities:
Securities of subsidiaries	(195		)	(229		)	—			(349		)
Net income (loss) attributable to common shares - diluted	$	3,517		$	11,199		$	(56,191	)	$	14,938

Weighted average number of shares of common stock outstanding - basic	33,984,195			34,527,230			34,269,096			34,599,739
Weighted average number of incremental shares of common stock issuable from exchangeable interests and contingent considerations	—			—			—			—
Weighted average number of shares of common stock outstanding - diluted	33,984,195			34,527,230			34,269,096			34,599,739

Basic net income (loss) attributable to common shares	$	0.11		$	0.33		$	(1.64	)	$	0.44

Diluted net income (loss) attributable to common shares	$	0.10		$	0.32		$	(1.64	)	$	0.43

(23) Related Party Transactions

Corvid Peak is a related party of the Company because Corvid Peak is deemed to be controlled by Michael Barnes, the Company’s Executive Chairman. Tiptree agreed to invest $75,000 to seed new investment funds to be managed by Corvid Peak, which was completely funded in the first quarter of 2020. The Company will pay Corvid Peak an annual management fee of 1.25% of the net asset value of invested capital and an incentive fee equal to 20% of the net profits, subject to a conventional high water mark. The Company incurred $225 and $235 of management and incentive fees to Corvid Peak for the three months ended June 30, 2020 and 2019, respectively, and $437 and $469 of management and incentive fees to Corvid Peak for the six months ended June 30, 2020 and 2019, respectively.

F- 45

TIPTREE INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2020

(in thousands, except share data)

Pursuant to the Transition Services Agreement, Tiptree and Corvid Peak have mutually agreed to provide certain services to one another. Payments under the Transition Services Agreement in the three and six months ended June 30, 2020 and 2019 were not material.

(24) Subsequent Events

To simplify our corporate structure and remove duplicative holding companies, on July 17, 2020, Operating Company merged into Tiptree, with Tiptree as the surviving entity (the “Reorganization”). In connection with the Reorganization, Operating Company contributed all of its assets to Caroline Holdings LLC, which was renamed Tiptree Holdings LLC. Pursuant to an Amendment, Assumption and Consent Agreement, dated July 17, 2020 by and among Tiptree, certain of its subsidiaries and Fortress, Tiptree Holdings LLC became the borrower under the Credit Agreement, dated as of February 21, 2020, by and among Tiptree, certain of its subsidiaries and Fortress.

On August 4, 2020, the Company’s board of directors declared a quarterly cash dividend of $0.04 per share to holders of common stock with a record date of August 24, 2020, and a payment date of August 31, 2020.

On August 4, 2020, Fortegra entered into an Amended and Restated Credit Agreement by and among Fortegra and its subsidiary, LOTS Intermediate Co., as borrowers, the lenders from time to time party thereto, certain of Fortegra’s subsidiaries, as guarantors, and Fifth Third Bank, National Association, as the administrative agent and issuing lender (the “Fortegra Credit Agreement”). The Fortegra Credit Agreement provides for a $200,000 revolving credit facility, all of which is available for the issuance of letters of credit, with a sub-limit of $17,500 for swing loans and matures on August 4, 2023.

F- 46

Item 2. 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 allocates capital across a broad spectrum of businesses, assets and other investments. Our 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 also generate earnings from a diverse group of select investments that we refer to as Tiptree Capital. We evaluate our performance primarily by the comparison of our shareholders’ long-term total return on capital, as measured by Adjusted EBITDA, Operating EBITDA and growth in book value per share plus dividends.

Summary factors impacting the first half of 2020:

Overall:


•	Book value per share of $9.97 as of June 30, 2020, a decrease of 11.7% (including dividends) from June 30, 2019, primarily driven by the unrealized mark-to-market losses on our investment in Invesque, and equities and other securities held in the insurance investment portfolio.


•	In February 2020, we refinanced our existing facility with Fortress, extending the maturity to February 2025, and increasing the principal amount to $125 million.


•	Cash and cash equivalents of $80.6 million as of June 30, 2020, of which $70.2 million resides outside our statutory insurance subsidiaries.


•	We purchased and retired 1,342,168 shares of our common stock for $8.5 million.

Tiptree Insurance:


•	Gross written premiums year-to-date 2020 were $489.5 million, up 6.2% from the prior year period, driven by growth in warranty and specialty programs, offset by declines in credit protection. Net written premiums were $232.9 million, down 15.2%, driven by a decline in credit protection, offset by growth in warranty and specialty programs.

•

Pre-tax loss in Tiptree Insurance was $13.0 million for the six months ended June 30, 2020, driven primarily by investment mark-to-market losses of $28.0 million on equities, loans, and other securities held at fair value, approximately $12.2 million of which is related to Invesque. While equities, other than Invesque, and other securities held at fair value in our portfolio recovered partially in the second quarter of 2020, the markets remain volatile.


•	Tiptree Insurance Operating EBITDA was $29.0 million for the six months ended June 30, 2020, up $0.5 million from the prior year period, due to improvement in underwriting performance, including the acquisition of Smart AutoCare, partially offset by lower investment income from lower interest rates.


•	In January 2020, we acquired Smart AutoCare, a vehicle warranty solutions provider in the United States. The transaction valued the business at $160 million of enterprise value, representing a multiple of 8.3x modified cash EBITDA (excluding anticipated revenue and expense synergies).

Tiptree Capital:

•

The pretax loss in Tiptree Capital was $48.1 million for the six months ended June 30, 2020, primarily driven by the unrealized mark-to-market loss of $58.4 million on our investment in Invesque. Operating EBITDA grew year over year, driven by the inclusion of all five vessels in our maritime transportation business, and improved results in our specialty finance business from higher loan origination volume and margins.

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 Part I, Item 1A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and in Part II, Item 1A in this 10-Q. 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.

In the first half of this year, widespread business closures, travel limitations, and stay-at-home orders due to the global spread of COVID-19 created significant market volatility, uncertainty and economic disruption. Our insurance investment portfolio experienced negative unrealized mark-to-market fair value adjustments as securities and equity markets declined in response to concerns about the economic effects of the social distancing measures associated with mitigation efforts. Despite the unrealized marks, our overall capital position remains strong and we expect to continue to be able to support growth in our Insurance segment, which may be at a slower pace than we have experienced in recent quarters as a result of the current economic disruption. In addition, our investment in Invesque, which is reported at fair value and operates in the seniors housing and skilled nursing industries, continues to be materially negatively affected by the declines in equities in the senior housing sector. In response to the uncertainty in the industry, Invesque announced in early April that it was suspending dividends to conserve liquidity until the impact of COVID-19 on occupancy rates and its operations is better known. While the overall impacts to our business operations to date have been relatively modest, and we have begun to see some improvement in certain of our businesses as sectors of the economy started to re-open later in the quarter, should a widespread economic shutdown reoccur and continue for an extended period, our business could be adversely impacted.

Our insurance business generally focuses on products which have low severity but high frequency loss experiences and are short duration. As a result, the 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. To mitigate counterparty risk, we ensure our distribution partners’ captive reinsurance entities are over-collateralized with highly liquid investments, primarily cash and cash equivalents. 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 will continue to be growth opportunities to expand our warranty and specialty programs insurance business model to other niche products and markets.

The economic impact of COVID-19 has caused disruption to certain of our distribution partners’ businesses in our Insurance segment, particularly auto dealerships and retail partners, who rely on brick and mortar outlets to sell their products. Conversely, those same partners have experienced reduced claims, as consumers have reduced miles driven and warranty service calls. Less than 5% of our credit insurance products are exposed to increases in unemployment rates and over 50% of our credit insurance products protect underlying property, claims on which are not related to COVID-19. While we saw volume declines in portions of our credit protection and warranty product lines in response to the reduced economic activity in the second quarter of 2020, as parts of the economy begin to re-open, we believe our overall insurance sales will continue to grow, albeit at a slower pace, in 2020.

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, and equity securities. Many of our investments are held at fair value. Changes in fair value for loans, credit investment funds, and equity securities 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. 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. As mentioned above, the recent market declines due to the COVID-19 pandemic had a negative impact on these securities. While markets have partially recovered since quarter end, any prolonged economic impact from the current environment could result in additional unrealized or realized losses on these securities. In addition, both as part of our insurance company investments and separately in Tiptree Capital, common shares of Invesque represent a significant asset on our condensed consolidated balance sheet. Decreases in the fair value of Invesque’s common stock and changes to its dividend payout levels, which we experienced during the first half of the year, had a significant impact on our results of operations, and could continue to do so should Invesque’s operations continue to be negatively affected as a result of the pandemic.

The maritime transportation industry is highly competitive and fragmented. Demand for shipping capacity is a function of global economic conditions and the related demand for commodities, production and consumption patterns, and affected by events which interrupt production, trade routes, and consumption. The COVID-19 pandemic significantly impacted economic activity

in China, the United States, Europe, and across developing markets, reducing demand for oil and other commodities. The sharp reduction in demand negatively affected charter rates for dry-bulk commodities, other than grains, in the first half of the year. The oversupply in oil markets initially led to significant demand for floating storage, increasing charter rates for product tankers. Both of these trends began to reverse late in the second quarter of 2020, with rates for dry bulk vessels improving and rates for product tankers softening. The shipping industry is cyclical with high volatility in charter hire rates and profitability, which can change rapidly as the economic impact of the pandemic and the surplus supply of oil unfolds during the remainder of the year. General global economic conditions, along with company and industry specific factors, are expected to continue to impact the fair value of our vessels and associated operating results.

Our business can also be impacted in various ways by changes in interest rates, which can result in fluctuations in the fair value of our investments, revenues associated with floating rate investments, volume and revenues in our mortgage business and interest expense associated with floating rate debt used to fund many of our operations. The current low interest rate environment benefits our interest cost on debt, although our corporate debt facility with Fortress is subject to a LIBOR floor, which limits further decline in our interest cost at the corporate level. Separately, certain of our investments are LIBOR based, which will result in lower investment income during a period of extended low rates.

RESULTS OF OPERATIONS

The following is a summary of our consolidated financial results for the three and six months ended June 30, 2020 and 2019. 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 (i) to add back corporate interest expense, consolidated income taxes and consolidated depreciation and amortization expense, (ii) for the effect of purchase accounting, (iii) for non-cash fair value adjustments, and (iv) for 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. See “Non-GAAP Reconciliations” for a reconciliation of these measures to their GAAP equivalents.

Selected Key Metrics



($ in millions, except per share information)	Three Months Ended June 30,				Six Months Ended June 30,
GAAP:	2020		2019		2020			2019
Total revenues	$	199.2	$	191.1	$	328.9		$	375.0
Net income (loss) attributable to common stockholders	$	3.8	$	11.7	$	(56.2	)	$	15.7
Diluted earnings per share	$	0.10	$	0.32	$	(1.64	)	$	0.43
Cash dividends paid per common share	$	0.040	$	0.075	$	0.080		$	0.075

Non-GAAP: ⁽¹⁾
Operating EBITDA	$	22.2	$	12.7	$	38.0		$	25.3
Adjusted EBITDA	$	12.6	$	22.9	$	(58.3	)	$	37.5
Book value per share	$	9.97	$	11.47	$	9.97		$	11.47


⁽¹⁾	For information relating to Operating and Adjusted EBITDA and book value per share, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”

Revenues

For the three months ended June 30, 2020, revenues were $199.2 million, which increased $8.1 million, or 4.2% compared to the prior year period primarily due to growth in service and administrative fees. For the six months ended June 30, 2020, revenues were $328.9 million, which decreased $46.1 million, or 12.3% compared to the prior year period, primarily due to net realized and unrealized losses on Invesque and other securities held at fair value. Earned premiums and service and administrative fees were $150.2 million for the three months ended June 30, 2020, up $7.0 million, or 4.9%, and $315.2 million for the six months ended June 30, 2020, up $27.1 million, or 9.4%, driven by growth in warranty service contracts and light commercial specialty programs. Offsetting these increases were net unrealized losses of $6.3 million and $90.2 million for the three and six month periods ended June 30, 2020, on Invesque, other equity holdings, loans at fair value and other securities combined with lower net investment income as a result of lower interest rates.

The combination of unearned premiums and deferred revenues on the balance sheet grew by $306.4 million, or 42.2%, from June 30, 2019 to June 30, 2020 as a result of increased written premiums, primarily in warranty programs, including the acquisition of Smart AutoCare, which contributed $172.7 million of growth in deferred revenues, and in light commercial specialty programs.

The table below provides a break down between net realized and unrealized gains and losses from Invesque and from other securities which impacted 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, which is highlighted by the recent market declines caused by uncertainly regarding the impact of COVID-19 and oversupply in the oil markets. Our fixed income securities are primarily marked to market through accumulated other comprehensive income (AOCI) in stockholders’ equity and do not impact net realized and unrealized gains and losses until they are sold.



($ in millions)	Three Months Ended June 30,					Six Months Ended June 30,
	2020			2019		2020			2019
Net realized and unrealized gains (losses)⁽¹⁾	$	5.6		$	8.7	$	(19.6	)	$	10.2
Net realized and unrealized gains (losses) - Invesque	$	(11.9	)	$	3.7	$	(70.6	)	$	6.2


⁽¹⁾	Excludes Invesque, Mortgage realized and unrealized gains and losses and NPLs.

Net Income (Loss) Attributable to Common Stockholders

For the three months ended June 30, 2020, net income available to common stockholders was $3.8 million, a decrease of $7.9 million. For the six months ended June 30, 2020, net loss available to common stockholders was $56.2 million, a decrease of $71.9 million. The decrease was primarily driven by the same factors that impacted revenues described above.

Operating and Adjusted EBITDA - Non-GAAP

Operating EBITDA for the three months ended June 30, 2020 was $22.2 million, an increase of $9.5 million, or 74.8% from the prior year period, and $38.0 million for the six months ended June 30, 2020, an increase of $12.7 million, or 50.2%. For the three and six months ended June 30, 2020, the key drivers of the increases were improved performance in Tiptree Capital and lower executive incentive compensation accruals at Corporate.

Adjusted EBITDA for the three months ended June 30, 2020 was $12.6 million, a decrease of $10.3 million, and a loss of $58.3 million for the six months ended June 30, 2020, a decrease of $95.8 million. The key drivers of the decreases in the three and six months ended June 30, 2020 were higher unrealized and realized losses on investments in Invesque and the insurance portfolio. See “— Non-GAAP Reconciliations” for a reconciliation of Operating and Adjusted EBITDA to GAAP net income.

Book Value per share - Non-GAAP

Total stockholders’ equity was $347.2 million as of June 30, 2020 compared to $407.1 million as of June 30, 2019. Over the past twelve months, Tiptree returned $14.0 million to shareholders through share repurchases and dividends paid. Book value per share for the period ended June 30, 2020 was $9.97, a decrease from book value per share of $11.47 as of June 30, 2019. The key drivers of the period-over-period reduction were losses per share and dividends paid of $0.16 per share. The decrease was partially offset by the purchase of 1.342 million shares at an average 40% discount to book value.

Results by Segment

We classify our business into one reportable segment, Tiptree Insurance, with the remainder of our non-insurance operations aggregated into Tiptree Capital. Corporate activities include holding company interest expense, corporate employee compensation and benefits, and other expenses, including, but not limited to, public company expenses. The following table presents the components of total pre-tax income.

Pre-tax Income



($ in millions)	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Tiptree Insurance	$	14.1		$	12.0		$	(13.0	)	$	20.1
Tiptree Capital	(1.8		)	11.7			(48.1		)	17.6
Corporate	(7.8		)	(7.9		)	(16.2		)	(16.8		)
Pre-tax income (loss)	$	4.5		$	15.8		$	(77.3	)	$	20.9

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 decisions. Invested Capital represents the 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 a 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 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. The increase in negative Invested Capital at the Corporate level is a combination of the investment of the net proceeds from our corporate debt refinancing into Tiptree Insurance to fund our warranty business and the increased investment in vessels in Tiptree Capital since the same period in the prior year.



	As of June 30,
($ in millions)	Invested Capital⁽¹⁾						Total Capital⁽¹⁾
	2020			2019			2020		2019
Tiptree Insurance	$	332.5		$	306.5		$	510.2	$	466.5
Tiptree Capital	146.1			177.5			146.1		177.5
Corporate	(85.7		)	(37.4		)	37.6		32.8
Total Tiptree	$	392.9		$	446.6		$	693.9	$	676.8

Operating and Adjusted EBITDA



($ in millions)	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Tiptree Insurance	$	14.7		$	14.8		$	29.0		$	28.5
Tiptree Capital	11.8			3.6			17.9			8.3
Corporate	(4.3		)	(5.7		)	(8.9		)	(11.5		)
Operating EBITDA⁽¹⁾	$	22.2		$	12.7		$	38.0		$	25.3
Stock based compensation expense	(1.9		)	(1.6		)	(3.6		)	(3.0		)
Vessel depreciation, net of capital expenditures	(1.3		)	(0.6		)	(2.4		)	(1.2		)
Realized and unrealized gains (losses)⁽²⁾	(6.3		)	12.4			(90.2		)	16.4
Third party non-controlling interests⁽⁴⁾	(0.1		)	—			(0.1		)	—
Adjusted EBITDA⁽¹⁾	$	12.6		$	22.9		$	(58.3	)	$	37.5


⁽¹⁾	For further information relating to 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⁾	Excludes Mortgage realized and unrealized gains and losses - Performing and NPLs.

Tiptree Insurance

Our principal operating subsidiary, Tiptree Insurance, 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 underwriting margin, combined ratio and Operating EBITDA. The investment portfolio income consists of investment income and gains and losses, and is measured by net portfolio income.

The following tables present the insurance segment results for the three and six months ended June 30, 2020 and 2019.

Operating Results



($ in millions)	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020			2019
Gross written premiums	$	212.7	$	262.6	$	489.5		$	461.0
Net written premiums	100.4		153.6		232.9			274.6
Revenues:
Net earned premiums	$	107.3	$	116.5	$	228.6		$	235.5
Service and administrative fees	42.9		26.7		86.6			52.6
Ceding commissions	4.6		3.1		11.1			5.6
Net investment income	2.3		3.4		5.8			7.7
Net realized and unrealized gains (losses)	5.6		3.7		(28.0		)	5.8
Other income	2.4		1.0		4.3			1.8
Total revenues	$	165.1	$	154.4	$	308.4		$	309.0
Expenses:
Policy and contract benefits	49.1		39.5		110.0			80.3
Commission expense	67.9		72.7		138.3			147.6
Employee compensation and benefits	15.0		12.1		32.0			24.1
Interest expense	3.6		3.5		7.2			7.6
Depreciation and amortization expense	2.6		2.3		4.9			4.6
Other expenses	12.8		12.3		29.0			24.7
Total expenses	$	151.0	$	142.4	$	321.4		$	288.9
Pre-tax income (loss)	$	14.1	$	12.0	$	(13.0	)	$	20.1

Results

Our 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 specialty programs, including through the acquisition of Smart AutoCare, while maintaining a leading position in our credit protection markets. That, combined with the earnings performance of the investment portfolio, is a key driver in comparing 2020 versus 2019 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 $306.4 million, or 42.2%, from $726.2 million as of June 30, 2019 to $1,032.6 million as of June 30, 2020. The first quarter 2020 acquisition of Smart AutoCare represented growth of $172.7 million of deferred revenues for the current period.

Insurance underwriting results improved, driven primarily by increased underwriting margin of $5.1 million, or 14.5% for the three months ended June 30, 2020, and $14.7 million, or 21.7% for the six months ended June 30, 2020.

Pre-tax income was $14.1 million for the three months ended June 30, 2020, an increase of $2.1 million. The primary driver of the increase was improved service and administrative fees of $16.2 million, partially offset by declines in net earned premiums, and increased operating expenses from the acquisition of SmartAutoCare.

Pre-tax loss was $13.0 million for the six months ended June 30, 2020, a decrease of $33.1 million. The primary drivers of the decrease were net realized and unrealized losses of $28.0 million in the six months ended June 30, 2020 versus gains of $5.8 million for the six months ended June 30, 2019, primarily related to Invesque, and other equities and loans held at fair value in the portfolio, offset by growth in service and administrative fees.

Revenues

Revenues are generated by the sale of the following products: credit protection, warranty, specialty, services and other. Credit protection products include credit life, credit disability, credit property, involuntary unemployment, and accidental death and dismemberment. Warranty products include vehicle service contracts, furniture and appliance service contracts and mobile device protection. Specialty programs are primarily personal and commercial lines and other property-casualty products.

For the three months ended June 30, 2020, total revenues were $165.1 million, up $10.7 million, or 6.9%, primarily driven by increases in service and administrative fees of $16.2 million, partially offset by declines in net earned premiums of $9.2 million.

For the six months ended June 30, 2020, total revenues were $308.4 million, down $0.6 million, or 0.2%, primarily driven by net realized and unrealized losses on the investment portfolio of $28.0 million, compared to $5.8 million of gains in the 2019 period, a decrease of $33.8 million. See “—Tiptree Insurance Investment Portfolio” for a further discussion of the investment results.

For the three and six months ended June 30, 2020, there was a decrease in earned premiums of $9.2 million, or 7.9%, and $6.9 million, or 2.9%, respectively, driven by warranty programs. For the three and six months ended June 30, 2020, there was an increase in service and administrative fees of $16.2 million, or 60.7%, and $34.0 million, or 64.6%, respectively. The increase was driven by growth in warranty programs due to the acquisition of Smart AutoCare.

Expenses

Total expenses include policy and contract benefits, commissions expense and operating expenses. For the three months ended June 30, 2020, total expenses were $151.0 million, up $8.6 million, or 6.0%, and for the six months ended June 30, 2020, total expenses were $321.4 million, up $32.5 million, or 11.2%, primary driven by increases in policy and contract benefits and employee compensation and benefits, partially offset by reduced commission expense, including impacts from the acquisition of Smart AutoCare.

There are two types of expenses for claims under insurance and warranty service contracts included in policy and contract benefits: member benefit claims, and net losses and loss adjustment expenses. Member benefit claims represent the costs of services and replacement devices incurred in warranty protection and motor 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 three months ended June 30, 2020, policy and contract benefits were $49.1 million, up $9.6 million, or 24.3%, and for the six months ended June 30, 2020, policy and contract benefits were $110.0 million, up $29.7 million, or 37%, primarily as a result of growth in written premiums and the acquisition of Smart AutoCare.

Commission expense is incurred on most product lines, the majority of which are retrospective commissions paid to agents, distributors and retailers selling our products, including credit insurance policies, warranty and mobile device protection service contracts, and motor club memberships. When claims increase, in most cases our distribution partners bear the risk through a reduction in their retrospective commissions. 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 three months ended June 30, 2020 was $67.9 million, down $4.8 million, or 6.6%, and for the six months ended June 30, 2020 was $138.3 million, down $9.3 million, or 6.3%, primarily due to a combination of higher claims borne by our distribution partners, through a reduction of retrospective commissions, and the ceding of a portion of our credit protection insurance book at year-end 2019.

Operating expenses include employee compensation and benefits, interest expense, depreciation and amortization expense and other expenses. For the three months ended June 30, 2020, employee compensation and benefits were $15.0 million, up $2.9 million, or 24.0%, and for the six months ended June 30, 2020, employee compensation and benefits were $32.0 million, up $7.9 million, or 32.8%, primarily from increased headcount in connection with the acquisition of Smart AutoCare. Interest expense of $3.6 million in the three months ended June 30, 2020 increased by $0.1 million, or 2.9%, primarily from higher average outstanding balances. Interest expense of $7.2 million in the six months ended June 30, 2020 decreased by $0.4 million, or 5.3%, primarily from reduced interest rates. Other expenses for the three months ended June 30, 2020 were $12.8 million, up $0.5 million, or 4.1%, and for the six months ended June 30, 2020 were $29.0 million, up $4.3 million, or 17.4%, primarily from higher premium taxes due to growth in written premiums and professional fees incurred in connection with the acquisition.

Key Operating Metrics and Non-GAAP Operating Results

Gross & Net Written Premiums

Gross written premiums represent 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



	Three Months Ended June 30,								Six Months Ended June 30,
($ in millions)	Gross Written Premiums				Net Written Premiums				Gross Written Premiums				Net Written Premiums
Insurance Products:	2020		2019		2020		2019		2020		2019		2020		2019
Credit protection	$	106.2	$	158.3	$	57.9	$	100.7	$	264.7	$	290.6	$	139.7	$	189.7
Warranty	49.8		68.6		19.9		38.3		119.3		110.2		51.4		61.1
Specialty	56.7		35.7		22.6		14.6		105.5		60.2		41.8		23.8
Total	$	212.7	$	262.6	$	100.4	$	153.6	$	489.5	$	461.0	$	232.9	$	274.6

Total gross written premiums for the three months ended June 30, 2020 were $212.7 million, which represented a decrease of $49.9 million, or 19.0%. The decline was driven by credit protection and warranty product volumes related to the impact of COVID-19, offset by an increase of specialty programs. Total gross written premiums for the six months ended June 30, 2020 were $489.5 million, which represented an increase of $28.5 million, or 6.2%. The increase was driven by growth in warranty and specialty programs, offset by a decrease in credit protection due to declines in volumes related to the impact of COVID-19.

Total net premiums written for the three months ended June 30, 2020 were $100.4 million, down $53.2 million, or 34.6%, and for the six months ended June 30, 2020 were $232.9 million, down $41.7 million, or 15.2%, driven by decreases in warranty and credit protection, offset by an increase in specialty programs. The amount of business retained for the six months ended June 30, 2020 was 47.6%, down from 59.6% in the prior year period, as we ceded a portion of our credit protection policies at year-end 2019.

We believe our warranty service contracts and light commercial programs provide opportunity for growth through expanded product offerings, new clients and geographic expansion. While we continue to expect growth in these areas, we expect the rate of increase could be dampened in 2020 as a result of the disruption in the economy, particularly from effects on retail and auto dealerships, related to COVID-19.

Product Underwriting Margin - Non-GAAP

The following table presents product specific revenue and expenses within the Tiptree Insurance segment. We generally manage our exposure to 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 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.

Underwriting Revenues and Underwriting Margin - Non-GAAP⁽¹⁾



	Three Months Ended June 30,								Six Months Ended June 30,
($ in millions)	Underwriting Revenues				Underwriting Margin				Underwriting Revenues				Underwriting Margin
Insurance products:	2020		2019		2020		2019		2020		2019		2020		2019
Credit protection	$	90.9	$	107.3	$	20.0	$	22.5	$	193.5	$	213.7	$	40.9	$	42.0
Warranty	42.2		26.4		13.9		7.9		90.2		54.9		28.5		16.4
Specialty	20.8		11.2		3.0		2.3		40.8		22.1		6.9		4.3
Services and other	3.3		2.4		3.3		2.4		6.1		4.8		6.0		4.9
Total	$	157.2	$	147.3	$	40.2	$	35.1	$	330.6	$	295.5	$	82.3	$	67.6


⁽¹⁾	For further information relating to the Company’s underwriting margin, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”

Underwriting margin for the three months ended June 30, 2020 was $40.2 million, up $5.1 million, or 14.5%, and for the six months ended June 30, 2020 was $82.3 million, up $14.7 million, or 21.7%. Credit protection underwriting margin was $20.0 million for the three months ended June 30, 2020, a decrease of $2.5 million, or 11.1%, and $40.9 million for the six months

ended June 30, 2020, a decrease of $1.1 million, or 2.6%. Credit protection was impacted by lower sales volumes in the second quarter of 2020, which we believe was related to reduced consumer lending activity as a result of stimulus payments received and social distancing measures associated with COVID-19. Underwriting margin for warranty products for the three months ended June 30, 2020 was $13.9 million, up $6.0 million, or 75.9%, and for the six months ended June 30, 2020 was $28.5 million, up $12.1 million, or 73.8%, driven primarily by the acquisition of Smart AutoCare. Specialty underwriting margin for the three months ended June 30, 2020 was $3.0 million, up $0.7 million, or 30.4%, and for the six months ended June 30, 2020 was $6.9 million, up $2.6 million, or 60.5%, driven by growth in our light commercial specialty programs. Services and other contributed $3.3 million in the three months ended June 30, 2020, which was up $0.9 million, or 37.5%, and $6.0 million in the six months ended June 30, 2020, which was up $1.1 million, or 22.4%.

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 (excluding returns on the investment portfolio). Investors use this ratio to evaluate the ability of insurers to profitably underwrite the risks they assume over time and manage 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 millions)							As of June 30,
							2020			2019
Invested Capital⁽¹⁾							$	332.5		$	306.5
Total Capital⁽¹⁾							$	510.2		$	466.5

	Three Months Ended June 30,						Six Months Ended June 30,
Operating EBITDA drivers:	2020			2019			2020			2019
Underwriting	$	12.4		$	10.9		$	23.5		$	20.5
Investments	2.3			3.9			5.5			8.0
Tiptree Insurance Operating EBITDA⁽¹⁾	$	14.7		$	14.8		$	29.0		$	28.5
Insurance operating ratios:
Combined ratio	91.8		%	92.7		%	92.6		%	93.2		%


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

The combined ratio was 91.8% for the three months ended June 30, 2020, compared to 92.7% for the prior year period, and 92.6% for the six months ended June 30, 2020, compared to 93.2% for the prior year period. The ratio was relatively stable period-over-period, driven by consistent margins across our product offerings. See “—Insurance Investment Portfolio” for a further discussion of the investment results and “—Non-GAAP Reconciliations” for a reconciliation to GAAP pre-tax income.

Insurance Investment Portfolio

Our insurance investment portfolio includes investments held in statutory insurance companies and in unregulated entities. The portfolio held in statutory insurance companies are subject to different regulatory considerations, including with respect to types of assets, concentration limits, affiliate transactions and the use of leverage. Our investment strategy is designed to achieve attractive risk-adjusted returns over the entire investment horizon across select asset classes, sectors and geographies while maintaining adequate liquidity to meet our claims payment obligations. As such, volatility from realized and unrealized gains and losses may impact period-over-period performance. Unrealized gains and losses on equity securities and loans held at fair value impact current period net income, while unrealized gains and losses on available for sale (AFS) 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, including 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 year to date portfolio return, 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.

Tiptree Insurance Investment Portfolio - Non-GAAP



($ in millions)							As of June 30,
							2020			2019
Cash and cash equivalents⁽¹⁾							$	47.8		$	124.0
Available for sale securities, at fair value							345.7			269.1
Equity securities							83.3			55.9
Corporate bonds, at fair value							91.5			—
Loans, at fair value⁽²⁾							6.8			23.5
Real estate, net							1.8			7.0
Other investments							18.2			9.2
Securities sold, not yet purchased							(49.4		)	—
Net investments							$	545.7		$	488.7

⁽¹⁾ Cash and cash equivalents, plus restricted cash, net of due from/due to brokers and investment portfolio debt, 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.

Tiptree Insurance Net Investment Portfolio Income - Non-GAAP

($ in millions)	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net investment income	$	2.3		$	3.4		$	5.8		$	7.7
Other income	—			0.3			—			0.5
Realized gains (losses)	1.8			3.4			(15.2		)	3.6
Unrealized gains (losses)	3.8			0.3			(12.8		)	2.2
Unrealized gains (losses) on available for sale securities	4.9			1.5			5.3			4.6
Interest expense	—			—			—			(0.6		)
Net portfolio income (loss)	$	12.8		$	8.9		$	(16.9	)	$	18.0
Portfolio return %⁽¹⁾	2.4		%	1.9		%	(3.1		)%	3.8		%


⁽¹⁾	Portfolio return % represents the ratio of net investment income, realized and unrealized gains (losses) (including realized and unrealized gains (losses) on available for sale securities included in AOCI), less investment portfolio interest expense to the average of the prior two quarters total investments less investment portfolio debt plus cash.

Net investments of $545.7 million have grown 11.7% from June 30, 2019 through a combination of organic growth in written premiums and the acquisition of Smart AutoCare.

Our net investment income includes interest and dividends, 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 and losses on securities classified as AFS separately within AOCI on our balance sheet. For loans, at fair value, and equity securities, we report unrealized gains and losses within net realized gains and losses on the condensed consolidated statement of operations.

For the three months ended June 30, 2020, the net investment portfolio income was $12.8 million, up $3.9 million from the 2019 period. For the six months ended June 30, 2020, the net investment portfolio loss was $16.9 million, down $34.9 million from the 2019 period, due to realized and unrealized losses. Net investment income was $2.3 million for the three months ended June

30, 2020, down $1.1 million, or 32.4%, and was $5.8 million for the six months ended June 30, 2020, down $1.9 million, or 24.7%, driven primarily by our efforts to reduce exposure to levered credit through the sale of loans held at fair value, combined with an overall decline in LIBOR rates. For the three and six months ended June 30, 2020, fair market value changes on equities and other securities carried at fair value resulted in unrealized and realized gains of $5.6 million and losses of $28.0 million, respectively, compared to gains of $3.7 million and $5.8 million in the three and six month 2019 periods, respectively. The portfolio return for the three months increased from 1.9% to 2.4% as a result of unrealized gains in the 2020 period. The portfolio return for the six months decreased from 3.8% in the 2019 periods to negative 3.1% in the 2020 period driven by lower net investment income and realized and unrealized losses in the six months ended June 30, 2020, compared to unrealized gains in the prior year.

Tiptree Capital

Tiptree Capital consists of our non-insurance operating businesses and investments. As of June 30, 2020, Tiptree Capital includes our Invesque shares, maritime transportation operations, and mortgage operations. We manage Tiptree Capital on a total return basis, balancing current cash flow and long-term value appreciation.

The following table summarizes total revenues and pre-tax income from Tiptree Capital.

Operating Results



($ in millions)	Three Months Ended June 30,					Six Months Ended June 30,
	2020			2019		2020			2019
Total revenues	$	34.3		$	36.7	$	20.6		$	66.0
Pre-tax income (loss)	$	(1.8	)	$	11.7	$	(48.1	)	$	17.6

Drivers of pre-tax income



($ in millions)	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Asset management fees and credit investments	$	—		$	7.5		$	—		$	8.0
Maritime transportation	$	(0.2	)	$	—		$	1.0		$	0.5
Specialty finance and other	$	8.2		$	(1.4	)	$	6.7		$	(1.1	)
Senior living (Invesque)⁽¹⁾	$	(9.9	)	$	5.6		$	(55.9	)	$	10.2

(1)

Includes $0.0 million of dividends (due to the suspension of Invesque’s dividend announced in April 2020) and $9.9 million of unrealized losses for the three months ended June 30, 2020, and $2.6 million of dividends and $3.0 million of unrealized gains for the three months ended June 30, 2019. Includes $2.5 million of dividends and $58.4 million of unrealized losses for the six months ended June 30, 2020, and $5.1 million of dividends and $5.1 million of unrealized gains for the six months ended June 30, 2019.

Results from Operations

Tiptree Capital earns revenues from the following sources: net interest income; mortgage gains and origination fees; asset management fees from CLOs under management (prior to the sale of our Telos asset management business which occurred on April 26, 2019); distributions and realized and unrealized gains on the Company’s investment holdings (primarily Invesque); and charter revenue from vessels within our maritime transportation operations.

Revenues for the three months ended June 30, 2020 were $34.3 million, a decrease of $2.4 million from the prior year period, and revenues for the six months ended June 30, 2020 were $20.6 million, a decrease of $45.4 million from the prior year period. Components of revenue for the three months ended June 30, 2020 include $39.6 million in specialty finance and $4.6 million from maritime transportation, which were offset by negative marks on Invesque of $9.9 million. Components of revenue for the six months ended June 30, 2020 include $64.7 million in specialty finance, $11.8 million from maritime transportation, and $2.5 million of Invesque dividends, which were partially offset by negative marks on Invesque of $58.4 million.

Pre-tax loss for the three months ended June 30, 2020 was $1.8 million, compared to income of $11.7 million in the 2019 period, and pre-tax loss for six months ended June 30, 2020 was $48.1 million, compared to income of $17.6 million in the 2019 period. The primary driver of the decreases were unrealized losses on our investment in Invesque, partially offset by improved performance in specialty finance. For the three months ended June 30, 2020, we received no dividends from Invesque, which suspended its dividend in April 2020, and incurred $9.9 million of unrealized losses compared to $2.6 million of dividends and $3.0 million of unrealized gains in the 2019 period. For the six months ended June 30, 2020, we received $2.5 million of dividends

from Invesque and incurred $58.4 million of unrealized losses compared to $5.1 million of dividends and $5.1 million of unrealized gains in the 2019 period. Pre-tax income from specialty finance improved by $9.6 million for the three months ended June 30, 2020, and improved $7.8 million for the six months ended June 30, 2020, primarily driven by higher volumes and margins associated with a lower mortgage interest rate environment.

Tiptree Capital - Invested Capital and Operating EBITDA - Non-GAAP⁽¹⁾



($ in millions)	Invested Capital⁽¹⁾				Operating EBITDA⁽¹⁾
	As of June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019		2020		2019
Senior living (Invesque)	$	35.2	$	100.5	$	—	$	2.6	$	2.5	$	5.1
Maritime transportation	74.1		48.7		1.2		0.6		3.7		1.7
Specialty finance and other	36.8		28.3		10.6		0.4		11.7		1.5
Total	$	146.1	$	177.5	$	11.8	$	3.6	$	17.9	$	8.3


⁽¹⁾	For information relating to Invested Capital and Operating EBITDA, including a reconciliation to GAAP financials, see “—Non-GAAP Reconciliations.”

Invested Capital

Invested Capital decreased from $177.5 million as of June 30, 2019 to $146.1 million as of June 30, 2020, primarily due to unrealized losses as a result of the decline in Invesque’s share price, offset by the purchase of two additional vessels in the third and fourth quarter of 2019 for a net aggregate purchase price of $38.8 million, and improved earnings in specialty finance.

Operating EBITDA

Operating EBITDA increased $8.2 million, or 227.8%, to $11.8 million for the three months ended June 30, 2020, and $9.6 million, or 115.7%, to $17.9 million for the six months ended June 30, 2020. The key driver of the Operating EBITDA increases were the improvement within specialty finance driven by increased mortgage volumes and margins. See “— Non-GAAP Reconciliations” for a reconciliation to GAAP net income.

Corporate



($ in millions)	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Employee compensation and benefits	$	1.7	$	1.5	$	3.8	$	3.3
Employee incentive compensation expense	1.0		3.0		2.4		5.0
Interest expense	2.7		1.6		4.7		3.2
Depreciation and amortization expense	0.2		0.1		0.4		0.2
Other expenses	2.2		1.7		4.9		5.1
Total expenses	$	7.8	$	7.9	$	16.2	$	16.8

Results

Corporate expenses include expenses of the holding company for interest expense, employee compensation and benefits, and public company and other expenses. 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, decreased $1.8 million and $2.1 million for the three and six months ended June 30, 2020, respectively, driven primarily by a reduction in employee incentive compensation. Interest expense for the three and six months ended June 30, 2020 was $2.7 million and $4.7 million, respectively, an increase of $1.1 million and $1.5 million from the same periods in the prior year, driven by a higher average outstanding balance during the 2020 periods. As of June 30, 2020, the outstanding borrowing was $123.4 million, compared to $70.2 million at June 30, 2019.

Provision for Income Taxes

The total income tax benefit of $21.2 million for the six months ended June 30, 2020 and total income tax expense of $4.4 million for the six months ended June 30, 2019 are reflected as components of net income (loss).

For the three months ended June 30, 2020, the Company’s effective tax rate was equal to (0.1)%. The effective rate for the three months ended June 30, 2020 was lower than the U.S. federal statutory income tax rate of 21.0%, primarily from the impact of expected refunds arising from the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). For the three months ended June 30, 2019, the Company’s effective tax rate was equal to 22.3%. The effective rate for the three months ended June 30, 2019 was higher than the statutory rate of 21.0%, primarily due to the dividends received deduction and other discrete items.

For the six months ended June 30, 2020, the Company’s effective tax rate was equal to 27.4%. The effective rate for the six months ended June 30, 2020 was higher than the U.S. federal statutory income tax rate of 21.0%, primarily from the impact of state rates and other discrete items. For the six months ended June 30, 2019, the Company’s effective tax rate was equal to 20.9%. The effective rate for the six months ended June 30, 2019 was lower than the statutory rate of 21.0%, primarily due to the dividends received deduction and other discrete items.

On March 27, 2020, the CARES Act was enacted, implementing numerous changes to tax law including temporary changes regarding the prior and future utilization of net operating losses. During the six months ended June 30, 2020, the Company recorded a $2.4 million tax benefit related to the ability to carry back net operating losses to prior periods under the CARES Act, resulting in a decrease of our deferred tax asset of $5.8 million and increase to our current receivable of $8.2 million. The Company continues to assess the potential tax impacts of this legislation on its financial position and results of operations.

Balance Sheet Information - as of June 30, 2020 compared to the year ended December 31, 2019

Tiptree’s total assets were $2,480.5 million as of June 30, 2020, compared to $2,198.3 million as of December 31, 2019. The $282.2 million increase in assets is primarily attributable to the growth in our Insurance segment, in particular the acquisition of Smart AutoCare.

Total stockholders’ equity was $347.2 million as of June 30, 2020, compared to $411.4 million as of December 31, 2019, primarily driven by the net loss, stock repurchases and dividends. As of June 30, 2020, there were 33,676,183 shares of common stock outstanding, as compared to 34,562,553 as of December 31, 2019.

The following table is a summary of certain balance sheet information:



	As of June 30, 2020
($ in millions)	Tiptree Insurance		Tiptree Capital		Corporate			Total
Total assets	$	2,084.7	$	363.9	$	31.9		$	2,480.5

Corporate debt	$	177.6	$	—	$	123.4		$	301.0
Asset based debt	27.3		85.3		—			112.6

Tiptree Inc. stockholders’ equity	$	275.4	$	146.1	$	(85.7	)	$	335.8
Non-controlling interests - Other	8.8		2.6		—			11.4
Total stockholders’ equity	$	284.2	$	148.7	$	(85.7	)	$	347.2

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 and vessel depreciation 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 millions)	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net income (loss) attributable to common stockholders	$	3.8		$	11.8		$	(56.2	)	$	15.7
Add: net (loss) income attributable to non-controlling interests	0.7			0.4			0.1			0.8
Income (loss)	$	4.5		$	12.2		$	(56.1	)	$	16.5
Corporate debt related interest expense⁽¹⁾	5.9			4.9			11.2			9.9
Consolidated income tax expense (benefit)	—			3.5			(21.2		)	4.4
Depreciation and amortization expense⁽²⁾	4.3			3.1			8.1			6.1
Non-cash fair value adjustments⁽³⁾	(2.2		)	(0.8		)	(3.0		)	(1.4		)
Non-recurring expenses⁽⁴⁾	0.1			—			2.7			2.0
Adjusted EBITDA	$	12.6		$	22.9		$	(58.3	)	$	37.5
Add: Stock based compensation expense	1.9			1.6			3.6			3.0
Add: Vessel depreciation, net of capital expenditures	1.3			0.6			2.4			1.2
Less: Realized and unrealized gains (losses)⁽⁵⁾	(6.3		)	12.4			(90.2		)	16.4
Less: Third party non-controlling interests⁽⁶⁾	(0.1		)	—			(0.1		)	—
Operating EBITDA	$	22.2		$	12.7		$	38.0		$	25.3

_______________________________



(1)	Corporate debt interest expense includes interest expense from secured corporate credit agreements, junior subordinated notes and preferred trust securities. Interest expense associated with asset-specific debt in Tiptree Insurance and Tiptree Capital is not added-back for Adjusted EBITDA and Operating EBITDA.
(2)	Represents total depreciation and amortization expense less purchase accounting amortization related adjustments at our insurance companies. 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 companies increased EBITDA above what the historical basis of accounting would have generated.
(3)	For our maritime transportation operations, depreciation and amortization is deducted as a reduction in the value of the vessel.
(4)	Acquisition, start-up and disposition costs, including debt extinguishment, legal, taxes, banker fees and other costs.
(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.

Adjusted EBITDA and Operating EBITDA - Non-GAAP

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



	Three Months Ended June 30, 2020
($ in millions)	Tiptree Insurance		Tiptree Capital			Corporate Expenses			Total
Pre-tax income/(loss) from continuing operations	$	14.1	$	(1.8	)	$	(7.8	)	$	4.5
Adjustments:
Corporate debt related interest expense⁽¹⁾	3.2		—			2.7			5.9
Depreciation and amortization expenses⁽²⁾	2.6		1.5			0.2			4.3
Non-cash fair value adjustments⁽³⁾	—		(2.2		)	—			(2.2		)
Non-recurring expenses⁽⁴⁾	0.1		—			—			0.1
Adjusted EBITDA	$	20.0	$	(2.5	)	$	(4.9	)	$	12.6
Add: Stock-based compensation expense	0.5		0.8			0.6			1.9
Add: Vessel depreciation, net of capital expenditures	—		1.3			—			1.3
Less: Realized and unrealized gain (loss)⁽⁵⁾	5.8		(12.1		)	—			(6.3		)
Less: Third party non-controlling interests⁽⁶⁾	—		(0.1		)	—			(0.1		)
Operating EBITDA	$	14.7	$	11.8		$	(4.3	)	$	22.2



	Six Months Ended June 30, 2020
($ in millions)	Tiptree Insurance			Tiptree Capital			Corporate Expenses			Total
Pre-tax income (loss)	$	(13.0	)	$	(48.1	)	$	(16.2	)	$	(77.3	)
Adjustments:
Corporate debt related interest expense⁽¹⁾	6.5			—			4.7			11.2
Depreciation and amortization expense ⁽²⁾	4.8			2.9			0.4			8.1
Non-cash fair value adjustments⁽³⁾	—			(3.0		)	—			(3.0		)
Non-recurring expenses⁽⁴⁾	2.3			—			0.4			2.7
Adjusted EBITDA	$	0.6		$	(48.2	)	$	(10.7	)	$	(58.3	)
Add: Stock based compensation expense	0.8			1.0			1.8			3.6
Add: Vessel depreciation, net of capital expenditures	—			2.4			—			2.4
Less: Realized and unrealized gains (losses)⁽⁵⁾	(27.6		)	(62.6		)	—			(90.2		)
Less: Third party non-controlling interests⁽⁶⁾	—			(0.1		)	—			(0.1		)
Operating EBITDA	$	29.0		$	17.9		$	(8.9	)	$	38.0



	Three Months Ended June 30, 2019
($ in millions)	Tiptree Insurance		Tiptree Capital			Corporate Expenses			Total
Pre-tax income/(loss) from continuing operations	$	12.0	$	11.7		$	(7.9	)	$	15.8
Adjustments:
Corporate debt related interest expense⁽¹⁾	3.3		—			1.6			4.9
Depreciation and amortization expenses⁽²⁾	2.1		0.8			0.1			3.0
Non-cash fair value adjustments⁽³⁾	—		(0.8		)	—			(0.8		)
Non-recurring expenses⁽⁴⁾	0.1		0.2			(0.3		)	—
Adjusted EBITDA	$	17.5	$	11.9		$	(6.5	)	$	22.9
Add: Stock-based compensation expense	0.7		0.1			0.8			1.6
Add: Vessel depreciation, net of capital expenditures	—		0.6			—			0.6
Less: Realized and unrealized gain (loss)⁽⁵⁾	3.4		9.0			—			12.4
Operating EBITDA	$	14.8	$	3.6		$	(5.7	)	$	12.7



	Six Months Ended June 30, 2019
($ in millions)	Tiptree Insurance		Tiptree Capital			Corporate Expenses			Total
Pre-tax income (loss)	$	20.1	$	17.6		$	(16.8	)	$	20.9
Adjustments:
Corporate debt related interest expense⁽¹⁾	6.7		—			3.2			9.9
Depreciation and amortization expense⁽²⁾	4.3		1.6			0.2			6.1
Non-cash fair value adjustments⁽³⁾	—		(1.4		)	—			(1.4		)
Non-recurring expenses⁽⁴⁾	1.4		0.2			0.4			2.0
Adjusted EBITDA	$	32.5	$	18.0		$	(13.0	)	$	37.5
Add: Stock based compensation expense	1.3		0.2			1.5			3.0
Add: Vessel depreciation, net of capital expenditures	—		1.2			—			1.2
Less: Realized and unrealized gains (losses)⁽⁵⁾	5.3		11.1			—			16.4
Operating EBITDA	$	28.5	$	8.3		$	(11.5	)	$	25.3

_______________________________

The footnotes below correspond to the tables above, under “—Adjusted EBITDA and Operating EBITDA - Non-GAAP”



(1)	Corporate debt interest expense includes interest expense from secured corporate credit agreements, junior subordinated notes and preferred trust securities. Interest expense associated with asset-specific debt in Tiptree Insurance and Tiptree Capital is not added-back for Adjusted EBITDA and Operating EBITDA.
(2)	Represents total depreciation and amortization expense less purchase accounting amortization related adjustments at our insurance companies. 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 companies increased EBITDA above what the historical basis of accounting would have generated.
(3)	For our maritime transportation operations, depreciation and amortization is deducted as a reduction in the value of the vessel.
(4)	Acquisition, start-up and disposition costs, including debt extinguishment, legal, taxes, banker fees and other costs.
(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.

Book Value per share - Non-GAAP

Management believes the use of this financial measure provides supplemental information useful to investors as book value is frequently used by the financial community to analyze company growth on a relative per share basis. The following table provides a reconciliation between total stockholders’ equity and total shares outstanding, net of treasury shares.



($ in millions, except per share information)	As of June 30,
	2020		2019
Total stockholders’ equity	$	347.2	$	407.1
Less: Non-controlling interests	11.4		11.0
Total stockholders’ equity, net of non-controlling interests	$	335.8	$	396.1

Total common shares outstanding	33.7		34.5

Book value per share	$	9.97	$	11.47

Invested & Total Capital - Non-GAAP

Invested Capital represents its total cash investment, including any re-investment of earnings, and acquisition costs, net of tax. Total Capital represents Invested Capital plus corporate debt.



($ in millions)	As of June 30,
	2020		2019
Total stockholders’ equity	$	347.2	$	407.1
Less: Non-controlling interests	11.4		11.0
Total stockholders’ equity, net of non-controlling interests - other	$	335.8	$	396.1
Plus: Tiptree Insurance accumulated depreciation and amortization, net of tax	53.1		46.3
Plus: Acquisition costs	4.0		4.2
Invested Capital	$	392.9	$	446.6
Plus: Corporate debt	301.0		230.2
Total Capital	$	693.9	$	676.8

Tiptree Insurance - Underwriting Margin - Non-GAAP

Underwriting margin is a measure of the underwriting profitability of our insurance operations. It represents net earned premiums, service and administrative fees, ceding commissions and other income less policy and contract benefits and commission expense. We use the combined ratio as an insurance operating metric to evaluate our 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.

The following table provides a reconciliation between underwriting margin and pre-tax income for the following periods:



($ in millions)	Three Months Ended June 30,						Six Months Ended June 30,
Revenues:	2020			2019			2020			2019
Net earned premiums	$	107.3		$	116.5		$	228.6		$	235.5
Service and administrative fees	42.9			26.7			86.6			52.6
Ceding commissions	4.6			3.1			11.1			5.6
Other income	2.4			1.0			4.3			1.8
Underwriting revenues - Non-GAAP	$	157.2		$	147.3		$	330.6		$	295.5
Less underwriting expenses:
Policy and contract benefits	49.1			39.5			110.0			80.3
Commission expense	67.9			72.7			138.3			147.6
Underwriting margin - Non-GAAP	$	40.2		$	35.1		$	82.3		$	67.6
Less operating expenses:
Employee compensation and benefits	15.0			12.1			32.0			24.1
Other expenses (excluding non-recurring expenses)	12.7			12.3			26.7			23.5
Combined Ratio	91.8		%	92.7		%	92.6		%	93.2		%
Plus investment revenues:
Net investment income	2.3			3.4			5.8			7.7
Net realized and unrealized gains	5.6			3.7			(28.0		)	5.8
Less other expenses:
Interest expense	3.6			3.5			7.2			7.6
Non-recurring expenses	0.1			—			2.3			1.2
Depreciation and amortization expense	2.6			2.3			4.9			4.6
Pre-tax income (loss)	$	14.1		$	12.0		$	(13.0	)	$	20.1

Tiptree Insurance Investment Portfolio - Non-GAAP

The following table provides a reconciliation between total investments and net investments for the following periods:



($ in millions)	As of June 30,
	2020			2019
Total Investments	$	547.3		$	364.7
Investment portfolio debt⁽¹⁾	(17.6		)	—
Securities sold, not yet purchased	(49.4		)	—
Cash and cash equivalents	50.5			140.8
Restricted cash⁽²⁾	63.8			—
Receivable due from brokers⁽³⁾	—			3.4
Liability due to brokers⁽³⁾	(48.9		)	(20.2		)
Net investments - Non-GAAP	$	545.7		$	488.7


⁽¹⁾	Consists of asset based financing on loans, including certain credit investments, and working capital facilities. See Note (11) Debt, net in the notes to the condensed consolidated financial statements for further details.


⁽²⁾	Restricted cash available to invest within certain credit investment funds which are consolidated under GAAP.


⁽³⁾	Receivable due from and Liability due to brokers for unsettled trades within certain credit investment funds which are consolidated under GAAP.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are unrestricted cash, cash equivalents and other liquid investments and distributions from operating subsidiaries, including income from our investment portfolio and sales of assets and investments. We intend to use our cash resources to continue to fund our operations and grow our businesses. We may seek additional sources of cash to fund acquisitions or investments. These additional sources of cash may take the form of debt or equity and may be at the parent, subsidiary or asset level. We are a holding company and our liquidity needs are primarily for interest payments on the Fortress credit facility, compensation, professional fees, office rent and insurance costs. In February 2020, we refinanced our existing facility with Fortress, extending the maturity to February 2025 and increasing the principal amount to $125 million, generating approximately $53 million of cash after repaying the existing facility and expenses. A portion of those funds were invested in Tiptree Insurance to fund our warranty business, with the remainder used to provide additional liquidity.

Our subsidiaries’ ability to generate sufficient net income and cash flows to make cash distributions will be subject to numerous business and other factors, including restrictions contained in our subsidiaries’ financing agreements, regulatory restrictions,

availability of sufficient funds at such subsidiaries, general economic and business conditions, tax considerations, strategic plans, financial results and other factors such as target capital ratios and ratio levels anticipated by rating agencies to maintain or improve current ratings. In April 2020, Invesque suspended its dividend to conserve liquidity until the impact of COVID-19 on occupancy rates and its operations is better known. The suspension will negatively impact our cash flow. However, we expect our cash and cash equivalents and distributions from operating subsidiaries and our subsidiaries’ access to financing to be adequate to fund our operations for at least the next 12 months.

As of June 30, 2020, cash and cash equivalents, excluding restricted cash, were $80.6 million, compared to $133.1 million at December 31, 2019, a decrease of $52.5 million primarily as a result of increased investments, including our acquisition of Smart AutoCare, partially offset by the refinancing of the Fortress credit facility.

Our mortgage business relies on short term uncommitted sources of financing as a part of their normal course of operations. To date, we have been able to obtain and renew uncommitted warehouse credit facilities. If we were not able to obtain financing, then we may need to draw on other sources of liquidity to fund our mortgage business. See Note (11) Debt, net in the notes to condensed consolidated financial statements, for additional information regarding our mortgage warehouse borrowings.

For purposes of determining enterprise value and Adjusted EBITDA, we consider corporate credit agreements and preferred trust securities, which we refer to as corporate debt, as corporate financing and associated interest expense is added back. The below table outlines this amount by debt outstanding and interest expense at the insurance company and corporate level.

Corporate Debt



($ in millions)	Corporate Debt Outstanding as of June 30,				Interest Expense for the Three Months Ended June 30,				Interest Expense for the Six Months Ended June 30,
	2020		2019		2020		2019		2020		2019
Tiptree Insurance	$	177.6	$	160.0	$	3.2	$	3.3	$	6.5	$	6.7
Corporate	123.4		70.2		2.7		1.6		4.7		3.2
Total	$	301.0	$	230.2	$	5.9	$	4.9	$	11.2	$	9.9

As of February 21, 2020, our new $125 million credit facility with Fortress carries a rate of LIBOR (with a minimum LIBOR rate of 1.00%), plus a margin of 6.75% per annum. We are required to make quarterly principal payments of approximately $1.56 million. See Note (11) Debt, net in the notes to condensed consolidated financial statements for details.

In March 2020, we extended the maturity date of our Insurance company’s revolving line of credit to July 2020, and in July 2020 we further extended the maturity date to October 2020. As of June 30, 2020, $17.6 million of the $75.0 million borrowing capacity was outstanding and being used for working capital and general corporate purposes.

Consolidated Comparison of Cash Flows



($ in millions)	Six Months Ended June 30,
Total cash provided by (used in):	2020			2019
Net cash (used in) provided by:
Operating activities	$	60.3		$	1.8
Investing activities	(36.1		)	156.3
Financing activities	(13.8		)	(64.5		)
Net increase (decrease) in cash, cash equivalents and restricted cash	$	10.4		$	93.6

Cash provided by operating activities was $60.3 million for the six months ended June 30, 2020 compared to $1.8 million of cash provided by operating activities in the prior year period. In the first half of 2020, the primary sources of cash from operating activities included proceeds from mortgage loans outpacing originations and growth in warranty net deferred revenues, partially offset by increases in notes and accounts receivable and decreases in unearned premiums from our insurance operations. In the first half of 2019, the primary sources of cash included consolidated net income (excluding unrealized gains and losses), increases in unearned premiums and deferred revenues, partially offset by increases in notes and accounts receivable, reinsurance receivables and deferred acquisition costs related to growth in our insurance operations.

Cash used in investing activities was $36.1 million for the six months ended June 30, 2020 compared to $156.3 million of cash provided by investing activities for the prior year period. In the first half of 2020, the primary use of cash from investing activities

was the purchase of investments outpacing proceeds from the sales of investments in our insurance investment portfolio, and the growth in notes receivables. In the first half of 2019, we reduced our investments in loans and used a substantial portion of the proceeds to repay asset-based debt. We also received proceeds associated with a contingent earn-out from our sale of Care Investment Trust.

Cash used in financing activities was $13.8 million for the six months ended June 30, 2020 compared to cash used in financing activities of $64.5 million in the prior year period. In the first half of 2020, we repurchased $8.5 million of the Company’s common stock and paid $2.8 million in dividends. In the first half of 2019, we fully repaid outstanding asset-based borrowings in our credit loan fund held within our insurance investment portfolio and we repurchased $9.1 million of the Company’s common stock.

Contractual Obligations

The table below summarizes consolidated contractual obligations by period for payments that are due as of June 30, 2020:



($ in millions)	Less than 1 year		1-3 years		3-5 years		More than 5 years		Total
Corporate debt	$	17.6	$	—	$	123.4	$	160.0	$	301.0
Asset based debt	95.7		—		16.9		—		112.6
Total debt ⁽¹⁾	$	113.3	$	—	$	140.3	$	160.0	$	413.6
Operating lease obligations ⁽²⁾	7.3		12.3		9.4		9.7		38.7
Total	$	120.6	$	12.3	$	149.7	$	169.7	$	452.3


⁽¹⁾	See Note (11) Debt, net, in the accompanying condensed consolidated financial statements for additional information.


⁽²⁾	Minimum rental obligation for office leases. The total rent expense for the three months ended June 30, 2020 and 2019 was $2.1 million and $2.1 million, respectively, and total rent expense for the six months ended June 30, 2020 and 2019 was $4.2 million and $4.4 million, respectively.

Critical Accounting Policies and Estimates

The preparation of our financial statements in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ materially from those estimates. There have been no material changes to the critical accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Recently Adopted and Issued Accounting Standards

For a discussion of recently adopted and issued accounting standards, see the section “Recent Accounting Standards” in Note (2) Summary of Significant Accounting Policies of the notes to the accompanying condensed consolidated financial statements.

OFF-BALANCE SHEET ARRANGEMENTS

In the normal course of business, we enter into various off-balance sheet arrangements including entering into derivative financial instruments and hedging transactions, operating leases and sponsoring and owning interests in consolidated and non-consolidated variable interest entities.

Further disclosure on our off-balance sheet arrangements as of June 30, 2020 is presented in the “Notes to Condensed Consolidated Financial Statements” in “Part I. Item 1. Financial Statements (Unaudited)” of this filing as follows:


•	Note (10) Derivative Financial Instruments and Hedging


•	Note (21) Commitments and Contingencies

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 described our Quantitative and Qualitative Disclosures About Market Risk. There were no material changes to the assumptions or risks during the six months ended June 30, 2020.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act) as of the end of the period covered by this report. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that material information is recorded, processed, summarized and reported accurately and on a timely basis. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d- 15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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.

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 reasonably estimate a range of loss.

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 or results of operations.

Item 1A. Risk Factors

For information regarding factors that could affect our Company, results of operations and financial condition, see the risk factors discussed under Part I, Item 1A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. There have been no material changes in those risk factors. The following risk is in addition to those set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Our results of operations could in the future be materially adversely impacted by the coronavirus pandemic (COVID-19).

The global spread of the coronavirus (COVID-19) has created significant market volatility and uncertainty and economic disruption. In addition, the impact of COVID-19 and measures to prevent its spread have caused, and may continue to cause, substantial disruption to distribution channels, auto dealer partners and contract counterparties, and may limit our access to capital and customers through self-isolation, travel limitations, business restrictions, margin calls, and otherwise. While the re-opening of the US and global economies began in the second quarter of 2020, a resurgence of the virus has either slowed or in some cases resulted in a roll back of the re-opening of some businesses. As a result, it is currently unclear as to how much and when these economies will recover in the near term. Some ports used in our shipping business may adopt measures in reaction to COVID-19 that delay our ability to operate our vessels efficiently. Our investment in Invesque, which operates in the senior housing, medical office and skilled nursing industry, is reported at fair market value on a quarterly basis and has been

and could continue to be materially negatively affected by the market decline in equity securities in these industry sectors. Invesque’s business may be adversely affected by the impact of COVID-19 on occupancy rates and the operations of Invesque and its tenants and operators. Though many of our employees are able to work remotely, the impact on the economy as a result of COVID-19 has nevertheless negatively affected many of our customers and channels through which we sell our products and services, which could result in significant declines in sales. In addition, operating remotely may slow or otherwise limit our ability to add new products and customers. Further, actions of regulators and other governmental authorities may delay or limit our ability to exercise remedies under our policies or loans in the event of defaults or cancellations. These effects, individually or in the aggregate, could materially adversely impact our businesses, financial condition, operating results, liquidity and cash flows and such adverse impacts may be material to our results of operations and liquidity position. Any of the foregoing factors, or other cascading effects of the COVID-19 pandemic that are not currently foreseeable, could materially increase our costs, negatively impact our sales and damage the Company’s results of operations and its liquidity position, possibly to a significant degree. The duration of any such impacts cannot be predicted at this time.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Share repurchase activity for the three months ended June 30, 2020 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⁾
April 1, 2020 to April 30, 2020: Open Market Purchases	Tiptree Inc.	258,655	$	5.43	258,655
May 1, 2020 to May 31, 2020: Open Market Purchases	Tiptree Inc.	321,645	$	6.25	321,645
June 1, 2020 to June 30, 2020: Open Market Purchases	Tiptree Inc.	178,737	$	6.41	178,737
	Total	759,037	$	—	759,037	$	11,489,987


(1)	On May 2, 2019, the Board of Directors of Tiptree authorized Tiptree’s Executive Committee to repurchase up to $20 million of its outstanding common stock in the aggregate from time to time.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits, Financial Statement Schedules



The following documents are filed as a part of this Form 10-Q:

Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019	F- 3
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019	F- 4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2020 and 2019	F- 5
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the periods ended June 30, 2020 and 2019	F- 6
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019	F- 8
Notes to Condensed Consolidated Financial Statements	F- 9

Exhibits:
The Exhibits listed in the Index of Exhibits, which appears immediately following the signature page, is incorporated herein by reference and is filed as part of this Form 10-Q.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, Tiptree Inc. has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.



		Tiptree Inc.

Date:	August 5, 2020	By:/s/ Michael Barnes
		Michael Barnes
		Executive Chairman

Date:	August 5, 2020	By:/s/ Jonathan Ilany
		Jonathan Ilany
		Chief Executive Officer

Date:	August 5, 2020	By:/s/ Sandra Bell
		Sandra Bell
		Chief Financial Officer

EXHIBIT INDEX



Exhibit No.	Description
31.1	Certification of Executive Chairman pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.3	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1	Certification of Executive Chairman pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.3	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

101.INS	XBRL Instance Document*
101.SCH	XBRL Taxonomy Extension Schema Document*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*

Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, (ii) the Condensed Consolidated Statements of Operations for the six months ended June 30, 2020 and 2019, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss) for the six months ended June 30, 2020 and 2019, (iv) the Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three month periods ended June 30, 2020 and 2019, (v) the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 and (vi) the Notes to the Condensed Consolidated Financial Statements.