First Life America Corporation, our indirect, majority-owned subsidiary, owns a 20,000 square foot office building on approximately six and one-half acres of land located in Topeka, Kansas. Brooke Capital, First Life America Corporation and Brooke Capital Advisors, Inc. occupy approximately 7,500 square feet of the building, and the remainder of the building is leased to agencies of the federal government.
Other receivables, increased primarily from amounts due from franchisees for purchase of insurance agencies.
Other operating expenses represented approximately 28%, 25% and 22%, respectively, of Brooke Capital’s total revenues for the years ended December 31, 2007, 2006 and 2005. Other operating expenses increased at a faster rate than total operating revenues primarily as the result of the provision by Brooke Capital of additional collateral preservation assistance to franchisees coping with financial stress resulting from less commission revenues from reduction of premium rates by insurance companies.
business start up period, but for which the franchisee did not complete the development process for various reasons including unwillingness to make the personal sacrifices required when starting a business.
business and providing certain loss mitigation activities associated with distressed loans. Loss mitigation activities typically include marketing support, operational support, management services and liquidation services. For these collateral preservation services, Aleritas shares a portion of the loan fee and interest income received on loan balances over the life of the loans.
When Aleritas sells loans to participating lenders that qualify as true sales under SFAS 140, a gain on sale is recognized when the note receivables are sold. When Aleritas sells notes receivable to participating lenders, it typically retains interest and servicing rights. The component of the gain on sale of notes receivable to participating lenders is the gain on sale Aleritas records associated with the interest-only strip receivable and servicing assets, net of direct expenses, as described below. Unlike loans sold to qualifying special-purpose entities, Aleritas is the primary servicer of loans sold to participating lenders and as such servicing assets and liabilities are recorded.
When Aleritas sells loans to qualifying special-purpose entities that qualify as true sales under SFAS 140, a gain on sale is recognized when the note receivables are sold. When Aleritas sells note receivables to
Reserves for Insurance Claims Reserves for Insurance Claims are comprised of amounts set aside for claims on DB Indemnity, Ltd. insurance policies. DB Indemnity is a captive insurance company that issues financial guaranty policies covering loans originated by Aleritas. Reserves for claims on DB Indemnity insurance policies are estimated by analyzing historical claim payments, the amount delinquent loans, the amount of loans in which default has been declared, the amount of loans in which an obligor’s business
December 31, 2007 and 2006, we recorded the fair value of retained interest at $35,893,000 and $16,591,000, respectively, with $7,749,000 and $4,497,000, respectively, listed as Interest-only strip receivable on our balance sheet, and $28,144,000 and $12,094,000, respectively, in retained interest carried in our securities.
A material change in any of the foregoing economic and market conditions would likely have a material adverse effect on our ability to pursue sales of our loan participations or loan securitizations. In addition, such changes in economic and market conditions could lead to an impairment in the value of our retained interest and servicing assets. Either the loss of our loan sale markets or an impairment in the retained interest and servicing assets could, in turn, have a material adverse effect on our results of operations and financial condition.
Proposed Accounting Changes In August 2005, the Financial Accounting Standards Board (FASB) issued an exposure draft which amends Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This exposure drafts seeks to clarify the derecognition requirements for financial assets and the initial measurement of interests related to transferred financial assets that are held by a transferor. Our current off-balance sheet securitizations in our Lending Services segment could be required to be consolidated in our financial statements based on the provisions of the exposure draft. We will continue to monitor the status of the exposure draft and consider what changes, if any, could be made to the structure of the securitizations to continue to derecognize loans transferred to the securitization special purpose entities. At December 31, 2007, the securitization special purpose entities held loans totaling $309,804,000, which we could be required to consolidate into our financial statements under the provisions of this exposure draft.
See footnote 10 to our consolidated financial statements for information about related party transactions.
Brooke Credit Corporation (d/b/a Aleritas Capital Corporation beginning in January 2008), a Kansas corporation, is a specialty finance company that lends primarily to locally-owned businesses that sell insurance. The core target market consists of independent insurance agencies, captive insurance agencies and managing general agencies, where the sale of insurance is their primary business. In addition, Brooke Credit Corporation loans money to funeral home owners, where the sale of insurance is often an important, although not primary, part of their business. Titan Lending Group, Inc., a wholly owned subsidiary of Brooke Credit Corporation was formed in March 2007 to originate loans to independent insurance agencies that are not franchisees of Brooke Capital Corporation. Brooke Credit Corporation is traded over the counter (OTCBB: BRCR). The Company owns 62% of Brooke Credit Corporation’s outstanding stock.
Brooke Agency Services Company LLC is licensed as an insurance agency and was created to serve as the agent of record for property, casualty, life and health insurance offered by the Company’s network of franchisees. Brooke Agency Services Company LLC has acquired ownership of franchise agreements from the Company and/or Brooke Capital Corporation as part of an arrangement to preserve collateral on behalf of Brooke Credit Corporation, as required by the securitization process. Brooke Agency Services Company LLC has contracted with the Company and/or Brooke Capital Corporation for performance of any obligations to agents associated with all such franchise agreements. The financial information of this subsidiary is consolidated with the Company’s financial information.
Impaired and non-accruing loans at December 31, 2007 aggregated approximately $29,000 for Brooke Savings Bank for which an allowance of $9,000 has been established.
“Investment in Businesses” gains or losses are the difference between the sales price and the book value of the business, which is carried at the lower of cost or fair value. Businesses are typically sold in the same units as purchased. However, in instances where a part of a business unit is sold, management estimates the fair value of the portion of the business unit being sold. The difference between the sales price and the resulting fair value estimation is the amount of the gain or loss. Any such fair value estimation is evaluated for reasonableness by comparing the market value estimation of the portion being sold to the book value for the
Insurance losses to be incurred and loss expenses to be paid by DB Indemnity, Ltd. and Delta Plus Holdings, Inc. are estimated and recorded when advised by the insured. Outstanding losses and loss expense adjustments represent the amounts needed to provide for the estimated ultimate cost of settling claims relating to insured events that have occurred before the balance sheet date. These amounts are based upon estimates of losses reported by the insureds plus an estimate for losses incurred but not reported.
In June 2004, Brooke Credit Corporation sold $24,832,000 of loans to qualifying special purpose entity Brooke Securitization Company 2004A, LLC. This sale represents a loan securitization for which an interest receivable was retained. Of the loans sold, $20,000,000 of asset-backed securities were issued to accredited investors by Brooke Securitization Company 2004A, LLC. Brooke Credit Corporation received servicing income of $5,000, $8,000, and $10,000, respectively, from the primary servicer for the years ended December 31, 2007, 2006 and 2005. The fair value of the interest-only strip receivable retained, the fair value of the difference between loans sold and securities issued to accredited investors (or the retained equity) and the fair value of cash reserves were recorded on the Company’s books as a security with balances of $2,837,000 and $3,612,000, respectively, at December 31, 2007 and December 31, 2006. At December 31, 2007, this security is comprised of retained interest-only strip receivables totaling $987,000, retained equity in the special purpose entity totaling $1,725,000 and cash reserves totaling $125,000.
Also included in securities were amounts held due to the timing of loan payments and payments to the asset-backed security holders. At December 31, 2007 and 2006, these amounts totaled $983,000 and $463,000, respectively.
contributions to the plan. No employer contributions were charged to expense for years ended December 31, 2006 and 2005.
Effective July 18, 2007, pursuant to the Amended and Restated Agreement and Plan of Merger dated as of April 30, 2007 (the “Merger Agreement”) by and among Oakmont Acquisition Corp. (“Oakmont”), Brooke Credit Corporation (“Brooke Kansas”) and the Company, Brooke Kansas was merged with and into Oakmont. In connection with the merger, Oakmont changed its name to Brooke Credit Corporation (the “Surviving Corporation”). Pursuant to the Merger Agreement, each share of the issued and outstanding common stock of Oakmont was converted into one share of the validly issued, fully paid and non-assessable authorized share of common stock of the Surviving Corporation. The Company, along with seven other former Brooke Kansas equity holders, received aggregate merger consideration of 16,304,000 shares of the Surviving Corporation’s common stock, and the common stock of Brooke Kansas was cancelled. Shares of the Surviving Corporation’s common stock received by the Company along with shares of the Surviving Corporation purchased by the Company in the open market, Brooke Corporation owns approximately 62% of the Surviving Corporation’s issued and outstanding stock. An additional aggregate of 4,000,000 shares of the Surviving Corporation’s common stock will be issued to Brooke Corporation and the other former Brooke Kansas stockholders, or reserved for issuance pursuant to assumed warrants, in the event the Surviving Corporation achieves adjusted earnings of $15,000,000 in 2007. An additional aggregate of 1,000,000 shares of the Surviving Corporation’s common stock will be issued to Brooke Corporation and the other former Brooke Kansas stockholders, or reserved for issuance pursuant to assumed warrants, in the event the Surviving Corporation achieves adjusted earnings of $19,000,000 in 2008.
Net income and capital and surplus at December 31, 2007 for Traders Insurance Company’s insurance operations as reported in these financials prepared in accordance with GAAP as compared to amounts in accordance with SAP prescribed or permitted by the MID are as follows (in thousands):
Reinsurance recoverable on unpaid losses includes estimated amounts of unpaid losses and loss adjustment expenses which are expected to be recoverable from reinsurers pursuant to reinsurance agreements. Such amounts have been estimated using actuarial assumptions consistent with those used in establishing the related liability for losses and loss adjustment expenses. Reinsurance does not relieve Traders Insurance Company of its obligations to policyholders pursuant to its insurance policies.