On October 1, 2017, we sold our investment in our commercial lending subsidiary for $13.5 million in a combination of cash and a seller’s note.
Total Adjusted EBITDA for the year ended December 31, 2016 was $78.9 million compared to $58.4 million for 2015, an increase of $20.5 million or 35.1%. The key drivers of the change in Adjusted EBITDA were the same as those which impacted our net income before non controlling interests. See “- Non-GAAP Reconciliations” for a reconciliation to GAAP net income.
Pre-tax income increased by $14.8 million from 2015 to 2016, primarily driven by improvement of $18.9 million in earnings related to the investment portfolio which included increased net investment income, realized and unrealized gains on equities which were slightly offset by higher asset-based interest expense. Insurance operations declined from 2015 to 2016 by $4.1 million primarily driven by competitive pressures in the mobile protection product and increased operating costs as the business continues to invest in additional product offerings.
For the year ended December 31, 2017, revenues on the investment portfolio, including net investment income and realized and unrealized gains, were a loss of $0.2 million compared to $27.7 million of income in the 2016 period, a decrease of $28.0 million. This was primarily driven by unrealized losses on equities of $23.8 million in 2017 compared to unrealized gains of 7.3 million in 2016. From 2015 to 2016, revenues on the investment portfolio increased by $21.2 million, going from $6.5 million in the 2015 period to $27.7 million for the year ended December 31, 2016. This was consistent with the strategy to grow investable assets and selectively use alternative investments in increase yield over the long-term. See “-Specialty Insurance Investment Portfolio” for further discussion of the investment results.
Employee compensation and benefits increased $0.8 million from 2016 to 2017 as corporate staff increased as a result of improvements to our reporting and controls infrastructure, which was partially offset by lower accrued incentive compensation. Employee compensation and benefits in 2015 included a non-recurring severance expense of $6.5 million.
The Company had a tax benefit from continuing operations of $12.6 million for the year ended December 31, 2017 as compared to a tax expense of $12.5 million for the year ended December 31, 2016. The effective tax rate on income from continuing operations for the year ended December 31, 2017 was approximately 377.2% compared to 25.5% for the year ended December 31, 2016. Differences from the statutory income tax rates are primarily the result of the tax law change signed on December 22, 2017 effective
The consolidated asset-based interest expense is subtracted from EBITDA to arrive at Adjusted EBITDA. This includes interest expense associated with asset-specific debt at subsidiaries in the specialty insurance, asset management, mortgage and other operations.
Cash provided by operating activities (excluding VIEs) was $45.3 million for the year ended December 31, 2016. The primary sources of cash from operating activities included mortgage sales outpacing originations in our loan origination business, and increases in unearned premiums and policy liabilities in our specialty insurance business. The primary uses of cash from operating activities included increases in notes and accounts receivable and reinsurance receivables, and decreases in deferred revenue and reinsurance payables in our specialty insurance business.
Cash provided by financing activities - VIEs was $8.6 million for the year ended December 31, 2015 driven primarily by a net increase in debt on the CLOs.
As of December 31, 2017 and 2016, Tiptree directly owned approximately 81% of TFP. The remaining 19% is owned by various limited partners and reported as non-controlling interest. All of Tiptree’s Class B common stock is owned by TFP and is accounted for as treasury stock. Tiptree’s Class B common stock has the same voting rights as the Class A common stock but no economic rights.
Acquisitions that do not meet the criteria for the acquisition method of accounting are accounted for as acquisitions of assets.
Commissions are paid to distributors and retailers selling credit insurance policies, motor club memberships, mobile device protection, and warranty service contracts, and are generally deferred and expensed in proportion to the earning of related revenue. Credit insurance commission rates, in many instances, are set by state regulators and are also impacted by market
On August 10, 2017, the Company’s ownership in the subordinated notes of Telos 7 was redeemed for cash as part of the complete liquidation of the CLO. The operations of Telos 7 were consolidated in the Company’s consolidated financial statements through the redemption date.
D. Significant Accounting Policies Related to Dispositions, Assets Held for Sale and Discontinued Operations
The following table presents the Company’s investments in loans, measured at fair value pledged as collateral:
(3) Seller provided financing related to the sale of Siena. See (4) Dispositions, Assets Held for Sale and Discontinued Operations.
The following table presents the net gain on the sale of mortgage loans and the cumulative net unrealized gains (losses) on equity securities, trading, at fair value recorded on the consolidated statements of operations:
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 it’s counterparties fail to meet the contract terms. The derivative financial instruments are located within derivative assets at fair value and are reported in other investments. Derivative liabilities are reported within other liabilities and accrued expenses.
On June 24, 2016, the Company entered into a Fourth Amendment to the Credit Agreement entered into on September 18, 2013. The Fourth Amendment provides for additional term loans in an aggregate principal amount of $15,000 and provides the ability to prepay loans under the Credit Agreement, subject to payment of a make-whole premium until the one year anniversary of the Fourth Amendment. The obligations under the Credit Agreement are secured by liens on substantially all of the otherwise unencumbered assets of the Company. The principal amount of the loan is to be repaid in quarterly installments, the amount of which may be adjusted based on the net leverage ratio (as defined in the Credit Agreement) at the end of each fiscal quarter. The Credit Agreement is subject to a LIBOR floor of 1.25% and matures on September 22, 2018. Borrowings may not be reborrowed after principal payments are made. As of December 31, 2017 and 2016, the maximum borrowing capacity under the agreement was $125,000 and the outstanding balance was $28,500 and $58,500, respectively.
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
NPLs that have become REOs were measured at fair value on a non-recurring basis during the year ended December 31, 2017 and the year ended December 31, 2016. The carrying value of REOs at December 31, 2017 and December 31, 2016 was $16,056 and $13,366, respectively. Upon conversion to REO, the fair value is estimated using broker price opinion (BPO). BPOs are subject to judgments of a particular broker formed by visiting a property, assessing general home values in an area, reviewing
The following table summarizes changes to the issuances of subsidiary RSU’s under the subsidiary incentive plans for the periods indicated: