On February 9, 2015, affiliates of Care acquired five seniors housing communities with affiliates of Royal for $29.3 million which are managed by Royal pursuant to a management agreement.
The Company reported net income before non-controlling interests of $8.8 million in the year ended December 31, 2015, an increase of $4.2 million from the year ended December 31, 2014. The primary drivers of the year-over-year difference in net income before non-controlling interests were the same factors which impacted the year-over-year change from pre-tax income from continuing operations, plus additional factors of the decrease in the provision for income taxes and the impact of the gain on sale and loss of income from discontinued operations due to our sale of PFG at the end of the second quarter.
(3) Represents additional commissions expense that would have been recorded without purchase accounting; the values of deferred commission assets were eliminated in purchase accounting.
The following table presents product revenue mix within the insurance and insurance services segment for the year ended December 31, 2015 without any adjustment for the effects of purchase price accounting.
For insurance and insurance services, the main components of revenue are service and administrative fees, ceding commissions and earned premiums, net. Net revenues, which is a non-GAAP financial measure, is shown as total revenue less commissions paid to brokers, member benefit claims and net loss and loss adjustment expenses. We use Net revenues as another means of understanding product contributions to our results. Year over year comparisons of total revenues are often impacted by clients’ choice as to whether to retain risk.
The mortgage business’s pre-tax net income was $3.7 million for the year ended December 31, 2015, compared with a pre-tax net loss of $2.1 million for the same period in 2014, an increase of $5.8 million. The improvement in results was primarily driven by a combination of the acquisition of Reliance and increased loan volume at Luxury, which contributed to a year over year improvement in mortgage origination volume of 131% from $538.7 million for the year ended December 31, 2014 to $1,243.7 million for the current year period combined with a 81% improvement in revenue margins, measured in basis points, year over year, primarily as a result of the inclusion of Reliance’s higher margin Federal Housing Administration and the U.S. Department of Veterans Affairs (“FHA/VA”) and agency products.
Total sold volume in the current year was $1,119.4 million, up from $446.8 million a year earlier. The primary drivers of the increase in volume was the acquisition of Reliance and improvements in the mortgage industry overall, driven by a number of economic factors, including continued low interest rates, improving employment and increases in home prices.
Asset management fees totaled $10.7 million in 2015, compared to $12.0 million for the prior year. Although the number of CLOs under management remained the same throughout 2015, base management fee income declined between 2014 and 2015. The decrease was due principally to the reduction in management fees earned on Telos 1 and Telos 2, which are past their reinvestment period and whose assets are declining, lower incentive fees on Telos 1 and Telos 2, and a higher proportional contribution from fees on Telos 5 and Telos 6, which were earned at a lower rate than the fees generated from Telos 1 and Telos 2, which were issued in 2006 and 2007. Partially offsetting this decline was the inclusion of fees for Telos 5 and Telos 6 for the full year 2015 as compared to 2014. Telos 5 was launched in May 2014 and Telos 6 in December 2014 such that the fees from these CLOs were earned for only a portion of 2014.
The Company’s CLO subordinated notes portfolio consists of subordinated notes and related participations in management fees issued primarily by CLOs managed by the Company (“CLO holdings”). As of December 31, 2015 and December 31, 2014 the Company’s CLO holdings, at fair value, were $28.7 million and $94.3 million respectively. For the year ended December 31, 2015, the Company incurred a pre-tax loss of $11.2 million on its CLO holdings, which comprised net distributions received of $14.7 million and realized and unrealized net losses of $25.9 million, including $8.0 million in realized GAAP losses as a result of the sale of CLO subordinated notes in the second quarter of 2015.
Cash provided by investing activities - discontinued operations was $4.1 million for the year ended December 31, 2015. The primary driver of the sources was repayment of policy holder loans, offset by the sale of the non-controlling interest of PFG.
included in the consolidated financial statements of Tiptree Financial Inc. and subsidiaries as of and for the year ended December 31, 2015. Our audit of internal control over financial reporting of Tiptree Financial Inc. also excluded an evaluation of the internal control over financial reporting of certain Care real estate properties and Reliance.
The Company’s Consolidated Statements of Cash Flows for the fiscal year ended December 31, 2014 have been revised for immaterial corrections and errors related to the presentation of our activities from CLOs, business and asset acquisitions, loan activity and certain other items. These corrections resulted in a decrease of cash provided by operating activities of $67.4 million, an increase in cash used in investing activities of $75.5 million and an increase in cash provided by financing activities of $142.9 million. Further, our cash balances and liquidity were not affected as of December 31, 2014 due to these revisions. See “Item 9A. Controls and Procedures” for actions the Company is taking to remediate material weaknesses and to enhance its control infrastructure as a result. In addition, certain prior period amounts have been reclassified to conform to the current year presentation.
Acquisition and transaction costs are related primarily to completed and potential acquisitions and include advisory, legal, accounting, valuation and other professional or consulting fees which are expensed as incurred.
•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
The Company records all security transactions on a trade-date basis. Realized gains (losses) are generally determined using the specific-identification method. ASC Topic 320, Investments - Debt and Equity Securities, requires the Company to classify its investments as trading (see Other Assets), available-for-sale, or held-to-maturity based on the Company’s intent to sell the security or, for a debt security, the Company’s intent and ability to hold the debt security to maturity. The Company did not hold any held-to-maturity securities at December 31, 2015 and 2014.
The Company evaluates whether insurance related deferred acquisition costs are recoverable at year-end, and considers investment income in the recoverability analysis. As a result of the Company's evaluations, no write-offs for unrecoverable insurance related deferred acquisition costs were recognized during the years ended December 31, 2015 and December 31, 2014, respectively.
Other assets consists of derivative instruments, trading securities, debt issuance costs, prepaid expenses, deposits for future acquisitions, REO and equity method and other investments. The Company defers debt issuance costs associated with its debt and amortizes the costs over the life of the debt instrument. See Note 14-Other Assets.
In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements, which covers a wide range of Topics in the Codification. The amendments in ASU 2015-10 represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost on most entities. Amendments with transition guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. All other amendments are effective upon the ASU’s issuance (June 12, 2015). The Company is currently evaluating the effect upon its financial statements.
Included in other assets are $2,197 of foreclosed residential real estate property.
The difference between the fair value of the NPLs and the unpaid principal balance was $(23,387).
Credit Default Swap Indices (CDX) are credit derivatives that reference multiple names through underlying baskets or portfolios of single name credit default swaps. The Company enters into these contracts as both a buyer of protection and seller of protection to manage the credit risk exposure of its investment portfolio. The Company is required to deposit cash collateral for these positions equal to an initial 2.25% of the notional amount of the sold protection side, subject to increase based on additional maintenance margin as a result of decreases in value. As of December 31, 2015, the total margin was $6,750.
The Company is obligated to pay interest on a monthly basis and has incurred interest expense of $4,507 and $3,830 for the year ended December 31, 2015 and 2014, respectively. The remaining amortization of the original issue discount totaled $476 and $743 for the year ended December 31, 2015 and 2014, respectively.
The Company adopted the Tiptree 2013 Omnibus Incentive Plan (2013 Equity Plan) on August 8, 2013. The general purpose of the 2013 Equity Plan is to attract, motivate and retain selected employees, consultants and directors for the Company, to provide them with incentives and rewards for performance and to better align their interests with the interests of the Company’s stockholders. A maximum of 2,000,000 shares of Class A common stock were authorized for issuance under the 2013 Equity Plan. Unless otherwise extended, the 2013 Equity Plan terminates automatically on the tenth anniversary of its adoption.
On January 14, 2016, Telos COF I, LLC, a subsidiary of Telos Credit Opportunities, amended its existing credit agreement with Capital One, N.A., as administrative agent, and the other lenders party thereto. The amendment reduced the maximum size of the facility to $100,000 and increased advance rates on certain types of loans.
On January 20, 2016, affiliates of Care and affiliates of Heritage acquired a senior housing community. Care owns an 80% interest in the community, while affiliates of Heritage own the remaining 20% interest and an affiliated management company provides management services to the communities under a management contract. In connection with the acquisition, Care and Heritage secured a $28,000, 7 year loan, which includes 24 months of interest only payments. The acquisition related disclosures by ASC 805 cannot be made as the initial accounting for the business transaction is incomplete.