As of December 31, 2016, the Company’s owned real estate properties consisted of 29 properties in our senior living segment, which are located across 11 states primarily in the Mid-Atlantic and Southern United States and 81 single family properties in our insurance segment consisting of REO properties resulting from our investments in non-performing residential mortgage loans.
The following tables set forth our consolidated selected financial data for the periods and as of the dates indicated and are derived from our audited Consolidated Financial Statements. The following consolidated financial data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") in
contributed $102.8 million of capital to our specialty insurance company to enhance their A.M. Best rating to an “A-“ (Excellent) group rating and allow for product expansion opportunities,
enhanced the returns on our specialty insurance investment portfolio by managing assets across multiple asset classes, sectors and geographies,
re-allocated our principal investments to the specialty insurance and asset management segments, and
Our profitability is affected by investment income and investment gains and losses. Our invested assets are invested principally in fixed maturity securities, equity securities, loans, CLOs, credit investment funds, and senior living related assets. Many of our investments are held at fair value. Changes in fair value of these assets are reported quarterly as unrealized gains or losses in revenues and can be impacted by changes in both interest rates and credit risk. Credit risk can impact our financial results in a number of ways, including the performance of our corporate loans, mortgage loans, holdings in CLO subordinated notes and other investments. When credit markets are performing well, loans held in our CLOs and credit fund investments may prepay, subjecting those investments to reinvestment risk. In deteriorating credit environments, default risk can impact the performance of our investments, as well as flowing through income as unrealized losses. Disruption in the credit markets can also impact our ability to raise third party funds to invest and grow our asset management fees.
Our business is also impacted in various ways by changes in interest rates. In addition to the impact interest rates can have on the fair value of the assets, interest rates can also impact the volume and revenues in our specialty finance business. In addition, most of our subsidiaries use debt financing to fund their business activities, much of which is floating rate debt, and the majority of which have LIBOR floors, LIBOR floors can result in a reduction in net interest margins in a declining interest rate environment, if earnings on our assets do not have similar floors or are based on different benchmarks than LIBOR, such as treasury rates or the prime rate. Certain
PFG revenues of $40.5 million and $78.7 million and net income of $7.0 million and $7.9 million for the years ended December 31, 2015 and December 31, 2014, respectively, and gain on sale of $15.6 million for the year ended December 31, 2015 are included in Discontinued operations, net.
For further information relating to the Company’s Adjusted EBITDA and book value per share, as exchanged, including a reconciliation to GAAP financials, see “-Non-GAAP Reconciliations.”.
For the year ended December 31, 2016, income from continuing operations was $32.3 million compared to a loss of $13.8 million in 2015. The key drivers of the $46.2 million increase were improved profitability in our specialty insurance segment driven by higher revenues and investment income, increased profits from our asset management segment as a result of incentive fees and CLO subordinated note returns, increased rental income in our senior living operations, and increases in mortgage volume and margins due to improving market conditions. This increased income was partially offset by higher corporate expenses from increased performance related incentive compensation and costs associated with our effort to improve our controls and financial reporting infrastructure. Additionally, a tax benefit of $4.0 million was recognized in the first quarter of 2016, which was driven by the tax reorganization effective January 1, 2016. A discussion of the changes in revenues, expenses and net income is presented below and in more detail in our segment analysis.
For the year ended December 31, 2016, net income available to Class A common stockholders was $25.3 million, an increase of $19.5 million, or 338.1%, from the prior year period. The key drivers of net income available to Class A common stockholders were the same factors which impacted the positive year-over-year change in income from continuing operations, and which were partially offset by the loss of the $22.6 million of earnings from discontinued operations recorded in the year ended December 31, 2015, which included the one-time net gain on the sale of PFG of $15.6 million.
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 income from continuing operations, and which were partially offset by the loss of $32.5 million of Adjusted EBITDA in the year ended December 31, 2015 related to discontinued operations. See “- Non-GAAP Reconciliations” for a reconciliation to GAAP net income.
For the year ended December 31, 2015, the Company reported revenues of $438.5 million, an increase of $358.1 million from the year ended December 31, 2014. The primary driver of the increase in revenues was the addition of Fortegra. Other key drivers were the improvement in volume and margins at our specialty finance segment, including from the addition of Reliance, and increased rental income from our real estate segment, offset in part by the elimination of the one-time gain of $7.9 million in 2014 from the repayment of a loan in that segment, and the realized and unrealized losses on CLO subordinated note investments in 2015.
For the year ended December 31, 2015, net income available to Class A common shareholders was $5.8 million compared to a loss of $1.7 million in the 2014. The primary drivers of the year-over-year difference were the same factors which impacted income from continuing operations, plus additional factors attributable to the decrease in the provision for income taxes and the positive impact of the gain on sale and lower income from discontinued operations due to our sale of PFG at the end of the second quarter of 2015.
For further information relating to the Company’s Adjusted EBITDA, including a reconciliation of the Company’s segments’ Adjusted EBITDA to GAAP pre-tax income, see “-Non-GAAP Reconciliations.”
Net earned premiums are the earned portion of net written premiums during a certain period. These consist of premiums directly written by us and premiums assumed by us as a result of reinsurance agreements. Whether direct or assumed, the premium is earned over the life of the respective policy using methods appropriate to the pattern of losses for the type of business. Our net earned premiums are partially offset by commission expenses and policy and contract benefits. The principal factors affecting net earned premiums are: the proportion of the risk assumed by our partners and reinsurers as defined in the applicable reinsurance treaty; increases and decreases in written premiums; the pattern of losses by type of business; increases and decreases in policy cancellation rates; the average duration of the policies written; and changes in regulation that would modify the earning patterns for the policies underwritten and administered. We generally limit the underwriting risk we assume through the use of both reinsurance (e.g., quota share and excess of loss) and retrospective commission agreements with our partners (e.g., commissions paid adjusted based on the actual underlying loss incurred), which manage and mitigate our risk.
We also earn ceding commissions on our debt protection products through risk sharing agreements. We elect to cede to reinsurers under reinsurance arrangements a significant portion of the credit insurance that we distribute on behalf of our clients. Ceding commissions earned under reinsurance agreements are based on contractual formulas that take into account, in part, underwriting performance and investment returns experienced by the assuming companies. As experience changes, adjustments to the ceding commissions are reflected in the period incurred and are based on the claim experience of the related policy.
We generate net investment income and net realized and unrealized gains (losses) from our investment portfolio.
The results of PFG, which was sold on June 30, 2015, are presented in discontinued operations for the years ended December 31, 2015 and 2014, and are not included in the specialty insurance segment results. The following tables present the specialty insurance segment results for the fiscal year ended December 31, 2016, 2015 and 2014. The fiscal year ended December 31, 2014 represents only one month of results for Fortegra, which was acquired in December 2014.
The acquisition of Fortegra resulted in purchase price accounting adjustments in the segment giving effect to push-down accounting treatment of the acquisition. These adjustments include setting deferred cost assets to a fair value of zero, modifying deferred revenue liabilities to their respective fair values, and recording a substantial intangible asset representing the VOBA. The application of push-down accounting creates a modest impact to net income, but significantly impacts individual assets, liabilities, revenues, and expenses. Due to acquisition accounting, revenue and expenses related to acquired contracts are recognized differently from those related to newly originated contracts.
Represents service fee and ceding commission revenues, and additional commissions, premium tax and other expenses that would have been recognized had purchase accounting effects not been recorded. Deferred service fee and ceding commission liabilities and deferred commission assets and deferred acquisitions costs at the acquisition date were reduced to reflect the purchase accounting fair value.
Represents net additional depreciation and amortization expense that would not have been recorded without purchase accounting; fixed assets and amortizing intangible assets were adjusted in purchase accounting based on fair value analyses.
The increase in earned premiums was driven by growth in our credit protection, warranty and program products. The largest driver was the result of a transaction, effective October 1, 2016, where our captive reinsurance subsidiary replaced a third party as reinsurer of certain credit protection products, thus avoiding reinsurance costs and gaining additional investment flexibility. This transaction was consistent with our strategy to grow underwriting and investment profits at our specialty insurance subsidiaries. As a result of this transaction, several income statement line items increased for the year ended December 31, 2016 when compared to prior periods, including earned premiums, commission expense and policy and contract benefits. The decrease in ceding commissions was primarily a result of severe storms in Louisiana and the southeast United States and was largely offset by lower commissions paid to our partners as much of the risk within those products was retained with our partners’ producer owned reinsurance companies or ceded to third party reinsurers.
Total gross written premiums for the year ended December 31, 2016 were $708.3 million, which represented an increase of $22.3 million or 3.2% from the prior year period. The amount of business retained was 47.6%, up from 26.5% in the prior year period as the Company retained more risk in 2016 than 2015. Total net premiums written for the year ended December 31, 2016 were $337.2 million, up $155.1 million or 85.2% from the same period year-over-year. The largest driver of the increase in retention and net written premiums was related to the transaction mentioned earlier where the Company re-assumed contracts of $138.7 million which were previously reinsured with a third party. Credit protection net premiums written for the year ended December 31, 2016 were $257.6 million, higher than the previous year period by $135.9 million primarily as a result of this assumed business. For 2016, warranty product net written premiums were $46.1 million, up $4.1 million from 2015 and program products were $33.5 million, up $15.1 million from 2015. Warranty and programs premium growth is primarily driven by increased policies written for furniture, appliances and non standard auto products. We believe there are additional opportunities to expand our warranty and programs insurance business model to other niche products and markets.
The following table presents product specific revenue and expenses within the specialty insurance segment for the fiscal years ended December 31, 2016 and 2015. As mentioned above, we generally limit the underwriting risk we assume through the use of both reinsurance (e.g., quota share and excess of loss) and retrospective commission agreements with our partners (e.g., commissions paid adjust based on the actual underlying losses incurred), which manage and mitigate our risk. Period-over-period comparisons of revenues are often impacted by the PORCs and clients’ choice as to whether to retain risk, specifically with respect to the relationship between service and administration expenses and ceding commissions, both components of revenue, and the offsetting policy and contract benefits and commissions paid to our partners and reinsurers. Generally, when losses are incurred, the risk which is retained by our
Policy and contract benefits, which include net losses, loss adjustments and member benefit claims, were $106.8 million for the year ended December 31, 2016, up $20.5 million period-over-period. The increase in net losses over the prior year period was a function of growth in earned premiums in credit and specialty products, partially offset by lower claims in mobile devices consistent with the decline in written premiums.
Commission expense, excluding the impacts of VOBA, was $158.0 million for the year ended December 31, 2016, up $7.1 million, driven by the increase in policies issued in the credit life and specialty auto warranty and insurance products. The increase was driven by growth in earned premiums in credit and specialty products, slightly offset by reduced payments to our distributors and retailers as a result of our partners’ absorption of losses from increased claims activity in the South and Southeast regions of the United States. Additionally, warranty commissions were down $10.1 million as a result of declines in the mobile protection product.
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. Investors use this ratio to evaluate our ability to profitably underwrite the risks we assume over time and manage our operating costs. A combined ratio less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss. Since VOBA purchase accounting adjustments impact revenues and expenses related to acquired contracts differently from newly originated, we also show the combined ratio on an as adjusted basis, eliminating the accounting effects of VOBA. Management believes showing an as adjusted combined ratio provides useful information to investors to compare period over period operating results. Following is a summary of these performance metrics for the years ended December 31, 2016 and 2015.
(1) For further information relating to the Company’s as adjusted combined ratio, including a reconciliation to GAAP financials, see “-Non-GAAP Reconciliations.”
The investment portfolio consists of assets contributed by Tiptree, cash generated from operations, and from insurance premiums written. The investment portfolio of our regulated insurance companies, captive reinsurance company and warranty business 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 across select asset classes, sectors and geographies while maintaining adequate liquidity to meet our claims payment obligations.
2016 net investment portfolio income was $24.6 million compared to $5.7 million in 2015. The average annualized yield improvement from 2.5% in 2015 to 8.0% in 2016 was primarily driven by increases in net investment income of $7.5 million, realized gains of $5.3 million, and unrealized gains of $8.4 million related to loans and equities.
Adjusted EBITDA was $60.5 million and $43.3 million for the year ended December 31, 2016 and 2015 respectively. The key drivers of growth were similar to those that impacted pre-tax results and include increased investment income and gains, in addition to increased product revenues, which were offset in part by increased commission expense and policy and contract benefits as written premium grew. See “-Non-GAAP Reconciliations” for a reconciliation to GAAP pre-tax income.
The Company’s asset management segment is comprised of TAMCO and its primary subsidiary, Telos, which earns revenues from CLOs under management, including management fees, distributions and realized and unrealized gains on the Company’s holdings of subordinated notes. Also included in the segment are the management fees, investment earnings and costs associated with our legacy tax-exempt securities business, CLO warehouse facilities and our credit hedging strategies. As of December 31, 2016, total fee earning AUM was $1.9 billion, which was flat to 2015 fee earning AUM. Total investment in CLO subordinated notes and management fee participation rights, at fair market value, as of December 31, 2016 was $57.3 million, up $26.4 million from December 31, 2015. On January 23, 2017 the Company sold its investment in Telos 5 for consideration of $15.9 million, reducing our investment in CLO subordinated notes and management fee participation rights to $41.4 million subsequent to year end.
Asset management as adjusted revenues include revenues from CLOs, legacy tax-exempt securities business, CLO warehouse facilities and our credit hedging strategies. The Company earns revenues from CLOs under management, whether consolidated or deconsolidated, which include fees earned for managing the CLOs, distributions received from the Company’s holdings of subordinated notes issued by the CLOs and realized and unrealized gains and losses from the Company’s holdings of subordinated notes. The revenue associated with the management fees and distributions earned and gains and losses on the subordinated notes attributable to the consolidated CLOs are reported as “net income (loss) attributable to the consolidated CLOs” in the Company’s financial statements. The table below shows the Company’s share of the results attributable to the CLOs, which were consolidated, on a deconsolidated basis. This presentation is a non-GAAP measure. Management believes this information is helpful for period-over-period comparative purposes as certain of our CLOs were consolidated for only some of the periods presented below. In addition, the Non-GAAP presentation allows investors the ability to calculate management fees as a percent of AUM, a common measure used by investors to evaluate asset managers, and which is one of the performance measures upon which management is compensated. While consolidation versus deconsolidation impacts the presentation of revenues, it does not impact expenses or pre-tax income. See “-Non-GAAP Reconciliations” for a reconciliation to GAAP revenues.
For further information relating to the Asset Management as adjusted revenues, including a reconciliation to GAAP revenues, see “Non-GAAP Reconciliations” on page 45.
net cash proceeds of $39.7 million and tax losses of approximately $12.5 million. The unrealized loss in 2015 was due to the mark-to-market write-down in our retained CLO subordinated note holdings of $29.1 million. The lower distributions from the subordinated notes in 2015 compared to the prior year is primarily due to our sales of CLO subordinated notes in 2015. The other income decline was a result of lower interest income on CLO warehouses and run-off of legacy investments in tax exempt securities.
Adjusted EBITDA was $25.3 million for the year ended December 31, 2016, compared to a loss of $6.8 million for the comparable prior year period. The increase was driven by the same factors discussed above under “Results.” Adjusted EBITDA for 2015 declined by $24.9 million from 2014 primarily as a result of the unrealized and realized marks on CLO subordinated notes, in addition to the other factors mentioned above. See “-Non-GAAP Reconciliations” for a reconciliation to GAAP pre-tax income.
For the year ended December 31, 2016, we had a pre-tax loss of $5.8 million compared with a pre-tax loss of $9.5 million for the same period in 2015. The properties acquired in 2016 and 2015 have generated higher rental and related revenue in 2016 compared to 2015. However the Company also incurred additional depreciation, amortization and interest expenses as a consequence of the acquisition of these properties. As a result, the lower loss was driven by greater growth in rental income, due to both improvements in the operating performance of the underlying properties and the addition of new properties, relative to the growth in operating expenses, including the depreciation and amortization and interest expense related to the acquired properties.
For 2015, we had a pre-tax loss of $9.5 million, compared with pre-tax income of $3.2 million in 2014. In 2014, we recorded a gain of approximately $7.9 million on the repayment in full to Care of a loan that was secured by real property (the “Westside Loan”). There was no similar gain in 2015. Several properties acquired in 2015 required restructuring and capital expenditures to increase occupancy and rental rates. As a result, we expected a delay in growth in revenue as the properties were in the turnaround phase. As
Revenues were $60.7 million for the year ended December 31, 2016, compared with $46.1 million for the comparable 2015 period, an increase of $14.6 million or 31.7%. The increase in rental and related revenue was primarily due to the facilities acquired since the first quarter of 2015, including five properties acquired in 2016 and eleven properties acquired in 2015.
Our total revenues were $46.1 million for 2015, compared with $29.3 million for 2014, an increase of $16.8 million or 57.3%. Excluding the one-time $7.9 million gain from the repayment of the Westside Loan in 2014, total revenue increased $24.7 million or 115.4% year over year. Rental and related income in 2015 was $45.4 million, compared with $20.2 million for 2014, an increase of $25.2 million or 124.1% from the prior year. The increase in rental and related revenue was primarily due to the addition of nine Managed Properties, including five managed properties added in the first quarter of 2015 and four managed properties added in the fourth quarter of 2014.
For further information relating to the Senior Living NOI, including a reconciliation to GAAP pre-tax income, see “-Non-GAAP Reconciliations.”
Adjusted EBITDA was $6.6 million for 2015 compared to $10.4 million in 2014, a decline of $3.8 million primarily due to the inclusion of the one-time repayment of the Westside Loan in 2014, partially offset by improved NOI due to property acquisitions. See “-Non-GAAP Reconciliations” for a reconciliation to GAAP pre-tax income.
Revenues increased from $55.0 million in 2015 to $95.4 million in 2016, primarily driven by higher volume and the inclusion of Reliance for the full year. Mortgage origination volume improved 49.1% from $1.2 billion for the year ended December 31, 2015 to $1.9 billion for 2016 while realizing 100.3 basis points improvement in revenue margins year-over-year. This was primarily a result of the inclusion of Reliance’s volume for a full year and the change in product mix towards higher margin government and agency products. In addition, commercial lending grew with average earning assets of $80.8 million in 2016, compared with $56.0 million in 2015, an increase of 44.3%. The improvement was driven by increased loan originations and higher utilization rates of facilities by borrowers which increased interest income and loan fees, reported in other income.
For 2015, total revenues were $55.0 million compared to $15.2 million in 2014. The increase 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%, up from $0.5 billion in 2014 to $1.2 billion in 2015. Revenue margins improved by 81% year over year, primarily as a result of the inclusion of higher margin FHA/VA and agency products. Commercial lending average earning assets were $56.0 million in 2015, compared with $29.3 million in 2014, an increase of 91%. The improved revenues were primarily driven by higher interest income on the loans and fees associated with the Company’s lending activities.
For 2015, total expenses were $48.7 million, compared to $17.2 million for 2014. The primary driver of higher expenses was a combination of the inclusion of Reliance, higher commissions and loan origination expense as the result of increased volumes within our mortgage and commercial lending products.
Adjusted EBITDA was $10.5 million for the year ended December 31, 2016 compared to $5.9 million in 2015. The increases were driven by the same factors that impacted pre-tax income explained above. For 2015, Adjusted EBITDA increased by $7.4 million as a result of the drivers that impacted pre-tax income above. See “-Non-GAAP Reconciliations” for a reconciliation to GAAP pre-tax income.
For the year ended December 31, 2015, we recorded a loss of $34.4 million compared to $15.4 million in 2014, a decrease in pre-tax income of $19.0 million. The key drivers of the year-over-year increase in loss were due to increased professional fees and other expenses of $5.6 million, primarily as a result of our efforts to improve our reporting and controls infrastructure and increases in employee compensation and benefits of $9.5 million, which was primarily driven by a one-time expense for a former executive of $6.5 million.
For the year ended December 31, 2016, revenues were $3.7 million compared to a loss of $0.3 million in the year ended December 31, 2015. The increase of $4.0 million was primarily the result of realized gains on legacy principal investments. From the 2014 to 2015 period revenues decreased from $2.5 million to a loss of $0.3 million as a result of sales of legacy principal investments and unrealized marks incurred in 2015.
Employee compensation and benefits were $13.4 million in the year ended December 31, 2016, compared to $14.0 million in the year ended December 31, 2015. Excluding the one-time charge for a former executive of $6.5 million in 2015, payroll expenses increased by $5.9 million in the 2016 period, as the Company expanded its staff as a result of our efforts to improve our reporting and controls infrastructure, as well as higher accrued incentive compensation expense for the year ended December 31, 2016 as compared to the prior year as a result of higher total Adjusted EBITDA period-over-period. For 2016, 65% of employee compensation was related to business performance.
Interest expense was $4.7 million in the year ended December 31, 2016, compared to $5.6 million in the year ended December 31, 2015. Other expenses were $16.4 million in the year ended December 31, 2016 as compared to $14.3 million in 2015. The increase of $2.1 million was driven by increased corporate compliance costs associated with being an accelerated filer combined with incremental consulting spend to remediate material weaknesses. Other corporate expenses, including audit and consulting fees, have expanded primarily as a result of implementing enhanced infrastructure and controls, which we estimate was approximately $3.5 million of incremental cost for the year ended December 31, 2016. For 2016, 58% of other expenses were associated with audit, Sarbanes-Oxley compliance and tax professional fees.
Tiptree’s total assets were $2.9 billion as of December 31, 2016, compared to $2.5 billion as of December 31, 2015. The $395.2 million increase in assets is primarily attributable to increases in assets of consolidated CLOs, acquisitions in our senior living segment, increases in loans at amortized cost, as well as increases in accounts receivable and deferred acquisition costs at Fortegra, offset slightly by a reduction in loans at fair value, securities available for sale and reinsurance receivables.
For the year ended December 31, 2016, the Company re-purchased 6.8 million shares for $43.8 million compared with 0.6 million shares for $4.0 million for 2015. On June 23, 2016, the Company repurchased 5.6 million shares of Class A common stock of Tiptree for aggregate consideration of $36.4 million. On September 14, 2016, the Company purchased 1.0 million shares of Class A common stock for $6.1 million. Both transactions were accretive to both book value per share in the current quarter and are expected to be accretive to earnings per share on a GAAP basis. The shares acquired are held as treasury shares and are not outstanding for accounting or voting purposes. An additional 0.2 million shares of Class A common stock were repurchased for $1.3 million under the previously approved stock repurchase plan. As of December 31, 2016 there are 34,983,616 shares of Tiptree Class A common stock outstanding.
The Company defines EBITDA as GAAP net income of the Company adjusted to add consolidated interest expense, consolidated income taxes and consolidated depreciation and amortization expense as presented in its financial statements and Adjusted EBITDA as EBITDA adjusted to (i) subtract interest expense on asset-specific debt incurred in the ordinary course of its subsidiaries’ business operations, (ii) adjust for the effect of purchase accounting, (iii) add back significant acquisition related costs, (iv) adjust for significant relocation costs and (v) any significant one-time expenses.
For our senior living segment, Adjusted EBITDA excludes the impact of the change of fair value of interest rate swaps hedging the debt at the property level. For Reliance, Adjusted EBITDA excludes the impact of changes in contingent earn-outs.
Acquisition costs include legal, taxes, banker fees and other costs associated with senior living acquisitions in 2016 and 2015 and the Fortegra acquisition in 2014.
Consists of payments pursuant to a separation agreement, dated as of November 10, 2015.
The following table provides a reconciliation between segment total investments and net investments for the fiscal years ended December 31, 2016, 2015 and 2014.
(1) Consists of asset-based financing on certain credit investments and NPLs, net of deferred financing costs, see Note 13 - Debt, net for further details.
As of December 31, 2016, we had cash and cash equivalents, excluding restricted cash of $63.0 million, compared to $69.4 million at December 31, 2015, a net decrease of $6.4 million, primarily driven by cash used to invest in our investment portfolio.
Our intermediate holding company has a credit facility with Fortress to provide working capital. Loans under the Fortress credit agreement bear interest at LIBOR (with a minimum LIBOR rate of 1.25%), plus a margin of 6.50% per annum. We are required to make quarterly principal payments of $0.5 million, subject to adjustment based on the Net Leverage Ratio (as defined in the Fortress credit agreement) at the end of each fiscal quarter. All remaining principal, and any unpaid interest, under the Fortress credit agreement is payable on maturity at September 18, 2018. The outstanding debt under the Fortress credit agreement was $58.5 million as of December 31, 2016 compared to $45.5 million as December 31, 2015. See Note-(13) Debt, net for additional information of our debt and that of our subsidiaries.
The amounts associated with operating, investing and financing activities for the year ended December 31, 2016, 2015 and 2014 from discontinued operations are presented as a component of the Company’s Consolidated Statements of Cash Flows.
Cash used in operating activities - VIEs was $8.6 million for the year ended December 31, 2016. The primary uses of cash from operating activities - VIEs were due to the increases in accrued interest receivable on the loans.
Cash used in investing activities - VIEs was $75.5 million for the year ended December 31, 2016. The primary driver of the cash used in investing activities - VIEs was purchases of loans in Telos 7 during the ramp up period as it converted from a warehouse to a CLO during the second quarter.
Cash used in financing activities for continuing operations (excluding VIEs) was $77.5 million for the year ended December 31, 2016. The primary drivers of the cash used included paydown of the Telos 7 warehouse debt and repurchases of Class A common shares. The sources of cash were from borrowings in our senior living segment to fund our investments in real estate, borrowings in our specialty finance segment to fund loan growth, increase in debt in our specialty insurance segment for working capital, an increase
in borrowings at the Telos Credit Opportunities Fund to grow the loan portfolio, and a new borrowing to fund additional investment in NPLs.
Cash used in continuing operations (excluding VIEs) was $28.3 million for the year ended December 31, 2015. The primary uses of cash from continuing operations included increased balances in mortgage loans held for sale as a result of higher volume in our mortgage segment, and increases in deferred acquisition costs and reinsurance receivables at Fortegra. The primary sources of cash from continuing operations (excluding VIEs) included operating cash generated at Care, increases in unearned premiums, deferred revenue, reinsurance payables and policy liabilities at Fortegra.
Cash provided by operating activities - VIEs was $25.0 million for the year ended December 31, 2015. The primary source of cash from operating activities - VIEs was the net gains on sale of loans in the CLOs.
Cash used in investing activities from continuing operations (excluding VIEs) was $263.3 million for the year ended December 31, 2015. The primary uses of cash from investing activities from continuing operations (excluding VIEs) included the acquisition of senior living properties at Care, purchases of loans in the Telos Credit Opportunities Fund, acquisition of NPLs and increases in outstanding loans at Siena. The cash provided by investing activities was primarily driven by the sale of PFG.
Cash used in investing activities - discontinued operations was $11.9 million for the year ended December 31, 2015. The primary driver of cash provided from investing activities was the repayment of policy holder loans, partially offset by the purchases of available for sale debt securities.
Cash used in investing activities from continuing operations (excluding VIEs) was $15.2 million for the year ended December 31, 2014. The primary uses of cash from investing activities from continuing operations (excluding VIEs) were: the acquisition of Luxury and Fortegra, offset by net sales and maturities of investments related to new CLO launches.
Cash used in financing activities - discontinued operations was $7.7 million for the year ended December 31, 2014. The primary driver of the cash used was the repayment of debt outstanding.
The table below summarizes Tiptree’s consolidated contractual obligations by period for payments that are due as of December 31, 2016:
The Company’s significant accounting policies are described in Note-(2) Summary of Significant Accounting Policies. As disclosed in Note 2, the preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. The Company believes that the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult , subjective and complex judgments. Further information can be found in the notes to the consolidated financial statements related to the following: valuation of assets where quoted market prices are not available can be found under “Fair Value Measurement” in Note-(2) Summary of Significant Accounting Policies; policies related to goodwill and intangible assets can be found in Note-(2) Summary of Significant Accounting Policies-Goodwill and Identifiable Intangible Assets, Net; and additional information on income taxes can be found under Note-(22) Income Taxes. The consolidated financial statements prepared under GAAP for all periods presented include retroactive adjustments to comparative periods to reflect the combinations under common control described in Note-(1) Organization, related to TAMCO and the Contribution Transactions. All intercompany items
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.
a retrospective commission if the premium generated by that producer in the accounting period exceeds the costs associated with those policies, which includes the Company's administrative fees, claims, reserves, and premium taxes. The Company analyzes the retrospective commission calculation periodically for each producer and, based on the analysis associated with each such producer, the Company records a liability for any positive net retrospective commission earned and due to the producer or, conversely, records a receivable, net of allowance, for amounts due from such producer for instances where the net result of the retrospective commission calculation is negative.
The Company establishes valuation allowances for deferred tax assets when, in its judgment, it concludes that it is more likely than not that the deferred tax assets will not be realized. These judgments are based on projections of future income, including tax-planning strategies, by individual tax jurisdiction. Changes in economic conditions and the competitive environment may impact the accuracy of the Company’s projections. On a quarterly basis, the Company assesses the likelihood that its deferred tax assets will be realized and determines if adjustments to the Company’s valuation allowance is appropriate. As a result of this assessment, as of December 31, 2016, the consolidated valuation allowance for Tiptree was $0.8 million. The increase and/or decrease in valuation allowance could have a significant negative or positive impact on our current and future earnings. In 2016, the Company recorded a net decrease of valuation allowances of $0.2 million as compared to a decrease of $1.7 million in 2015.
GAAP also requires that an interim test be done whenever events or circumstances occur that may indicate that it is more likely than not that the fair value of any reporting unit might be less than its carrying value. No such events or circumstances have occurred during the years ended December 31, 2016 and December 31, 2014, respectively. 2015 had an impairment charge.
We have audited the accompanying consolidated balance sheets of Tiptree Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016. In connection with our audits of these consolidated financial statements, we also have audited financial statement schedule II. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Tiptree Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 13, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
We have audited Tiptree Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Tiptree Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
Management excluded the two Care Managed Properties acquired during the quarter ended March 31, 2016 and the one Care Managed Property acquired during the quarter ended September 30, 2016, with total assets of $83.4 million and total revenues of $10.9 million, from its evaluation of internal control over financial reporting for the year ended December 31, 2016. Our audit of internal control over financial reporting of Tiptree Inc. also excluded an evaluation of the internal control over financial reporting of these three Care managed properties.
In our opinion, Tiptree Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Tiptree Inc. (formally known as Tiptree Financial Inc., together with its consolidated subsidiaries, collectively, Tiptree or the Company, or we) is a Maryland Corporation that was incorporated on March 19, 2007. Tiptree is a diversified holding company with four reporting segments: specialty insurance, asset management, senior living and specialty finance. Tiptree’s Class A common stock is traded on the NASDAQ Capital Market under the symbol “TIPT”. Tiptree’s primary asset is its ownership of Tiptree Financial Partners, L.P. (TFP) an intermediate holding company through which Tiptree operates its businesses. Tiptree reports a non-controlling interest representing the economic interest in TFP held by other limited partners of TFP.
As of January 1, 2016, Tiptree directly owned approximately 81% of TFP. The remaining 19% is 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 voting but no economic rights. The limited partners of TFP (other than Tiptree itself) have the ability to exchange TFP partnership units for Tiptree Class A common stock at a rate of 2.798 shares of Class A common stock per partnership unit equal to the number of shares of Class B common stock outstanding. For every share of Class A common stock exchanged in this manner, a share of Class B common stock is canceled. The percentage of TFP owned by Tiptree may increase in the future to the extent TFP’s limited partners exchange their limited partnership units of TFP for Class A common stock of Tiptree. Changes in Tiptree’s ownership of TFP will be accounted for as equity transactions, which increase Tiptree’s ownership of TFP and reduce non-controlling interest in TFP without changing total stockholders’ equity of Tiptree.
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 risk for the entity to finance its activities without additional subordinated financial support from other parties.
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 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 income in the Consolidated Statements of Operations. Acquisition and transaction costs are related primarily to completed and potential business combinations and include advisory, legal, accounting, valuation and other professional or consulting fees which are expensed as incurred.
The results of operations of a business that has either been disposed of or are classified as held-for-sale are reported in discontinued operations if the disposal of the business represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. For such businesses that have been disposed of prior to December 15, 2014, the Company presents the operations of the business as discontinued operations, and retrospectively reclassifies operating results for all prior periods presented. The Company carries assets and liabilities held for sale at the lower of carrying value on the date the asset is initially classified as held for sale or fair value less costs to sell. At the time of reclassification to held for sale, the Company ceases the recording of depreciation on assets transferred.
b) Quoted prices for identical or similar assets or liabilities in nonactive markets;
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 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. Assets and liabilities measured at fair value pursuant to this guidance are reported separately in our Consolidated Balance Sheets from those instruments using another accounting method.
Derivative instruments are used in the overall strategy to manage exposure to market risks primarily related to fluctuations in interest rates. As a matter of policy, derivatives are not used for speculative purposes. Derivative instruments are measured at fair value on a recurring basis and are included in other investments or other liabilities and accrued expenses in the Consolidated Balance Sheets.
The Company initially measures the cost of restricted stock unit and restricted stock awards at fair value on the date of grant and subsequently recognizes the cost of such awards over the vesting period using the straight-line method. The compensation costs are charged to expense over the vesting period with a corresponding credit to additional paid-in capital.
The Company records all investment transactions on a trade-date basis. Realized gains (losses) are determined using the specific-identification method. The Company classifies its investments as trading, 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 have any held-to-maturity securities at December 31, 2016 and 2015.
AFS are securities that are not classified as trading or held-to-maturity and are intended to be held for indefinite periods of time.
The Company regularly reviews AFS securities, held-to-maturity and cost investments with unrealized losses in order to evaluate whether the impairment is other-than-temporary. Under the guidance for debt securities, other-than-temporary impairment (OTTI) is recognized in earnings in the Consolidated Statements of Operations for debt securities that the Company has an intent to sell or that it believes it is more likely than not that it will be required to sell prior to recovery of the amortized cost basis. For those securities that the Company does not intend to sell nor expect to be required to sell, credit-related impairment is recognized in earnings, with the non-credit-related impairment recorded in accumulated other comprehensive income (AOCI). An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in AOCI for AFS securities.
Loans, at fair value is substantially comprised of (i) non-performing residential loans (NPLs), (ii) middle market leveraged loans held by the Company and (iii) loans originated by the Company’s mortgage finance business. Changes in their fair value are reported within net realized and unrealized gains (losses) in our Consolidated Statements of Operations. In addition, substantially all investments within assets of consolidated CLOs consist of loans at fair value.
Certain loans originated by the Company’s commercial lending business within its specialty finance business are asset backed loans held for investment and are carried at amortized cost. The Company periodically reviews these loans for impairment. Impairment losses are taken for impaired loans based on the fair value of collateral on an individual loan basis. When it is probable that the Company will be unable to collect all amounts contractually due, the loan would be considered impaired.
An allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when the Company believes the uncollectibility of a loan balance is confirmed. Management reviews its methodology for its calculation of its loss provision as deemed necessary which is at least on an annual basis.
Equity securities, trading, at fair value are investments consisting of equity securities that are purchased principally for the purpose of selling them in the near term. Changes in fair value are recorded in net realized and unrealized gains (losses) on investments on the Consolidated Statements of Operations in the period of change.
written down to its fair value. There were no material impairments on the Company’s real estate investments for the years ended December 31, 2016, 2015 and 2014, respectively.
The Company’s notes receivable, net includes receivables from its senior living partners and receivables related to the specialty insurance business for its premium financing programs.
Generally, receivables overdue more than 120 days are written off when the Company determines it has exhausted reasonable collection efforts and remedies, see Note-(8) Notes and Accounts Receivable, net.
Other receivables primarily represent amounts due to the Company from its business partners for retrospective commissions, net of allowance and for motor club membership fees.
The Company defers certain costs of acquiring new and renewal insurance policies and other products within the Company’s specialty insurance business. Amortization of deferred acquisition costs was $142,337, $81,537 and $1,376 for the years ended December 31, 2016, 2015 and 2014, respectively.
Other assets consists of prepaid expenses, deposits for future acquisitions, inventory, and furniture, fixtures and equipment, net. See Note-(15) Other Assets.
Premiums written are earned over the life of the respective policy using the Rule of 78's, pro rata, or other actuarial methods as appropriate for the type of business. Unearned premiums represent the portion of premiums that will be earned in the future. A premium deficiency reserve is recorded if anticipated losses, loss adjustment expenses, deferred acquisition costs and policy maintenance costs exceed the recorded unearned premium reserve and anticipated investment income. As of December 31, 2016 and December 31, 2015, no deficiency reserves were recorded.
The Company’s claims are generally reported and settled quickly, resulting in consistent historical loss development patterns. The Company’s actuaries apply a variety of generally accepted actuarial methods to the historical loss development patterns, to derive cumulative development factors. These cumulative development factors are applied to reported losses for each accident quarter to compute ultimate losses. The indicated required reserve is the difference between the ultimate losses and the reported losses. The actuarial methods used include but are not limited to the chain ladder method, the Bornhuetter-Ferguson method, and the expected loss ratio method. The actuarial analyses are performed on a basis gross of ceded reinsurance, and the resulting factors and estimates are then used in calculating the net loss reserves which take into account the impact of reinsurance. The Company has not made any changes to its methodologies for determining claim reserves in the periods presented.
Deferred revenues represent the portion of income that will be earned in the future attributable to motor club memberships, mobile device protection plans, and other non-insurance service contracts that are earned over the respective contract periods using Rule of 78's, modified Rule of 78's, pro rata, or other methods as appropriate for the contract. A deficiency reserve would
Net earned premium is from direct and assumed earned premium consisting of revenue generated from the direct sale of insurance policies by the Company's distributors and premiums written for insurance policies by another carrier and assumed by the Company. Whether direct or assumed, the premium is earned over the life of the respective policy using methods appropriate to the pattern of losses for the type of business. Methods used include the Rule of 78's, pro rata, and other actuarial methods. Management selects the appropriate method based on available information, and periodically reviews the selections as additional information becomes available. Direct and assumed premiums are offset by premiums ceded to the Company's reinsurers, including producer owned reinsurance companies (PORCs), earned in the same manner. The amount ceded is proportional to the amount of risk assumed by the reinsurer.
In April 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. These amendments change the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. In addition, ASU 2014-08 requires expanded disclosures about discontinued operations that will provide financial statement users with more information. ASU 2014-08 is effective for the first quarter of 2015 for the Company. The effects of applying the revised guidance will vary based upon the nature and size of future disposal transactions. It is expected that fewer disposal transactions will meet the new criteria to be reported as discontinued operations. The adoption of ASU 2014-08 did not have a material impact on the Company's consolidated financial statements.
In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. The pronouncement eliminates the concept of extraordinary items from GAAP. However, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. ASU 2015-01 was effective for the annual and interim periods beginning after December 15, 2015 with early adoption permitted. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability and consistent with debt discounts. ASU 2015-03 requires retrospective adoption and was effective for the Company on January 1, 2016. Accordingly, “Debt, net” is reported net of deferred financing costs as of December 31, 2016 and December 31, 2015, respectively, in the consolidated balance sheets. See Note-(13) Debt, net.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805):Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement to restate prior period financial statements for measurement period adjustments following a business combination. ASU 2015-16 requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The prior period impact of the adjustment should be either presented separately on the face of the income statement or disclosed in the notes. ASU 2015-16 became effective for fiscal years and interim reporting periods beginning after December 15, 2015, with early adoption permitted for financial statements that have not been issued. The Company elected to early adopt ASU 2015-16 for the year ended December 31, 2015 as it pertains acquisitions in the year ended December 31, 2015. The application of this new guidance did not have a material impact on the Company’s consolidated financial statements for any periods previously reported, though it will impact the recording of measurement period adjustments prospectively.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including the treatment of acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 is effective for public business entities in annual periods beginning after December 15, 2017, including interim periods therein and must be applied prospectively on or after the effective date. There are no disclosures required for a change in accounting principle at transition. Early adoption is permitted for transactions (i.e., acquisitions or dispositions) that occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. The Company elected to early adopt this standard, effective for transactions on or after October 1, 2016. See note (6) Investments, for a summary of acquisitions entered into by the Company which were accounted for as acquisitions of assets. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which makes targeted improvements to the recognition, measurement, presentation and disclosure of certain financial instruments. ASU 2016-01 focuses primarily on the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for certain financial instruments. Among its provisions for public business entities, ASU 2016-01 eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost, requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires the separate presentation in other comprehensive income of the change in fair value of a liability due to instrument-specific credit risk for a liability for which the reporting entity has elected the fair value option, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) and clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted for a limited number of provisions. The Company is currently evaluating the effect on its consolidated financial statements.
issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company is currently evaluating the effect on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07, Investments -Equity Method and Joint Ventures (Topic 323), which eliminates the requirement in Topic 323 that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2016 and should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early adoption is permitted. The Company is currently evaluating the effect on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. In addition, the amendments in this Update eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the effect on its consolidated financial statements.
In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, which rescinds SEC paragraphs pursuant to the SEC Staff Announcement, “Rescission of Certain SEC Staff Observer Comments upon Adoption of Topic 606,” and the SEC Staff Announcement, “Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or Equity,” announced at the March 3, 2016 Emerging Issues Task Force (EITF) meeting. The Company believes that that the adoption of this standard will not have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. ASU 2016-04 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 Company is currently evaluating the effect on its consolidated financial statements.
During the year ended December 31, 2016, subsidiaries in our senior living business and their partners entered into agreements to acquire and operate three senior housing communities for total consideration of $84,605 (which includes deposits of $125 paid in the fourth quarter of 2015), of which $59,817 was financed through mortgage debt issued in connection with the acquisitions, $4,778 was financed by contributions from partners of our subsidiary, and the remainder was paid with cash on hand. The partners provide management services to the communities under management contracts.
The primary reason for the Company’s acquisition of the senior housing communities is to expand its real estate operations. For the period from acquisition until December 31, 2016, revenue and the net loss in the aggregate for the three managed properties acquired were $10,878 and $2,416, respectively.
The following table summarizes the consideration paid and the amounts of the final determination, as described above, for transactions completed in the year ended December 31, 2016.
The following table shows the values recorded by the Company, as of the acquisition date, for finite-lived intangible assets and their estimated amortization period:
During the year ended December 31, 2015, the Company and a partner of a subsidiary in our senior living business entered into agreements to acquire and operate five senior housing communities for total consideration of $29,251 (which includes deposits of $587 paid in the fourth quarter of 2014), of which $19,943 was financed through mortgage debt issued in connection with the acquisitions, $1,861 was financed by a contribution of cash from the partner, and the remainder was paid with cash on hand. Affiliates of the partner provide management services to the communities under a management contract.
During the year ended December 31, 2015, the Company acquired the assets of six senior living communities for total consideration of $54,536 (which includes deposits of $1,490 paid in the fourth quarter of 2014), of which $39,500 was financed through mortgage debt issued in connection with the acquisitions, and the remainder was paid with cash on hand.
The primary reason for the Company’s acquisition of the senior living communities was to expand its real estate operations. For the period from acquisition until December 31, 2015, revenue and the net loss in aggregate for the properties acquired were $11,802 and $2,496, respectively.
The following table summarizes the consideration paid and the final determination of amounts of fair value of the assets acquired and the liabilities assumed for the acquisitions completed during the year ended December 31, 2015:
Supplemental pro forma results of operations have not been presented for the above 2015 business acquisitions as they were not material in relation to the Company’s reported results.
On January 1, 2015, Fortegra Financial Corporation (Fortegra) exercised an option to purchase the remaining 37.6% ownership interest in ProtectCELL. Upon exercising the option, Fortegra made an initial payment of $3,000 and made an additional payment of $4,100 in 2016 which was previously accrued.
The following unaudited supplemental pro forma information as of December 31, 2014 in the table below presents the Company's consolidated financial information as if Fortegra had been acquired on January 1, 2014:
The following table presents the cash flows from discontinued operations for the periods indicated:
Amount excludes $7,765 of non-controlling interests sold in connection with the sale of PFG.
The Company has four reportable operating segments, which are: (i) specialty insurance (formally known as insurance and insurance services), (ii) asset management, (iii) senior living (formally known as real estate), and (iv) specialty finance. The Company’s operating segments are organized in a manner that reflects how the chief operating decision maker, (CODM) views these strategic business units.
Each reportable segment’s income (loss) is reported before income taxes, discontinued operations and non-controlling interests.
Segment results incorporate the revenues and expenses of these subsidiaries since they commenced operations or were acquired.
In the fourth quarter of 2016, the Company made certain segment realignments in order to conform to the way the CODM internally evaluates segment performance. These realignments primarily consisted of the transfer of principal investments from corporate and other to the specialty insurance and asset management operating segments. As a result, corporate and other is no longer deemed to be an operating segment of the Company. For the year ended December 31, 2015, $(9,914) of pretax income (loss) previously reported in corporate and other was allocated $2,234 and $(12,148) to the specialty insurance and asset management operating segments, respectively. For the year ended December 31, 2014, $10,715 of pretax income previously reported in corporate and other was allocated to the asset management operating segment. For the years ended December 31, 2015 and 2014, inclusive of what was allocated to the asset management operating segment was $(11,020) and $7,755 of net income (loss) attributable to consolidated CLOs. The Company has reclassified prior period amounts to provide visibility and
comparability. This reclassification had no impact on the allocation of goodwill to reporting units. None of these changes impacts the Company’s previously reported consolidated net income or earnings per share.
Senior Living operations are conducted through Care Investment Trust LLC (Care), a wholly-owned subsidiary of Tiptree, which has a geographically diverse portfolio of seniors housing properties including senior apartments, assisted living, independent living, memory care and skilled nursing facilities in the U.S.
Specialty Finance operations are conducted through Siena Capital Finance LLC (Siena), which commenced operations in April 2013, and the Company’s mortgage businesses, which consist of Luxury, which was acquired in January 2014, and Reliance, which was acquired in July 2015. The Company’s mortgage origination business originated loans for sale to institutional investors, including GSEs and FHA/VA. Siena’s business consists of structuring asset-based loan facilities across diversified industries.
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 invested assets from these 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 available for sale securities:
The following table presents additional information on the Company’s available for sale securities:
The following table presents the Company’s investments in loans, measured at fair value and amortized cost:
Mortgage loans held for sale that have been pledged as collateral totaled $117,734 at December 31, 2016 and $112,743 at December 31, 2015. As of December 31, 2016, the fair value of mortgage loans exceeded the unpaid principal balance of $118,162 by $3,277. The unpaid principal balance and fair value of mortgage loans held for sale that are 90 days or more past due were $142 and $66, respectively, as of December 31, 2016. The unpaid principal balance and fair value of mortgage loans held for sale that are 90 days or more past due were $142 and $82, respectively, as of December 31, 2015. The Company discontinues accruing interest on all loans that are 90 days or more past due.
Non-performing loans that have been pledged as collateral totaled $60,409 at December 31, 2016. As of December 31, 2016 and December 31, 2015, the Company’s investments included $74,923 and $38,289, respectively, of non-performing loans collateralized by real estate of which the unpaid principal balance was $113,892 and $61,676, respectively. As of December 31, 2016 and December 31, 2015, the difference between the fair value of the NPLs and the unpaid principal balance was $(38,969) and $(23,387), respectively. Included in real estate, net as of December 31, 2016 and December 31, 2015 are $13,366 and $2,197, respectively, of foreclosed residential real estate property resulting from the conversion of an NPL to REO.
Depreciation expense related to the Company’s real estate investments was $7,851, $5,509 and $2,768 for the years ended December 31, 2016, 2015 and 2014, respectively.
The following table presents the future minimum rental revenue under the noncancelable terms of all operating leases as of:
The schedule of minimum future rental revenue excludes residential lease agreements, generally having terms of one year or less. Rental revenues from residential leases were $47,147, $36,551 and $15,803 for the years ended December 31, 2016, 2015 and 2014, respectively.
Included in net realized gains (losses) is gain on sale of loans held for sale, net of $68,181, $33,849 and $7,154 for the years ended December 31, 2016, 2015 and 2014, respectively.
Equity Securities: The fair values of publicly traded common and preferred stocks were obtained from market value quotations provided by an independent pricing service and fall under Level 1 of the fair value hierarchy. The fair values of non-publicly traded common and preferred stocks were based on prices obtained from an independent pricing service using unobservable inputs and fall under Level 3 of the fair value hierarchy.
Derivative Assets and Liabilities: Derivatives are comprised of credit default swaps (CDS), index credit default swaps (CDX), interest rate lock commitments (IRLC), to be announced mortgage backed securities (TBA) and interest rate swaps (IRS). 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. In general, the fair value of CDSs and CDXs are based on dealer quotes. Because significant inputs, other than unadjusted quoted prices in active markets are used to determine the dealer quotes, such as price volatility, the Company classifies them as Level 2 in the fair value hierarchy. The fair value of IRS is based upon either valuation pricing models, which represent the amount the Company would expect to pay at the balance sheet date if the contracts were exited, or by obtaining broker or counterparty quotes. Because there are observable inputs used to arrive at these prices, the Company has classified IRS within Level 2 of the fair value hierarchy. Our mortgage origination subsidiaries issue IRLCs to its customers, which are carried at estimated fair value on the Company’s 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 fall out assumption. The fair values of these commitments generally result in a Level 3 classification. 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 generally result in a Level 2 classification.
Trading Assets and Liabilities: Trading assets and liabilities consist primarily of privately held equity securities, exchange-traded equity securities, CLOs, collateralized debt obligations (CDOs), derivative assets and liabilities, tax exempt securities, and U.S. Treasury short positions. The fair value of privately held equity securities are based on quotes obtained from dealers or internally developed valuation models. Because significant inputs used to determine the dealer quotes or model values are not observable, such as projected future earnings and price volatility, the Company has classified them within Level 3 of the fair value hierarchy. The Company’s U.S. Treasury short position is priced through dealer indicative quotes and as such is classified as Level 2. Trading assets are presented in the consolidated balance sheets within equity securities, trading, at fair value and other investments. Trading liabilities are included within other liabilities and accrued expenses.
Positions in securitized products such as CLOs and CDOs are based on quotes obtained from dealers and valuation models. When these quotes are based directly or indirectly on observable inputs such as quoted prices for similar assets exchanged in an active or inactive market, the Company has classified them within Level 2 of the fair value hierarchy. If these quotes are based on valuation models using unobservable inputs such as expected future cash flows, default rates, supply and demand considerations, and market volatility, the Company has classified them within Level 3 of the fair value hierarchy.
Nonperforming loans and REO: The Company determines the purchase price for NPLs at the time of acquisition and for each subsequent valuation by using a discounted cash flow valuation model and considering alternate loan resolution probabilities, including modification, liquidation, or conversion to REO. The significant unobservable inputs used in the fair value measurement of our NPLs are discount rates, loan resolution timeline, and the value of underlying properties. The fair values of NPLs which are making payments (generally based on a modification or a workout plan) are primarily based upon secondary market transaction prices, which are expressed as a percentage of unpaid principal balance (UPB). Observable inputs to the model include loan amounts, payment history, and property types. Our NPLs are on nonaccrual status at the time of purchase as it is probable that
Not included in this table are the debt obligations of consolidated CLOs, measured and leveled on the basis of the fair value of the (more observable) financial assets of the consolidated CLOs. See Note-(12) Assets and Liabilities of Consolidated CLOs.
The following table summarizes the total Notes and Accounts receivable, net:
Accounts and premiums receivable, net, Retrospective commissions receivable and Other receivables
The following table presents the components of policy and contract benefits, including the effect of reinsurance on losses and loss adjustment expenses ("LAE") incurred:
Represents intangible assets with an indefinite useful life. Impairment tests are performed at least annually on these assets.
During the fourth quarter of 2016, the Company changed the date of its annual impairment test of goodwill from December 31 to October 1. The Company believes the change in goodwill impairment date does not result in a material change in the method of applying the accounting principle. This change provides the Company additional time to complete the annual impairment test of goodwill in advance of our year end reporting. The Company will continue to perform interim impairment testing should circumstances or events require. This change does not result in a delay, acceleration, or avoidance of an impairment charge. This change will be applied prospectively beginning in 2017 because it is impracticable to apply it retrospectively due to the difficulty in making estimates and assumptions without using hindsight.
The following table present the amortization expense on finite-lived intangible assets for the following periods:
The following table presents the amortization expense on finite-lived intangible assets for the next five years by segment:
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 located within trading assets at fair value and are reported in other investments. Trading liabilities are reported within other liabilities and accrued expenses.
Credit derivatives are generally defined as over-the-counter contracts between a buyer and seller of protection against the risk of default on a set of obligations issued by a specified reference entity.
The Company enters into forward delivery contracts with investors to manage the interest rate risk associated with IRLCs and loans held for sale.
The Company uses interest rate swaps to hedge the variability of floating rate borrowings. Cash flow hedge accounting was applied to the floating rate borrowings in its specialty insurance business, and during the second quarter of 2016, the Company elected to apply cash flow hedge accounting to such transactions in its senior living business.
The following table presents the pretax impact of the cash flow hedging derivative instruments on the Consolidated Financial Statements for the following periods:
The term CLO generally refers to a special purpose vehicle that owns a portfolio of investments and issues various tranches of debt and subordinated note securities to finance the purchase of those investments. The investment activities of a CLO are governed by extensive investment guidelines, generally contained within a CLO’s indenture and other governing documents which limit, among other things, the CLO’s exposure to any single industry or obligor and provide that the CLO’s assets satisfy certain ratings requirements. Most CLOs have a defined investment period during which they are allowed to make investments and reinvest capital as it becomes available. The CLOs are considered variable interest entities (VIE).
The assets of each of the CLOs, including cash and cash equivalents, are held solely as collateral to satisfy the obligations of the CLOs. The Company does not own and has no right to the benefits from, nor does it bear the risks associated with, the assets held by the CLOs, beyond its direct investments in, and investment advisory fees generated from, the CLOs. If the Company were to liquidate, the assets of the CLOs would not be available to its general creditors, and as a result, the Company does not consider these assets available for the benefit of its investors. Additionally, the investors in the CLOs have no recourse to the Company’s general assets for the debt issued by the CLOs. Therefore, this debt is not the Company’s obligation. The Company consolidates entities when it is determined to be the primary beneficiary under current VIE accounting guidance.
The table below represents the assets and liabilities of the consolidated CLOs that are included in the Company’s Consolidated Balance Sheets as of the dates indicated:
The unpaid principal balance for these loans is $952,225 and $727,357 and the difference between their fair value and UPB is $23,985 and $46,573 at December 31, 2016 and December 31, 2015, respectively.
The following table represents revenue and expenses of the consolidated CLOs included in the Company’s Consolidated Statements of Operations for the periods indicated:
(3) The weighted average coupon rate for residential mortgage warehouse borrowings was 3.51% and 3.39% at December 31, 2016 and December 31, 2015, respectively. Includes debt having a maximum borrowing capacity of $103,000 with a stated interest rate of LIBOR +2.75% and a floor of 3.00%.
On June 24, 2016, the Company entered into a Fourth Amendment to the Credit Agreement. The Fourth Amendment provides for additional term loans in an aggregate principal amount of $15,000 with the same maturity date, margin above LIBOR, principal repayment term, and conditions and covenants as the existing term loans under the Credit Agreement. The Fourth Amendment also 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. As of December 31, 2016 and 2015, the maximum borrowing capacity under the agreement was $125,000 and the outstanding amount borrowed was $58,500 and $45,500, respectively.
The Company has financed purchases of certain investments in commercial loans and NPLs with portfolio-based leverage. These investments are held in our specialty insurance business. Such borrowings are generally recourse only to the specific investments in such portfolios. Repayment of such loans is (i) based upon a specific maturity date of May 5, 2020 (for maximum borrowings of $150,000) or (ii) based upon the earlier of September, 2018 or an amount of approximately 120% of the cash realization events in the portfolio plus an amount dependent on the balance of the interest reserve account (for a maximum borrowing of $40,000). As of December 31, 2016 and 2015, a total of $149,106 and $54,900, respectively, was outstanding under such financing agreements. The loan is subject to a LIBOR floor of 0.40%.
In addition, a subsidiary in the specialty finance business has outstanding borrowings which are recourse to the loan portfolio. Total outstanding borrowings under such facility totaled approximately $93,627 and $36,192 as of December 31, 2016 and 2015, respectively. The loan is subject to a LIBOR floor of 0.50%.
The Company, through subsidiaries in its specialty finance business has five warehouse borrowings with a total borrowing capacity at December 31, 2016 of $188,000. Such warehouse facilities are recourse to the assets of the subsidiary and are secured by liens on cash escrow and the loans held for sale in the warehouse. These credit agreements contain customary financial covenants that require, among other items, minimum amounts of tangible net worth, profitability, maximum indebtedness ratios, and minimum liquid assets. Three of these credit agreements are subject to a LIBOR floor of 0.25%.
A subsidiary in our specialty insurance business has $35,000 of preferred trust securities due June 15, 2037. Interest is payable quarterly. In 2012, a subsidiary in our specialty insurance business entered into an interest rate swap that exchanges the floating rate for a fixed rate, as further described in Note- (11) Derivative Financial Instruments and Hedging. The Company may redeem the preferred trust securities, in whole or in part, at a price equal to the full outstanding principal amount of such preferred trust securities outstanding plus accrued and unpaid interest.
The information about incurred and paid claims development for the years ended December 31, 2014 and 2015 is presented as supplementary information and is unaudited.
The following table presents the activity in the net liability for unpaid losses and allocated loss adjustment expenses of short-duration contracts:
Depreciation expense related to furniture, fixtures and equipment was $574, $370 and $228 for the years ended December 31, 2016, December 31, 2015 and December 31, 2014, respectively.
The following table presents the components of other income as reported in the Consolidated Statement of Operations, primarily comprised of interest income and loan fee income related to both loans at fair value and loans at amortized costs, net in our specialty finance business, and management fees from our asset management business:
The following table presents the components of other expenses as reported in the Consolidated Statement of Operations:
All shares of our Class A common stock have equal rights as to earnings, assets, dividends and voting. Shares of Class B common stock have equal voting rights but no economic rights (including no right to receive dividends or other distributions upon liquidation, dissolution or otherwise). Distributions may be paid to holders of Class A common stock when duly authorized by our board of directors and declared out of legally available assets.
The Company's 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 eliminated all dividends from its subsidiaries in the consolidated financial statements. The following table presents the dividends paid to the Company by its insurance company subsidiaries for the following periods:
At December 31, 2016, the maximum amount of dividends that our regulated insurance company subsidiaries could pay under applicable laws and regulations without regulatory approval was approximately $9,049. 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.
Under the National Association of Insurance Commissioners (NAIC) Risk-Based Capital Act of 1995, a company's Risk-Based Capital (RBC) is calculated by applying certain risk factors to various asset, claim and reserve items. If a company's adjusted surplus falls below calculated RBC thresholds, regulatory intervention or oversight is required. The Company's insurance company subsidiaries' RBC levels, as calculated in accordance with the NAIC’s RBC instructions, exceeded all RBC thresholds as of December 31, 2016.
The Care Investment Trust Inc. Manager Equity Plan was adopted in June 2007 and will automatically expire on June 21, 2017. As of December 31, 2016, 134,629 common shares remain available for future issuances. No shares have been issued since March 30, 2012 from this plan.
The table below summarizes changes to the issuances under the Company’s 2013 Equity Plan for the periods indicated:
The Company values RSUs at their grant-date fair value as measured by Tiptree’s common stock price. Included in vested shares for 2016 are 646 shares surrendered to pay taxes on behalf of the employees with shares vesting. During the year ended December 31, 2016, the Company granted 218,310 RSUs to employees of the Company, of which 111,759 vest over a period of three years that began in January 2016, 33,624 will vest over a period of two years beginning February 2016, 55,768 will vest over a period of two years beginning April 2016 and the remainder will vest over a period of three years beginning April 2016.
The fair value of each option grant was 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 over a lookback period equal to 2.5 years from the grant date, which represents the time period since the July 1, 2013 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 of $0.025 was 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 period:
Professional fees consist of the value of restricted stock units and options granted to persons providing services to the Company.
As of June 30, 2016, the Company has concluded that Mariner no longer meets the definition of a related party.
The following table presents the fees paid to related parties for services provided:
The amount of related party receivables and payables as of the balance sheet date was not material.
On June 23, 2016, subsidiaries of Tiptree purchased 5,596,000 shares of Class A common stock of Tiptree from entities affiliated with ProSight Specialty Insurance Group, Inc. (a principal owner of the Company’s Class A common stock prior to the purchase) for aggregate consideration of $36,374. The shares acquired by subsidiaries of Tiptree are held as treasury shares and are not outstanding for accounting or voting purposes.
The Company’s income taxes receivable as of December 31, 2016 was $4,842, offset with an income tax payable balance of $1,617, resulting in a consolidated net receivable of $3,225. As of December 31, 2015, there was a net receivable of $5,810.
For the year ended December 31, 2016, the Company’s effective tax rate on income from continuing operations was equal to 25.3%, which does not bear a customary relationship to statutory income tax rates. The effective tax rate for the year ended December 31, 2016 is lower than the U.S. statutory income tax rate of 35.0% primarily due to $4,044 of discrete tax benefits for the period, primarily related to the tax restructuring that resulted in a U.S. federal consolidated income tax group effective January 1, 2016. The Company’s effective tax rate before the restructure benefit was equal to 34.7% for the full year 2016.
For the year ended December 31, 2015, the Company’s effective tax rate on income from continuing operations was equal to (11.1)%, which does not bear a customary relationship to statutory income tax rates. The effective tax rate for the year ended December 31, 2015 is lower than the U.S. statutory income tax rate of 35%, primarily due to taxes incurred at certain corporate subsidiaries that do not consolidate with the Company’s taxable income, tax losses generated at certain of our taxable subsidiaries which require a valuation allowance and do not generate an income tax benefit, and state income taxes incurred on a separate legal entity basis.
Other than the valuation allowance discussed above, management believes it is more likely than not the remaining net operating loss carryforwards will be utilized prior to their expiration dates.
Minimum rental obligations for Tiptree, Care, MFCA, Siena, Luxury, Reliance and Fortegra office leases. For the year ended December 31, 2016, 2015 and 2014, rent expense for the Company’s office leases were $6,402, $5,784 and $1,508, respectively.
In addition, Tiptree’s subsidiary Siena issues standby letters of credit for credit enhancements that are required by its borrower’s respective businesses. As of December 31, 2016, there was $1,611 outstanding relating to these letters of credit.
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 policies. The action alleges violations of the Consumer Protection Act and certain insurance statutes, as well as common
The Company calculates basic net income per Class A common share based on the weighted average number of Class A common shares outstanding (inclusive of vested restricted share units). The unvested restricted share units have the 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, and for the years ended December 31, 2015 and December 31, 2014, the loss from continuing operations available to common stockholders was not allocated to the unvested restricted stock units as those holders do not have a contractual obligation to share in net losses.
Diluted net income per Class A common shares for the period includes the effect of potential equity of Siena, Reliance, and Operating Company as well as potential Class A common stock, if dilutive. For the years ended December 31, 2015 and December 31, 2014, the assumed exercise of all dilutive instruments were anti-dilutive, and therefore, were not included in the diluted net income per Class A common share calculation.
For the year ended December 31, 2015, the total net income (loss) attributable to non-controlling interest was $3,023, comprised of $(5,321) due to continuing operations and $8,344 attributable to discontinued operations. For the year ended December 31, 2014, the total net income (loss) attributable to non-controlling interest was $6,294, comprised of $1,939 due to continuing operations and $4,355 attributable to discontinued operations.