Our principal executive offices are located at 780 Third Avenue, 21st Floor, New York, New York 10017. The table below outlines the Company’s leased properties as of December 31, 2015, all of which are used as administrative offices. All facilities are considered adequate and suitable for the Company’s current level of operations. We do not own any properties for administrative purposes.
The Company’s owned real estate as of December 31, 2015 is listed below. All of the owned real estate consists of properties owned by Care, except the Stamford, CT location, which is owned by Luxury.
References to “Tiptree” or the “Company” mean Tiptree Operating Company, LLC (“Operating Company”) and its consolidated subsidiaries, together with the standalone net assets held by Tiptree Financial Inc. References to “Tiptree Financial” mean Tiptree Financial Inc. Tiptree Financial is publicly traded and owns approximately 81% of Operating Company.
Our Management’s Discussion and Analysis of Financial Conditions and Results of Operations is presented in this section as follows:
The Company currently has five reporting segments: insurance and insurance services, specialty finance, real estate, asset management, and corporate and other. See Note 5-Operating Segment Data, in the notes to the accompanying consolidated financial statements for detailed information regarding our segments. Since different factors affect the financial condition and results of operation of each segment, the following discussion is presented on both a consolidated and segment basis.
The dealer price quotes that we receive for our CLO subordinated notes are a function of the trading levels for similar securities observed by the dealers and the results of cash flow analysis that the dealers, buyers and sellers, perform to determine price along with seller-specific liquidity issues. The lower prices of CLO subordinated notes reflect expectations of higher default rates of the individual leveraged loans collateralizing the CLO. Leveraged loan price volatility has been driven primarily by default expectations in the energy, metals and mining sectors.
On March 30, 2015, Care completed the purchase of six seniors housing communities for $54.5 million. The properties are leased to Greenfield, who operate the properties.
In May 2015, the Company leveraged its $25.0 million to seed Telos Credit Opportunities Fund, L.P., a leveraged loan fund managed by the Company’s Telos subsidiary with an asset based secured credit facility of which $54.9 million was outstanding as of December 31, 2015.
On July 1, 2015, the Company completed the acquisition of Reliance, a retail mortgage originator, for $7.5 million, 1,625,000 shares of Class A common stock, $2.8 million in working capital adjustments and an earn-out provision over 3 years of up to 2 million Tiptree Class A shares. The results of our mortgage business, including Reliance, are reported in our specialty finance segment.
During the second half of 2015, we contributed an aggregate of $45.0 million to a special purpose vehicle, Telos 7, which entered into a warehouse credit facility in anticipation of launching a new CLO, of which $119.5 million was outstanding as of December 31, 2015. Until a CLO is launched, results of Telos 7 are included in our corporate and other segment.
During 2015, Tiptree Financial returned $7.3 million to Class A stockholders through dividends of $3.3 million and stock repurchases of $4.0 million. For further details, see “Part II-Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Purchases of Equity Securities by the Issuer and Affiliated Purchasers.”
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, 2015, the Company reported Adjusted EBITDA from continuing operations of $25.9 million, an increase of $1.8 million from the year earlier. The key drivers of the change in Adjusted EBITDA were the same as those which impacted our pretax income from continuing operations. The smaller decline versus that reported for pretax income from continuing operations was primarily driven by the elimination of the period over period changes attributable to increased depreciation and amortization at our real estate segment and the purchase accounting impacts at Fortegra.
The Company reported net income to common shareholders of $5.8 million in the year ended December 31, 2015, an increase of $7.5 million from the year ended December 31, 2014. The key drivers of net income were consistent with those that contributed to the differences in income before non-controlling interests, partially benefiting from the exchange of non-controlling interests for Tiptree Financial’s Class A shares during the year. As of December 31, 2015, the Class A common stockholders were entitled,
directly or indirectly, to approximately 81% of the net income of the Company, compared to approximately 77% as of December 31, 2014. For more information on the Company’s structure, see Note 1-Organization, in the accompanying consolidated financial statements.
Segment Results - Year Ended December 31, 2015 and December 31, 2014
Summary segment EBITDA and Adjusted EBITDA for continuing operations for the year ended December 31, 2015 and December 31, 2014(1)
The Company’s insurance and insurance services segment is comprised of its wholly-owned Fortegra subsidiary, which was acquired in December 2014. Comparisons in this report to Fortegra’s prior year operating results refer to Fortegra’s unaudited financial information for the year ended December 31, 2014, without taking into account the effects of purchase price accounting adjustments giving effect to the 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 value of the business acquired (“VOBA”). The application of push-down accounting creates a modest impact to net income, but significantly impacts individual assets, liabilities, revenues, and expenses. We have presented the year ended December 31, 2015 income statements on a pro forma basis to eliminate the impact of purchase price accounting adjustments. In addition, the purchase of the remaining 37.6% of ProtectCELL in January 2015 reduced the amount of net income attributable to non-controlling interests for the year ended December 31, 2015 and thus had a positive impact on net income.
(1) Represents service fee revenues that would have been recognized had purchase accounting effects not been recorded. Deferred service fee liabilities at the acquisition date were reduced to reflect the purchase accounting fair value.
(2) Represents ceding commission revenues that would have been recognized had purchase accounting effects not been recorded. Deferred ceding commissions liabilities at the acquisition date were reduced to reflect the purchase accounting fair value.
(4) Represents the removal of 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.
(6) Represents the removal of additional income tax expense resulting from the impact of recording purchase accounting. The recording of purchase accounting resulted in an overall positive impact to net income before income tax, and therefore, had the effect of increasing income tax expense.
Results of the Company’s PFG subsidiary, which had previously been presented in the insurance and insurance services segment have been reclassified as discontinued operations for 2014 and 2015. The Company’s PFG subsidiary was sold during the second quarter of 2015. Since Tiptree acquired Fortegra in December 2014, comparable prior year information is not included in or incorporated by reference in this report.
Net revenues were $135.6 million for the year ended December 31, 2015. After adjusting for the impact of purchase accounting, net revenues were $113.4 million, down slightly from 2014. While the net revenues for cell phone warranty contracts have been dampened by competitive pressures, slowing growth in that area has been more than offset by combined growth in the sale of credit life insurance, warranty and specialty insurance products in the auto sector and for other consumer durables.
Credit protection net revenues for the year ended December 31, 2015 were $64.7 million, higher than the previous year operating results. Cell phone warranty products for the year ended December 31, 2015 were $33.2 million, down approximately the same amount as credit protections net revenue were up from the prior year operating results. Improvement in specialty products helped close the gap in net revenues for the year ended December 31, 2015 due to the competitive pressures in the cellphone warranty business. Specialty products net revenue for the year ended December 31, 2015 was $5.5 million, up significantly from the prior year operating results. Credit protection products and specialty products continue to provide opportunities for growth through a combination of expanded product offerings, new clients and geographic expansion in the latter case.
Net revenues are net of commission paid to brokers. Commissions expense is incurred on most product lines, most of which are retrospective commissions paid to distributors and retailers selling our products, including credit insurance policies, motor club memberships, mobile device protection and warranty service contracts. Credit insurance commission rates are, in many cases, set by state regulators and are also impacted by market conditions and retention levels. Commission expense of $105.8 million for the year ended December 31, 2015, was driven by the increase in policies issued in the credit life and specialty auto warranty and insurance products. For the year ended December 31, 2015, commission expense adjusted for the impact of purchase accounting was $150.9 million, down meaningfully from the prior year as a result of lower ceding percentages.
Incurred claims are impacted by loss frequency, which is a measure of the number of claims per unit of insured exposure, and loss severity, which is based on the average size of claims. Factors affecting loss frequency and loss severity include changes in claims reporting patterns, claims settlement patterns, judicial decisions, economic conditions, morbidity patterns and the attitudes of claimants towards settlements.
Operating expenses in the insurance and insurance services segment are composed of payroll and employee commissions, interest expense, professional fees, depreciation and amortization expenses and other expenses. Segment operating expenses in the year ended December 31, 2015 were $105.9 million, a meaningful increase from the previous year costs. The primary driver of the year over year increase in costs was attributable to higher depreciation and amortization expense as a result of the purchase accounting impact on the amortization of the fair value attributed to the insurance policies and contracts acquired of $19.3 million for the year ended December 31, 2015. The purchase accounting expense was partially offset by cost reduction efforts throughout 2015. Pro forma operating expenses of $88.5 million were down year over year as a result of the cost reductions efforts described above.
Siena’s revenues totaled $10.1 million in 2015, compared with $4.5 million in 2014, an increase of $5.6 million or 124%. The increase in revenue year over year was primarily driven by the increase in lending volume, combined with higher loan fee income which was due to a higher number of loan waivers, and early termination and prepayment fees.
Selected mortgage margin and product mix analysis for the year ended December 31, 2015 and December 31, 2014
The table below presents the funded volume, brokered volume and sold volume of mortgage loans originated in our mortgage origination businesses as well as the mortgage margin, as measured in basis points, and product mix of such mortgage loans for the year ended December 31, 2015 and 2014, respectively. “Volume” refers to the unpaid principal balance of the mortgage loan. The table is being provided to assist investors’ understanding of the key drivers of the year over year and quarter over quarter change in revenues and expenses.
Net revenue margins also improved in the year ended December 31, 2015. While margins generally improved industry wide, the primary driver of the improved margins was the higher mix of FHA/ VA and agency volumes as the result of the inclusion of Reliance.
Mortgage business revenues for the year ended December 31, 2015 were $44.9 million compared with $10.7 million for the year ended December 31, 2014, an increase of $34.2 million or 320%. The revenue improvement was driven primarily by a combination of the inclusion of Reliance’s originations, which resulted in both higher funding volume and improved margins given Reliance’s focus on FHA/VA and agency production, which are higher margin products compared to jumbo mortgages and improved volume at Luxury. Revenues earned by the mortgage business are comprised of gain on sale on mortgages originated and sold to investors, gains and losses on the mortgage pipeline of interest rate lock commitments and mortgage loans held for sale and the associated hedges, net interest income on mortgages held for sale, and fees associated with the mortgage origination business. Loan fees are primarily comprised loan application fees, appraisal fees, document preparation fees, broker fees earned and loan underwriting fees.
Mortgage business expenses, for the year ended December 31, 2015 were $41.2 million compared with $12.8 million for the comparable period in 2014, an increase of $28.4 million or 222%. Expenses are composed of payroll and employee commissions and other expenses. As the mortgage origination business is highly scalable, expenses generally increase at a slower pace relative to increases in revenues. As a result, expenses were up less than the increases in funding volume and margins, driving improved profitability. The primary driver of higher expenses was a combination of the inclusion of Reliance, which recorded higher commissions and loan origination expense as the result of increased volumes.
Specialty finance segment Adjusted EBITDA was $5.9 million for the year ended December 31, 2015 compared to a loss of $1.5 million in the prior year period. Improvement in Adjusted EBITDA was driven by the increased volume, higher revenue margins, and the benefit of scale and improved income margins as described above.
The Company’s real estate segment consists of its wholly-owned Care subsidiary, which primarily acquires and owns seniors housing properties. As of December 31, 2015, Care’s portfolio consists of 24 properties across 9 states primarily in the Mid-Atlantic and Southern United States comprised of 11 Triple Net Lease Properties and 13 Managed Properties.
In Triple Net Lease Properties, Care only owns the real estate and enters into a long term lease with an operator who is typically responsible for bearing operating costs, including maintenance, utilities, taxes, insurance, repairs and capital improvements. Triple Net Lease Properties are not consolidated since Care does not manage the underlying operations. For Triple Net Lease Properties operations, Care recognizes primarily rental income from the lease since substantially all expenses are passed through to the tenant. In Managed Properties, Care generally owns between 65-80% of the real estate and the operations
with affiliates of the management company owning the remainder. Care therefore consolidates all of the assets, liabilities, income and expense of the Managed Properties operations in segment reporting.
Care had a pre-tax net loss of $9.5 million for 2015, compared with pre-tax net income of $3.2 million in 2014. In 2014, Care 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”). Care did not have a similar gain in 2015. Additionally, Care made significant investments in senior housing properties, including in Managed Properties during the second half of 2014 and the first quarter of 2015. The increase in the number of properties generated higher rental and other income in 2015 compared with 2014, however the Company also incurred additional depreciation, amortization and interest expenses as a consequence of the growth in Care’s property portfolio.
other expenses. Interest expense was $6.8 million for 2015, compared with $4.1 million for 2014. Payroll expenses were $18.5 million for 2015 compared with $8.1 million for 2014. Depreciation and amortization expenses were $14.5 million in 2015, compared with $7.2 million in 2014. Care’s other expenses, which include property operating expenses, office expenses, property acquisition costs, professional fees and property taxes, were $15.8 million for 2015, compared with $6.8 million for 2014. The increase in expenses was primarily attributable to consolidation of the expenses of the nine Managed Properties added in the fourth quarter of 2014 and first quarter of 2015 and an increase in amortization of in-place leases acquired.
Care had Adjusted EBITDA of $6.6 million for 2015 compared to $10.4 million in 2014 primarily due to the one-time December 2014 repayment to Care of the Westside Loan. See “Non-GAAP Financial Measures” below for a reconciliation to GAAP net income.
Asset Management segment - operating results for the year ended December 31, 2015 and December 31, 2014
Pre-tax net income for the asset management segment was $5.4 million for 2015, compared with pre-tax net income of $6.2 million for 2014, a decrease of $0.8 million. The principal reason for the decline was the reduction in CLO management fees, driven by a combination of amortized AUM in our older CLOs which are past their reinvestment periods and lower fees as described below.
Total expenses for the asset management segment were $5.3 million for 2015, compared with $5.9 million for 2014, excluding, in each case, incentive compensation for the employees of the asset management segment which is included in the corporate and other segment.
Asset management segment adjusted EBITDA was $5.4 million for 2015 compared to $6.2 million in the prior year. Decline was driven by the same factors discussed above.
The Company earns revenues from CLOs under management. These revenues comprise 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 management fees earned from the CLOs described below are reported in the asset management segment, while the sum of distributions earned and gains and losses on the Company’s holdings of subordinated notes issued by the CLOs are reported as net income (loss) attributable to the consolidated CLOs in the Company’s corporate and other segment.
The Company deconsolidated the results of Telos 1, Telos 2, Telos 3 and Telos 4 for the period that we did not own the subordinated notes for the year ended December 31, 2015 but not for the prior year period. The table below shows the results attributable to the CLOs both on a consolidated basis and an unconsolidated basis, which is a non-GAAP measure, for the year ended December 31, 2015, which management believes is helpful for year-over-year comparative purposes.
(1) Represents amounts from Telos 1, Telos 2, Telos 3 and Telos 4, which have been deconsolidated for the period that we did not own the subordinated notes. See Note 16-Assets and Liabilities of Consolidated CLOs, in the accompanying consolidated financial statements, regarding the deconsolidation of certain of our CLOs.
due to the mark-to-market write-down in our retained CLO subordinated note holdings. 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 Company’s corporate and other segment incorporates revenues from the Company’s investments in CLOs and tax exempt securities, income from the Company’s credit investment portfolio and net gains or losses from the Company’s corporate finance activity, including the interest rate and credit derivative risk mitigation transactions. Segment expenses include interest expense on the Fortress credit facility and head office payroll and other expenses.
The Company’s credit investment portfolio comprises its loan warehouse, investments in NPLs and its credit opportunity fund. The Company establishes loan warehouse credit facilities which are designed to hold loans until new CLOs are formed. During 2014, two warehouse facilities were terminated as CLOs were issued generating net income of $4.1 million for the year ended December 31, 2014. The Company established a warehouse facility in the third quarter of 2015 to purchase loans in anticipation of the subsequent launch of Telos 7. The Telos 7 loan warehouse incurred a loss of $1.9 million comprised of $3.0 million of interest income offset by $4.3 million of unrealized mark to market losses and $0.5 million of interest expense.
Corporate revenues comprise net realized and unrealized gains and losses on the Company’s credit mitigation transactions, income from the Company’s investments in the Star Asia Entities, common shares of RAIT and other corporate investments (not included in the other two CLO and credit investment categories).
Net revenue from Corporate investments was $964 thousand in the year ended December 31, 2015, compared with net revenues of $911 thousand in the year ended December 31, 2014. The decline was primarily the result of unrealized losses on investments of $240 thousand in the year ended December 31, 2015, compared with net unrealized losses of $224 thousand in the year ended December 31, 2014. Interest and other income also decreased from $694 thousand to $303 thousand from the prior year period.
Corporate and other operating expenses include payroll, professional fees and other expenses. Payroll expenses, which include salaries, bonuses and benefits totaled $14.0 million in the year ended December 31, 2015, compared to $4.5 million in the year ended December 31, 2014. Corporate payroll expense includes the expense of head office management, legal and accounting staff as well as the payroll expense associated with the management of the Company’s tax exempt portfolio. Payroll expenses increased in 2015 as the Company expanded its staff as a result of our efforts to improve our reporting and controls infrastructure and the accrual of separation payments to a former executive.
Tiptree Financial had tax expense from continuing operations of $1.4 million for the year ended December 31, 2015 as compared to a tax expense of $4.1 million for the year ended December 31, 2014. The effective tax rate on income from continuing operations for the year ended December 31, 2015 was approximately (11.1)% compared to 525.5% for the year ended December 31, 2014. Differences from the statutory income tax rates are primarily the result of the fact that we were not a consolidated group for corporate income tax purposes, the effect of changes in valuation allowance on net operating losses reported by certain of the Company’s subsidiaries, and the effect of state income taxes incurred on a separate legal entity basis.
Total stockholders’ equity of Tiptree Financial was $312.8 million as of December 31, 2015 compared to $284.5 million as of December 31, 2014. The primary reason for the change in Tiptree Financial’s stockholders’ equity was from the increases due to the issuance of shares for the Company’s acquisition of Reliance, shares issued for compensation, changes in non-controlling interests and net income, offset by decreases related to dividends paid and stock purchased under the stock purchase plans described above in “Part II-Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Purchases of Equity Securities by the Issuer and Affiliated Purchasers.”
Consists of future payments of $5.2 million to Geoffrey Kauffman, our former Co-Chief Executive Officer, payable in three equal installments in June 2016, January 2017 and January 2018 pursuant to a separation agreement, dated as of November 10, 2015. Does not include a separation payment of $1.3 million paid to Mr. Kauffman in December 2015.
Segment EBITDA and Adjusted EBITDA from continuing operations - Year Ended December 31, 2015 and December 31, 2014
Tiptree is a holding company and its liquidity needs are primarily for interest payments on the Fortress credit facility, compensation, professional fees, office rent and insurance costs.
As of December 31, 2015, the Company had unrestricted cash of $69.4 million compared to $53.0 million at December 31, 2014, a net increase of $16.4 million primarily consisting of cash proceeds from the sale of PFG offset by cash used in operating and investing activities.
flexibly fund preliminary capital contributions to leveraged business or assets. 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. Operating Company is required to make quarterly principal payments of $500,000, 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. Operating Company’s outstanding debt under the Fortress credit agreement was $45.5 million as of December 31, 2015 compared to $47.5 million as December 31, 2014. See Note 17-Debt, net for additional information of the debt of Tiptree and its subsidiaries.
Cash used in investing activities from continuing operations (excluding VIEs) was $263.2 million for the year ended December 31, 2015. The primary drivers of these investments were our: investments in NPLs, investments in real estate properties at Care, acquisition of Reliance and Fortegra’s acquisition of the remaining 37.6% of ProtectCell.
Cash provided by investing activities - VIEs was $44.0 million for the year ended December 31, 2015. The primary driver of the increase in cash from investing activities - VIEs was proceeds from loan repayments and sales of loans, net of purchases of loans.
Cash provided by financing activities - VIEs was $8.6 million for the year ended December 31, 2015. The primary driver of the cash provided by financing activities - VIEs was the sale of the subordinated notes issued by Telos 2 and Telos 4 during the second quarter of 2015.
Cash used in financing activities - discontinued operations was $(5.0) million for the year ended December 31, 2015. The primary driver of the cash used in financing activities - discontinued operations was the repayment of debt outstanding.
Cash provided by operating activities - VIEs was $22.0 million for the year ended December 31, 2014. The primary source of cash from operating activities - VIEs was the net gains on sale of loans in the CLOs.
The table below summarizes Tiptree’s consolidated contractual obligations by period for payments that are due as of December 31, 2015:
Mortgage notes payable include mortgage notes entered into by subsidiaries of Care LLC in connection with its acquisition of several properties and the mortgage note entered into by Luxury Mortgage Corp. with the Bank of Danbury (see Note 17-Debt, in the accompanying consolidated financial statements).
On September 18, 2013, Operating Company entered into a credit agreement with Fortress and borrowed $50.0 million under the credit agreement. The credit agreement also included an option for Operating Company to borrow additional amounts up to a maximum aggregate of $125.0 million, subject to satisfaction of certain customary conditions. On January 26, 2015, Tiptree entered into a First Amendment to its existing Fortress credit agreement (the “Amendment”) providing for additional term loans in an aggregate principal amount of $25.0 million to Tiptree. Tiptree paid down $25.0 million of the loans under the Fortress credit agreement upon the closing of the PFG sale on June 30, 2015 (see Note 17-Debt, in the accompanying consolidated financial statements, for further detail).
On July 25, 2013, Siena closed on a line of credit with Wells Fargo Bank. As of December 31, 2015 this revolving line is $75.0 million with an interest rate of LIBOR plus 225 basis points and a maturity date of October 17, 2019. As of December 31, 2015, there was $36.2 million outstanding on this line (see Note 17-Debt, in the accompanying consolidated financial statements).
Fortegra has a $15.0 million revolving line of credit agreement (the “Line of Credit”) with Synovus Bank, entered into on October 9, 2013, with a maturity date of April 30, 2017. The Line of Credit bears interest at a rate of 300 basis points plus 90-day LIBOR, and is available specifically for the South Bay premium financing product. The weighted average rate paid for the year ended December 31, 2015 was 3.30%.
Minimum rental obligation for Tiptree, Care, MFCA, Siena, Luxury and Fortegra office leases. The total rent expense for the Company for the year ended December 31, 2015 and 2014 was $5.8 million and $1.5 million, respectively.
Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures, defines fair value, describes the framework for measuring fair value, and addresses fair value measurement disclosures. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Although we sell substantially all of the loans we originate in our mortgage business, we remain subject to claims for repurchases or indemnities related to mortgage loans we originate in the event of early payment defaults or breaches of representations and warranties regarding loan quality, compliance and certain other loan characteristics. A reserve estimated for probable claims are based on historical experience and is calculated as a reduction to gain on sale on all of the loans we originate. Management reviews its methodology annually or more often if representation and warranty claims patterns change.
Service Fees. Service fee revenue is recognized as the services are performed. These services include fulfillment, software development, and claims handling for our customers. Collateral tracking fee income is recognized when the service is performed and billed. Management reviews the financial results under each significant contract on a monthly basis. Any losses that may occur due to a specific contract would be recognized in the period in which the loss is determined probable. During the years ended December 31, 2015 and December 31, 2014, the Company did not incur a loss with respect to a specific significant service fee contract.
Administrative Fees. Administrative fee revenue includes the administration of credit insurance, debt cancellation programs, motor club programs, and warranty programs. Related administrative fee revenue is recognized consistent with the earnings recognition pattern of the underlying insurance policies, debt cancellation contracts and motor club memberships being administered, using Rule of 78's, modified Rule of 78's, pro rata, or other methods as appropriate for the contract. Management selects the appropriate method based on available information, and periodically reviews the selections as additional information becomes available.
Net earned premium is from direct and assumed earned premium consisting of revenue generated from the direct sale of payment protection insurance policies by the Company's distributors and premiums written for payment protection 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.
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, 2015 and December 31, 2014, respectively.
Our mortgage origination subsidiaries enter into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes, as well as commitments to sell real estate loans to various investors. Substantially all of the commitments by our mortgage origination subsidiaries to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Other than these commitments to originate and sell loans, the Company did not guarantee any obligations of unconsolidated entities, or express intent to provide additional funding to any such entities. Other than the consolidation of Telos 5 and Telos 6, Tiptree does not maintain any other relationships with unconsolidated entities or financial partnerships, special purpose or VIEs, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2015, Tiptree did not guarantee any obligations of unconsolidated entities, enter into any commitments or express intent to provide additional funding to any such entities.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tiptree Financial Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
We have audited Tiptree Financial Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Tiptree Financial 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 Annual 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.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets, statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2015 of Tiptree Financial Inc.
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2015 consolidated financial statements, and this report does not affect our report dated March 15, 2016, which expressed an unqualified opinion on those consolidated financial statements.
Tiptree Financial Inc. acquired certain Care real estate properties and Reliance First Capital, LLC (Reliance) during 2015, and management excluded from its assessment of the effectiveness of Tiptree Financial Inc.’s internal control over financial reporting as of December 31, 2015, certain Care real estate properties and Reliance’s internal control over financial reporting associated with total assets of $28.5 million and $72.7 million, respectively and total revenues of $8.8 million and $22.9 million, respectively,
Tiptree Financial Inc. (Tiptree and, together with its consolidated subsidiaries, collectively, the Company, or We) is a Maryland Corporation that was incorporated on March 19, 2007. Until July 1, 2013, Tiptree operated under the name Care Investment Trust Inc. (which, for the period prior to July 1, 2013, we refer to as Care Inc.). Tiptree is a diversified holding company which conducts its operations through Tiptree Operating Company, LLC (the Operating Company). Tiptree’s primary focus is on five reporting segments: insurance and insurance services, specialty finance, real estate, asset management, and corporate and other. Tiptree’s Class A Common Stock is traded on the NASDAQ Capital Market under the symbol “TIPT”.
The accompanying consolidated financial statements of Tiptree have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) and include the accounts of the Company and its controlled subsidiaries.
Non-controlling interests on the Consolidated Statements of Operations represent the ownership interests in certain consolidated subsidiaries held by entities or persons other than Tiptree. Accounts and transactions between consolidated entities have been eliminated.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. Management makes estimates and assumptions that include but are not limited to the determination of the following significant items:
The Company accounts for acquisitions 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 the contingent consideration is remeasured at each reporting date with any change recorded in other income in the Consolidated Statements of Operations.
Deferred tax assets and liabilities are determined using the asset and liability method. Under this method, deferred tax assets and liabilities are established for future tax consequences of temporary differences between the financial statement carrying amounts of assets and liabilities and their tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to reverse. A valuation allowance is established when necessary to reduce a deferred tax asset to the amount expected to be realized. Several of the Company’s subsidiaries, file both federal and state tax returns on a standalone basis. These U.S. federal and state income tax returns, when filed, will be subject to examination by the Internal Revenue Service and state departments of revenue. See Note
The Company calculates EPS using the two-class method, which is an earnings allocation formula that determines EPS for common shares and participating securities. Unvested restricted share units contain non-forfeitable rights to distributions or distribution equivalents (whether paid or unpaid) and are participating securities that shall be included in the computation of EPS using the two-class method. Accordingly, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive distributions. The participating securities do not have a contractual obligation to absorb losses and are only allocated in periods where there is income from continuing operations.
The Company’s restricted cash primarily consists of cash for unremitted premiums received from agents and insurers, fiduciary cash for reinsurers and pledged assets for the protection of policy holders in various state jurisdictions.
AFS are securities that are not classified as trading or held-to-maturity, intended to be held for indefinite periods of time and include those debt and equity securities that management may sell as part of its asset/liability management strategy or in response to changes in interest rates, resultant prepayment risk or other factors. AFS securities are held at fair value on the Consolidated Balance Sheet with changes in fair value, net of related tax effects, recorded in the accumulated other comprehensive income (AOCI) component of stockholders’ equity in the period of change. Upon the disposition of an AFS security, the Company reclassifies the gain or loss on the security from accumulated other comprehensive income (loss) to net realized and unrealized gains (losses) on the Consolidated Statements of Operations.
Trading securities are investments consisting of debt and equity securities that are purchased principally for the purpose of selling them in the near term. Trading securities are recorded within other assets and other liabilities and accrued expenses and carried at fair value, with changes in fair value recorded in net realized and unrealized gains (losses) on investments on the Consolidated Statements of Operations in the period of change.
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 other expenses 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.
The Company has elected the fair value option for NPLs as we have concluded that fair value timely reflects the results of our investment performance. As substantially all of our loans were non-performing when acquired, we generally look to the estimated fair value of the underlying property collateral to assess the recoverability of our investments. We primarily utilize the local broker price opinion (BPO) but also consider any other comparable home sales or other market data, as considered necessary, in estimating a property’s fair value. For further discussion on the observable and unobservable inputs to the model and determination of fair value of NPLs, see Note 9-Fair Value of Financial Instruments.
Other investments in loans managed by the Company contain a diversified portfolio of middle market leveraged loans carried at estimated fair value. In general, the fair value of leveraged loans are obtained from an independent pricing service which provides secondary coverage of market participants. The values represent a composite of mark-to-market bid/offer prices. In certain circumstances the Company will make its own determination of fair value of leveraged loans based on internal models and other unobservable inputs.
Interest income is generally recognized using the effective interest method or on a basis approximating a level rate of return over the term of the loan. Nonaccrual loans are those on which the accrual of interest has been suspended. Loans are placed on nonaccrual status and considered nonperforming when full payment of principal and interest is in doubt, or when principal or interest is 90 days or more past due and collateral, if any, is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against interest income. In addition, the amortization of net deferred loan fees is suspended. Interest income on nonaccrual loans may be recognized only to the extent it is received in cash. However, where there is doubt regarding the ultimate collectability of loan principal, cash receipts on such nonaccrual loans are applied to reduce the carrying value of such loans. Nonaccrual loans may be returned to accrual status when repayment is reasonably assured and there has been demonstrated performance under the terms of the loan or, if applicable, the restructured terms of such loan. The Company did not have any originated loans on nonaccrual status as of December 31, 2015 or December 31, 2014.
Mortgage loans held for sale represent loans originated and held until sold to secondary market investors. Mortgage loans are typically warehoused for a period after origination or purchase before sale into the secondary market. Servicing rights are released upon sale of mortgage loans in the secondary market. The Company has elected to measure all mortgage loans held for sale at fair value. These loans are considered sold when the Company surrenders control to the purchaser. Loan sales are accounted for as sales of mortgage loans and the resulting gains or losses on such sales, net of any accrual for standard representations and warranties, are reported in operating results as a component of gain (loss) on mortgage loans held for sale in the Consolidated Statement of Operations in the period when the sale occurs.
Notes receivable includes receivables from its real estate partners and receivables from its commercial businesses for its premium financing program and from consumers for its pay us later financing program.
Accounts and premiums receivable from the Company’s insurance services business are presented net of the allowance for doubtful accounts and consist primarily of advance commissions and agents' balances in course of collection and billed but not collected policy premiums. For policy premiums that have been billed but not collected, the Company records a receivable on its balance sheet for the full amount of the premium billed, with a corresponding liability, net of its commission, to insurance
The Company defers certain costs of acquiring new and renewal insurance policies and other products within the Company’s insurance and insurance services segment.
Insurance policy related deferred acquisition costs are limited to direct costs that resulted from successful contract transactions and would not have been incurred by the Company's insurance company subsidiaries had the transactions not occurred. These capitalized costs are amortized as the related premium is earned.
We convert NPLs into REO through foreclosure (when we have obtained title to the property) or other resolution process (e.g., through a deed-in-lieu of foreclosure transaction). The fair value of these assets at the time of transfer to REO is estimated using BPOs, and if the property meets held-of-sale criteria, it is initially recorded at fair value less costs to sell as its cost basis. Subsequently, the property is carried at (i) the fair value of the asset minus the estimated costs to sell the asset or (ii) the cost of the asset.
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, 2015 and December 31, 2014, no deficiency reserves were recorded.
exposure, and loss severity, which is based on the average size of claims. Factors affecting loss frequency and loss severity may include changes in claims reporting patterns, claims settlement patterns, judicial decisions, legislation, economic conditions, morbidity patterns and the attitudes of claimants towards settlements.
selects the appropriate method based on available information, and periodically reviews the selections as additional information becomes available.
Rental revenue from residents in properties owned by Care but managed by a management company pursuant to a management agreement (Managed Properties) are recognized monthly as services are provided, as lease periods for residents are short-term in nature. The Company recognizes rental revenue from triple net leases (Triple Net Lease Properties) in accordance with ASC Topic 840, Leases which requires that revenue be recognized on a straight-line basis over the non-cancelable term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. Renewal options in leases with rental terms that are higher than those in the primary term are excluded from the calculation of straight line rent if the renewals are not reasonably assured. The Company commences rental revenue recognition when the tenant takes control of the leased space. The Company recognizes lease termination payments as a component of rental revenue in the period received, provided that there are no further obligations under the lease.
Member benefit claims represent claims paid on behalf of contract holders directly to third party providers for roadside assistance and for the repair or replacement of covered products. Claims can also be paid directly to contract holders as a reimbursement payment, provided supporting documentation of loss is submitted to the Company. Claims are recognized as expense when incurred.
In January 2014, the FASB issued ASU 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40), Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure. This amendment clarifies when an in substance repossession or foreclosure has occurred. Additionally, this amendment requires disclosure of the amount of foreclosed residential real estate property held and the recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure. The adoption of ASU 2014-04 did not have an impact on the Company's consolidated financial position, results of operations and cash flows.
In August 2014, the FASB issued ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity. This pronouncement is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. ASU 2014-13 provides for a measurement alternative whereby a company can measure both the financial assets and financial liabilities of its CLOs using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. The Company elected to early adopt ASU 2014-13 for the year ended December 31, 2014 as it pertains to the CLOs it consolidates and elected to apply it retrospectively to all relevant prior periods. The application of this new guidance resulted in adjustments to certain balances in the previously issued Consolidated Balance Sheets, Consolidated Statements of Operations, and Consolidated Statements of Cash Flows for the year ended December 31, 2014, as well as for the interim periods ending March 31, 2014, June 30, 2014, and September 30, 2014.
In May 2015, the FASB issued ASU 2015-08, Business Combinations (Topic 805): Pushdown Accounting-Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115 (SEC Update). ASU 2015-08 removes references to the SEC’s SAB Topic 5.J on pushdown accounting from ASC 805-50. The Commission’s Staff Accounting Bulletin, "SAB" 115 had superseded the guidance in SAB Topic 5.J in connection with the FASB’s November 2014 release of ASU 2014-17. The amendments in ASU 2015-08 therefore conform to the FASB’s guidance on pushdown accounting with the SEC’s. The amendments are effective upon issuance (May 12, 2015). The adoption of this standard did not have a material impact on the Company's consolidated financial position, results of operations and cash flows.
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
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 will be effective for the Company on January 1, 2016 and early adoption is permitted. The Company does not anticipate that the adoption of this standard will have a material impact on its Consolidated Balance Sheets, results of operations and cash flows.
In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which eliminates the requirement for entities to categorize within the fair value hierarchy investments for which fair values are measured at net asset value (NAV) per share (FASB ASC Subtopic 820-10). ASU 2015-07 also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the NAV per share practical expedient, instead limiting disclosures to investments for which the entity has elected the expedient. ASU 2015-07 is effective for the Company on January 1, 2016 and early adoption is permitted and retrospective adoption is required. The Company does not anticipate that the adoption of this standard will have a material impact on its Consolidated Balance Sheets, results of operations and cash flows.
In May 2015, the FASB issued ASU 2015-09, Financial Services-Insurance (Topic 944): Disclosures about Short-Duration Contracts, which expands the disclosure requirements for insurance companies that issue short-duration contracts (typically one year or less) to provide users with additional disclosures about the liability for unpaid claims and claim adjustment expenses and to increase the transparency of the significant estimates management makes in measuring those liabilities. In addition, the disclosures will serve to increase insight into an insurance entity’s ability to underwrite and anticipate costs associated with claims as well as provide users of the financial statements a better understanding of the amount and uncertainty of cash flows arising from insurance liabilities, the nature and extent of risks on short-duration contracts and the timing of cash flows arising
from insurance liabilities. ASU 2015-09 will be effective for the Company for the annual period beginning after December 15, 2015, and for interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the effect upon its financial statements.
In August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, which clarifies the treatment of debt issuance costs from line-of-credit arrangements after the adoption of ASU 2015-03. ASU 2015-15 clarifies that the SEC staff would not object to an entity deferring and presenting debt issuance costs related to a line-of-credit arrangement as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of such arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company is currently evaluating the effect upon its financial statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes - Balance Sheet Classification of Deferred Taxes (Subtopic 740), which requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this update. ASU 2015-17 is effective for reporting periods beginning after December 15, 2016, with early adoption permitted. An entity can elect to adopt ASU 2015-17 either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. If applied prospectively, an entity is required to include a statement that prior periods were not retrospectively adjusted. If applied retrospectively, an entity is also required to include quantitative information about the effects of the change on prior periods. The Company does not anticipate that the adoption of this standard will have a material impact on its Consolidated Balance Sheet, results of operations and cash flows.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 supersedes the previous leases standard, Leases (Topic 840). The standard is effective on January 1, 2019, with early adoption permitted. The Company is in the process of evaluating the impact the adoption of ASU 2016-02 will have on our financial position or results of operations.
For the year ended December 31, 2015, the company paid deposits of $125 for future acquisitions that had not closed as of December 31, 2015.
Supplemental pro forma results of operations have not been presented for the above 2015 business acquisitions as they are 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 it did not own and now owns 100% of ProtectCELL. Upon exercising the option, Fortegra made an initial payment of $3,000. Upon the conclusion of arbitration, Fortegra accrued $4,100 as of December 31, 2015.
On December 4, 2014, the Company completed the acquisition of Fortegra for total consideration of $211,740 comprised of cash on hand of $91,740 and borrowings of $120,000 in exchange for 100% ownership. Fortegra’s products include payment protection products, motor club memberships, service contracts, device and warranty services, as well as administration services to business partners, including insurance companies, retailers, dealers, insurance brokers and agents and financial services companies. The primary reason for the Company’s acquisition of Fortegra is to expand its insurance and insurance services operations.
For the year ended December 31, 2014, revenue and net income were $26,174 and $1,461, respectively.
During 2015, measurement period adjustments were made based on the valuation of assets acquired and liabilities assumed. The adjustments included a decrease to goodwill of $3,589 and other assets by $39 and an increase to reinsurance receivables by $9,220 and other intangibles assets by $500 and other receivables by $1,673. The Company made corresponding increases to other liabilities and accrued expenses by $6,270, commissions payable by $1,313, and deferred tax liabilities by $287, and decreases to non-controlling interests by $105.
The company completed the acquisition of 67.5% ownership of Luxury Mortgage Corp. (Luxury) for $1,519 on January 31, 2014 and is considered as an acquisition of a business. The primary reason for the Company’s acquisition of Luxury is to expand its mortgage origination operations.
On October 1, 2014, affiliates of Care and affiliates of Greenfield Holdings, LLC (Greenfield) acquired three seniors housing communities for $30,518 (which includes a deposit of $925, of which $425 and $500 were paid in the second and third quarter of 2014, respectively). This acquisition was financed with $23,095 of mortgage debt (of which $21,625 was drawn at close, with the remainder to be used upon financing future capital expenditure projects) and the remainder paid with cash on hand. The mortgage debt carries a variable rate of 30-day LIBOR plus 3.20% and matures on October 1, 2019. The amount of the mortgage debt may be increased one year after closing by an additional $2,000 subject to meeting certain terms and conditions. Affiliates of Care paid $24,421 for an 80% interest while affiliates of Greenfield paid for the remaining 20% interest. Affiliates of Greenfield also 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. The purchase of the Greenfield portfolio is considered an acquisition of a business in accordance with ASC 805.
On June 30, 2015, the Company completed the previously announced sale of its Philadelphia Financial Group (PFG) subsidiary. The Company received total cash of $142,837 and will receive two future payments over the next two years totaling approximately $7,341. The gain on the sale net of tax, was approximately $15,619, which is classified as a gain on sale from discontinued operations. The Company has reclassified the income and expenses attributable to PFG to income from discontinued operations, net for the year ended December 31, 2015 and December 31, 2014.
(1) Amount excludes $7,765 of non-controlling interests sold in connection with the sale of PFG.
During the year ended December 31, 2014, management changed its reportable operating segments. The Company now has five reportable operating segments, which are: (i) insurance and insurance services, (ii) specialty finance, (iii) real estate, (iv) asset management and (v) corporate and other. The Company’s operating segments are organized in a manner that reflects how management views these strategic business units.
Insurance and Insurance Services operations are conducted through Fortegra, a specialized insurance company that offers a wide array of consumer related protection products, including credit-related insurance, mobile device protection, and warranty and service contracts. Fortegra also provides third party administration services to insurance companies, retailers, automobile dealers, insurance brokers and agents and financial services companies.
Siena’s business consists of structuring asset-based loan facilities across diversified industries which include manufacturing, distribution, wholesale, and service companies. Our mortgage origination business includes Luxury, a residential mortgage lender that originates loans, including prime jumbo and super jumbo mortgages for sale to institutional investors and Reliance, a residential mortgage lender that originates loans, primarily GSE and FHA/VA mortgages, focusing on refinancing with a call center model.
All of the Company’s investments in available for sale securities as of December 31, 2015 and December 31, 2014 are held by Fortegra. Investments in available for sale securities held by PFG as of December 31, 2014 are included in assets held for sale.
The following tables present the Company's investments in available for sale securities:
The following tables summarize the gross unrealized losses on available for sale securities in an unrealized loss position:
The unpaid principal balance and fair value of held for sales that are 90 days or more past due were $142 and $82, respectively, as of December 31, 2015. There were no amounts that are 90 days or more past due as of December 31, 2014.The Company discontinues accruing interest on all loans that are 90 days or more past due.
Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized within Level 3 of the fair value hierarchy.
The Company’s fair value measurement is based on a market approach, which utilizes prices and other relevant information generated by market transactions involving identical or comparable financial instruments. Sources of inputs to the market approach include third-party pricing services, independent broker quotations and pricing matrices. Management analyzes the third party valuation methodologies and its related inputs to perform assessments to determine the appropriate level within the fair value hierarchy and to assess reliability of values. Further, management has a process in place to review all changes in fair value that occurred during each measurement period. Any discrepancies or unusual observations are followed through to resolution through the source of the pricing as well as utilizing comparisons, if applicable, to alternate pricing sources.
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.
NPLs converted to REOs were measured at fair value on a non-recurring basis during the year ended December 31, 2015 (the Company did not have investments in REO status in prior year period). The carrying value of REOs at December 31, 2015 was $2,197. Upon conversion to REO the fair value is estimated using BPOs. BPOs are subject to judgments of a particular broker formed by visiting a property, assessing general home values in an area, reviewing comparable listings, and reviewing comparable completed sales. These judgments may vary among brokers and may fluctuate over time based on housing market activities and the influx of additional comparable listings and sales.
(1) All transfers are deemed to occur at end of period. Transfers between Level 2 and 3 were a result of subjecting third-party pricing on both CLO and Non-CLO assets to various liquidity, depth, bid-ask spread and benchmarking criteria as well as assessing the availability of observable inputs affecting their fair valuation.
The following table represents additional information about liabilities that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value for the following periods:
ASC Topic 820, as amended by ASU 2011-04, requires disclosure of the following quantitative information about Level 3 significant unobservable inputs used in fair valuation. Disclosure of this information is not required in circumstances where a valuation (unadjusted) is obtained from a third-party pricing service and the information regarding the unobservable inputs is not readily available to the Company.
Additionally, the following financial assets and liabilities on the Consolidated Balance Sheets are not carried at fair value:
Cash and Cash Equivalents: The carrying amounts of cash and cash equivalents are carried at cost which approximates fair value. Categorized as Level 1 of the fair value hierarchy.
Accounts and premiums receivable, net, and other receivables: The carrying amounts approximate fair value since no interest rate is charged on these short duration assets. Categorized as Level 2 of the fair value hierarchy.
Loans Owned, at Amortized Cost: The fair value of loans owned, at amortized cost is computed by discounting the expected future cash flows at market rates. Variable rate lines of credit outstanding are assumed to be at fair value. Categorized as Level 3 of the fair value hierarchy.
Care owns a 75% interest in Care Cal JV LLC, which through two subsidiaries, owns what are referred to as the Calamar Properties. Affiliates of Calamar Enterprises, Inc. (Calamar) own a 25% interest in Care Cal JV LLC. In connection therewith, a subsidiary of Care Cal JV LLC issued notes to affiliates of Calamar. The cost basis of the notes at December 31, 2015 and December 31, 2014 was approximately $3,807 and $3,865, respectively. As of December 31, 2015, all of these notes were performing.
As of December 31, 2015, Fortegra held $17,889 in notes receivable, net. The majority of these notes totaling $12,216 consist of receivables from Fortegra’s premium financing program. A total of $1,482 was for notes receivable under its Pay us Later Program, which allows customers to finance the cost of electronic mobile devices and or protection programs on these devices. The remaining $4,191 represents unsecured notes receivable issued to various business partners in order to solidify relationships and grow its business. The Company has established a valuation allowance against its notes receivable of $885 as of December 31, 2015. As of December 31, 2015, there were $1,553 in balances classified as 90 days plus past due.
The following table presents the effect of reinsurance on losses and loss adjustment expenses (LAE) incurred by Fortegra for the following period:
At December 31, 2015, the three unrelated reinsurers from whom Fortegra has the largest receivable balances were: London Life Reinsurance Company (A. M. Best Rating: A); London Life International Reinsurance Corporation (A. M. Best Rating: not rated); and MFI Insurance Company, LTD (A. M. Best Rating: Not rated). The related receivables of London Life International Reinsurance Corporation and MFI Insurance Company, LTD are collateralized by assets held in trust accounts and letters of credit due to their offshore relationships. At December 31, 2015, the Company does not believe there is a risk of loss as a result of the concentration of credit risk in the reinsurance program.
(1) Represents a single family residential property located in Connecticut that is being rented through the Company's subsidiary, Luxury.
The following table presents the amortization expense on intangible assets for the next five years by relevant segment:
The following table presents the components of Other assets as reported in the Consolidated Balance Sheets:
The Company enters into to be announced (TBA) mortgage backed securities which facilitate hedging and funding by allowing the Company to prearrange prices for mortgages that are in the process of originating. The Company utilizes these hedging instruments for Agency (Fannie Mae and Freddie Mac) and FHA/VA (Ginnie Mae) eligible IRLCs and typically commit them to investors at prices higher than otherwise available.
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 Company, through its subsidiary Telos Asset Management LLC (Telos), is a CLO manager of six CLOs; namely Telos CLO 2014-6, Ltd. (Telos 6), Telos CLO 2014-5, Ltd. (Telos 5), Telos CLO 2013-4, Ltd. (Telos 4), Telos CLO 2013-3, Ltd. (Telos 3), Telos CLO 2007-2, Ltd. (Telos 2) and Telos CLO 2006-1, Ltd. (Telos 1). Prior to the adoption of ASU 2015-02, the Company determined that it was the primary beneficiary of all six CLOs.
In April 2015, the Company sold all of the subordinated notes of Telos 2 held by the Company for total proceeds of $19,740. In May 2015, the Company sold all of the subordinated notes of Telos 4 held by the Company for total proceeds of $19,988. As a result of the sales of the Company’s subordinated notes in Telos 2 and Telos 4, the Company determined that it is no longer the primary beneficiary under the current VIE accounting guidance and both CLOs were deconsolidated in the period in which they were sold.
(1) The unpaid principal balance for these loans is $727,357 and $1,868,752 and the difference between their fair value and UPB is $46,573 and $65,547 at December 31, 2015 and December 31, 2014 respectively.
As summarized in the table below, the application of the measurement alternative as prescribed by ASU 2014-13 results in the consolidated net income summarized above to be equivalent to Tiptree’s own economic interests in the CLOs which are eliminated upon consolidation:
The Company capitalized an aggregate of approximately $1,272 of costs associated with the original transaction and the amendment discussed in the preceding paragraph. The Company is amortizing the costs over the life of the facility. The Company recorded approximately $438 and $254 of expense for the year ended December 31, 2015 and 2014, respectively, related to these capitalized costs.
Also included in debt are any warehouse lines outstanding associated with the Company’s CLOs. As of December 31, 2015 there was $119,480 outstanding for Telos 7.
Operating Company believes it was in compliance with all of the financial covenants contained in the Credit Agreement as of December 31, 2015.
Fortegra believes it was in compliance with the covenants required by the respective Credit Agreement in effect at December 31, 2015.
Fortegra has a $15,000 revolving line of credit agreement (the Line of Credit) with Synovus Bank, entered into on October 9, 2013, with a maturity date of April 30, 2017. The Line of Credit bears interest at a rate of 300 basis points plus 90-day LIBOR, and is available specifically for the South Bay premium financing product. The weighted average rate paid for the year ended December 31, 2015 was 3.30%.
On January 31, 2014, Luxury issued a series of notes to pay several former shareholders of Luxury as part of the acquisition of Luxury by Tiptree. Although the notes accrue interest at a rate of 12.0% per annum, payments to former shareholders are subject to cash available for distribution based on the profitability of Luxury subject to stipulations governed by the note agreements. The notes all mature on January 31, 2021.
In addition to the Citibank line of credit, a subsidiary of Tiptree entered into a warehouse credit facility with Reliance pursuant to which Tiptree may provide up to $20,000 to Reliance for the purpose of originating mortgage loans. As of the date of this report, no amounts are outstanding under this warehouse credit facility.
On July 25, 2013 Siena established a revolving line of credit with Wells Fargo Bank. As of December 31, 2015, this revolving line has a maximum borrowing amount of $75,000 with an interest rate of LIBOR plus 2.25% and a maturity date of October 17, 2019.
The loan with Synovus Bank for the Greenfield Portfolio Managed Properties has an aggregate balance of $23,095 as of
The Housing and Urban Development loan from Red Mortgage Capital for the additional Heritage Portfolio seniors housing community has an aggregate balance of $5,942 as of December 31, 2015. The loan amortizes over a thirty year period at a fixed rate of 4.72%. The loan is secured by a first priority mortgage on the property. As of December 31, 2015, management believes Care is in compliance with the representations and covenants for this loan transaction.
The Company includes in its Consolidated Balance Sheets, as part of liabilities of consolidated CLOs, the debt obligations used to finance the investment in corporate loans and other investments owned by the CLOs that it manages. See Note 16-Assets and Liabilities of Consolidated CLOs, for additional information.
As of December 31, 2015, Tiptree’s authorized capital stock consists of 100,000,000 shares of preferred stock, $0.001 par value, 200,000,000 shares of Class A common stock, $0.001 par value, and 50,000,000 shares of Class B common stock, $0.001 par value. As of December 31, 2015 and December 31, 2014, no shares of preferred stock were issued and outstanding.
As of December 31, 2015 and December 31, 2014, there were 34,899,833 and 31,830,174 shares of Class A common stock issued and outstanding, respectively. As of December 31, 2015 and December 31, 2014, there were 8,049,029 and 9,770,367 shares of Class B common stock issued and outstanding, respectively.
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 if, as and when duly authorized by our board of directors and declared out of assets legally available therefor.
For the year ended December 31, 2015, the Company declared and paid dividends of $0.10, per common share of Class A stock. For the year ended December 31, 2014, the Company did not declare or pay any cash dividends on its common shares of Class A stock.
The following table presents the activity in accumulated other comprehensive income (loss) (AOCI), net of tax, for the following periods:
The following table presents the reclassification adjustments out of AOCI included in net income and the impacted line items on the Consolidated Statement of Operations for the following periods:
During the year ended December 31, 2015, 49,722 shares of immediately vested Class A common stock with an aggregate fair market value of $403 were issued to employees and persons providing services to the Company as incentive compensation under the 2007 Equity Plan. As of December 31, 2015, no common shares remain for future issuance under the 2007 Equity Plan.
A holder of the restricted stock units (RSUs), pursuant to the terms of the restricted stock unit agreement governing the awards, have all of the rights of a stockholder, including the right to vote and receive distributions. The RSUs shall vest and become nonforfeitable with respect to one-third of Tiptree shares granted on each of the first, second and third anniversaries of the date of the grant, and expensed using the straight-line method over the requisite service period as if the award was, in-substance, multiple awards.
The following table summarizes changes to the issuances of Restricted Stock Units under the Company’s 2007 and 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 2015 are 9,302 shares surrendered to pay taxes on behalf of the employees with shares vesting.
During the year ended December 31, 2015, the Company granted 128,599 RSUs to employees of the Company. The RSUs have a grant date value of $993, of which $693 vest over a period of three years beginning January 2016, and the remainder will vest over a period of three years beginning July 1, 2016. During the year ended December 31, 2015, the Company granted 15,000 shares of restricted stock with a grant date value of $110 which is subject to forfeiture until July 1, 2016.
On June 30, 2012, TAMCO, TFP and Tricadia Holdings LP (Tricadia) entered into a transition services agreement in connection with the internalization of the management of Tiptree (TSA). Pursuant to the TSA, Tricadia provides TAMCO and its affiliates, including TFP, with the services of designated officers as well as certain administrative, information technology, insurance, legal and accounting services. The TSA was assigned to the Company in connection with the Contribution Transactions. The Company pays Tricadia specified prices per service (detailed below) which totaled $2,207 and $2,714 for the year ended December 31, 2015 and 2014, respectively.
TFP and Back Office Services Group, Inc. (BOSG) entered into an administrative services agreement on June 12, 2007 (Administrative Services Agreement), which was assigned to the Operating Company on July 1, 2013 in connection with the Contribution Transactions, under which BOSG provides certain back office, administrative and accounting services to the Company including the services of the Company’s Chief Accounting Officer. BOSG is an affiliate of Mariner Investment Group (Mariner). Under the Administrative Services Agreement, the Company pays BOSG a quarterly fee of 0.025% of the Company’s Net Assets, defined as the Company’s total assets less total liabilities, including accrued income and expense, calculated in accordance with GAAP. This fee totaled $529 and $413 for the year ended December 31, 2015 and 2014, respectively. The Administrative Services Agreement has successive one year terms but may be terminated by the Company or BOSG upon 60 days prior notice.
The Company’s income taxes receivable as of December 31, 2015 and December 31, 2014 were $5,810 and $1,691, respectively.
For the year ended December 31, 2014, the Company’s effective tax rate on income from continuing operations was equal to 525.5%, which does not bear a customary relationship to statutory income tax rates. Differences from the statutory income tax rate are primarily the result of: (i) state income taxes; (ii) non-deductible transaction costs incurred on the Fortegra acquisition; and (iii) the effect of changes in valuation allowance on net operating losses reported by TFI, Siena Capital Finance Acquisition Corp., Luxury and MFCA Funding, Inc.
Separate returns are filed for Tiptree and each of the Company’s subsidiaries that are required to file returns (Reliance, Siena Capital Finance Acquisition Corp., Luxury, Fortegra, MFCA Funding, Inc., Care HSL TRS Holdings, and TAMCO Manager Inc.). These subsidiaries file returns in various state jurisdictions, and as such may have state tax obligations. Additionally, as needed the Company will take all necessary steps to comply with any income tax withholding requirements.
As of December 31, 2015, the Company had total U. S. Federal net operating loss carryforwards (NOLs) arising from continuing operations. The NOLs associated with PFG have been reclassified as discontinued operations and are not reflected in the table below. The following table presents the U.S. Federal NOLs by tax year of expiration:
Valuation allowances have been established for net operating loss carryforwards and other deferred assets generated by MFCA Funding, Inc. and Luxury, to the extent management has assessed it is more likely than not they will expire unutilized based on existing positive and negative evidence. Management believes it is more likely than not the remaining net operating loss carryforwards will be utilized prior to their expiration dates. As a result of this assessment, as of December 31, 2015, the consolidated valuation allowance for Tiptree was $965. As of December 31, 2014, the consolidated valuation allowance for Tiptree was $2,708. In 2015, the Company recorded a net decrease in its valuation allowances equal to $1,743, compared with an increase in its valuation allowance of $1,451 in 2014. Note that the valuation allowance excludes the valuation allowances recorded at PFG in the amount of $375 in 2014 which are not included due to the re-classification of PFG to assets held for sale.
As of December 31, 2015 and December 31, 2014, respectively, the Company had no material unrecognized tax benefits or accrued interest and penalties. Federal tax years 2012 through 2014 were open for examination as of December 31, 2015.
(1) Minimum rental obligations for Tiptree, Care, MFCA, Siena, Luxury and Fortegra office leases. For the year ended December 31, 2015 and 2014, rent expense for the Company’s office leases were $5,784 and $1,508, respectively.
Tiptree considers such litigation customary in Fortegra’s lines of business. In management's opinion, based on information available at this time, the ultimate resolution of such litigation, which it is vigorously defending, should not be materially adverse to the financial position of Tiptree. It should be noted that large punitive damage awards, bearing little relation to actual damages sustained by plaintiffs, have been awarded in certain states against other companies in the credit insurance business. At this time, the Company cannot estimate a range of loss that is reasonably possible.
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 did not allocate the loss from continuing operations available to common stockholders to the unvested restricted stock units as those holders do not have a contractual obligation to share in net losses.
(1) 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 attributable to non-controlling interest was $6,294, comprised of $1,939 due to continuing operations and $4,355 attributable to discontinued operations.
On January 11, 2016, Telos CLO 2016-7, Ltd (Telos 7) amended and restated its existing warehouse credit agreement with SG Americas Securities, LLC, as administrative agent, and the other lenders party thereto. The amendment reduces the amount that Telos 7 may borrow during the period between marketing and pricing a CLO and extended the revolving period of the loan.
On March 1, 2016, affiliates of Care and affiliates of Royal entered into an agreement to (i) own and operate a senior housing community and (ii) purchase adjacent land. Care owns a 65% interest in the community, while affiliates of Royal own the remaining 35% interest and an affiliated management company provides management services to the community under a management contract. In connection with the acquisition, Care and Royal secured a $11,218, 5 year loan, which includes 36 months of interest only payments. The amount of the mortgage debt may be increased one year after closing by an additional $1,000 subject to meeting certain terms and conditions. The acquisition related disclosures by ASC 805 cannot be made as the initial accounting for the business transaction is incomplete.
In the first quarter of 2016, the Company and its subsidiaries purchased an additional approximately 5,200,000 common shares of RAIT for an aggregate of $12,600.