The Company, whose operations date back to 2007, currently operates in five reporting segments: insurance and insurance services, specialty finance, asset management, real estate and corporate and other. See “Item 1. Business - Operating Businesses” and Note 6 - Operating Segment Data, 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 is presented on both a consolidated and segment basis.
We acquired Fortegra in December, 2014. The acquisition is expected to generate a significant portion of our revenue and net income in 2015. For 2014, only the revenues earned and expenses incurred from the date of Fortegra’s acquisition have been incorporated in our financial statements. The net results of Fortegra in this limited period reflects certain closing costs and adjustments which we do not foresee recurring in 2015.
Consolidated Statements of Operations - Year ended December 31, 2014 compared with Year ended December 31, 2013
Interest income is earned on the Company’s holdings of bonds and loans. Consolidated interest income was $14.8 million in 2014, compared to $11.7 million in 2013. Interest income was primarily earned from loans made by the Company’s specialty finance and real estate segments and from assets held in our corporate and other segment. Increased interest income in 2014 was attributable primarily to higher interest income from Siena’s expanded lending activities in 2014, which earned an additional $2.1 million of interest income in 2014 and at Luxury, which was acquired in 2014 and earned $1.0 million in 2014.
The Company’s net credit derivative income/(loss) is earned on its credit swap and credit derivative index (CDX) positions. Net credit derivative revenue is the net total of premium income earned and premium expense incurred on our credit derivatives and net unrealized gains and losses from changes in the fair value of our credit derivative transactions. The net credit derivative loss of $1.6 million in 2014 was consistent with the net credit derivative loss of $1.8 million in 2013.
Earned premium, net, was $12.8 million in 2014 and represent direct and assumed earned premiums generated by Fortegra, since its acquisition, from the direct sale of payment protection insurance policies by Fortegra’s distributors and premiums written for payment protection insurance policies by another carrier and assumed by Fortegra. The underlying insurance plans primarily relate to credit protection in the event of job loss or disability.
Further discussion of service and administrative fee income, ceding fees and commissions and net earned premium earned by Fortegra in the period since acquisition is presented in our insurance and insurance services segment analysis, see “- Segment Reporting - Segment Results - year ended December 31, 2014 compared to year ended December 31, 2013 -Insurance and Insurance Services.”
Gain on sale of loans held for sale, net, were $7.2 million which was earned by Luxury from the origination and sale of loans, primarily residential mortgages, since its acquisition in January 2014.
Siena and Luxury earn fees associated with their lending activities which are classified as loan fee income. Loan fee income was $3.7 million in 2014 and $459 thousand in 2013. Siena’s loan fee income was $1.9 million in 2014 and $459 thousand in 2013. The increase in loan fee income in 2014 was attributable to Siena’s increased lending activity in 2014. Luxury earned $1.8 million in loan fees since its acquisition in January 2014.
Professional fees include audit, legal, tax advice, consultancy and other professional fees. Professional fee expenses are incurred by our subsidiary companies and Tiptree and Operating Company. Consolidated professional fee expense was $9.3 million in 2014, compared to $7.1 million in 2013. The increase in professional fees is primarily attributable to higher audit and legal fees associated with the acquisition and sale of subsidiaries.
The Company incurred costs of $6.1 million in connection with its acquisition of Fortegra, including consultancy fees and accelerated stock vesting expenses, which are not expected to be recurring, and have been classified as acquisition costs.
Other expenses were $15.3 million in 2014 and $5.6 million in 2013. Other expenses are incurred by all our segments and primarily consist of office and rent expenses, together with other expenses specific to each of the Company’s operating segments. The increase in other expenses in 2014 was primarily attributable to the expansion in the Company’s business activities including the acquisition of Luxury in 2014 which added $2.9 million of other expenses and Fortegra’s other expenses of $4.0 million incurred in the period since its acquisition.
ASC Topic 810, Consolidations, requires the consolidation of a Variable Interest Entity (“VIE”) into the financial statements of the entity that is considered the VIE’s primary beneficiary (for further discussion, see Note 13-CLOs and Consolidated Variable Interest Entities of the accompanying financial statements). The Company has reviewed the CLOs it manages and determined that these CLOs should be consolidated into the Company’s financial statements.
New accounting guidance (ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity), enables the Company to recognize the value of the financial liabilities of the CLOs as the residual value of: (i) the sum of the fair value of the financial assets and the carrying value of any non-financial assets held temporarily, less (ii) the sum of the fair value of any beneficial interests in the CLOs held by the Company, including the fair value of subordinated debt and interest-only positions issued by the CLOs and unpaid compensation for management services provided by the Company. The Company has elected to early adopt this new accounting guidance and has also elected to apply it retrospectively for all relevant prior periods.
The impact of the early adoption of the change in accounting guidance is that the net income attributed to consolidated CLOs now represents the Company’s economic interests in the CLOs, which includes realized and unrealized gains and losses on the subordinated debt and interest-only positions of the CLOs held by the Company, distributions earned on such debt and positions and the CLO management fees earned by the Company.
Both income and expenses attributable to consolidated CLOs increased over the prior year, primarily due to the increased number of CLOs managed by the Company. On December 31, 2014, the Company managed six CLOs, compared to four CLOs on December 31, 2013. The net income attributable to CLOs was $19.5 million in 2014, compared to $28.9 million in 2013. The decrease in net income in 2014 was primarily attributable to the decline in the net value of subordinated notes held by the Company in 2014 and by a reduction in management fees earned by the Company in 2014. The components of net income attributable to the consolidated CLOs are tabulated below:
debt and positions). The expenses the Company incurs in connection with the management of the CLOs have also been allocated to the asset management segment.
For further discussion of the Company’s CLO income and the costs the Company incurs associated with the management of the CLOs, which are not included in the table above, see “- Segment Reporting - Segment Results - year ended December 31, 2014 compared to year ended December 31, 2013 -Asset Management” and “- Segment Reporting - Segment Results - year ended December 31, 2014 compared to year ended December 31, 2013 - Corporate and Other”.
Included in income from discontinued operations in 2013 was net income of $1.6 million from the Bickford Portfolio which did not recur in 2014. For further information relating to the sale of PFG see the discussion of discontinued operations in Part I of this document and Note 5-Dispositions, Assets Held for Sale and Discontinued Operations, in the accompanying consolidated financial statements.
Net loss available to Class A common stockholders for the year ended December 31, 2014 was $1.7 million compared to net income of $10.4 million for the same period in 2013. The decline in net income available to Class A common stockholders was primarily due to the decline in the Company’s net income from $40.7 million in 2013 to $4.6 million in 2014.
The Company’s total assets were $8.2 billion as of December 31, 2014, compared to $6.9 billion as of December 31, 2013. The $1.3 billion increase in assets is primarily attributable to $760.2 million of assets acquired as a result of the purchase of Fortegra in 2014 and an increase of $572 million in the assets of the consolidated CLOs as a result of the issuance of two new CLOs under management in 2014. Total stockholders’ equity of the Company increased to $401.7 million as of December 31, 2014 compared to $396.9 million as of December 31, 2013. Total stockholders’ equity of Tiptree Financial rose to $284.5 million as of December 31, 2014 compared to $99.0 million as of December 31, 2013. The primary reason for the change in Tiptree Financial Inc. stockholders’ equity was the increased proportion of the Company owned by Class A stockholders as of December 31, 2014 compared with December 31, 2013, coupled with an increase in the Company’s total stockholder equity, as noted above.
Fortegra, which was acquired in December, 2014, was added to the insurance and insurance services segment. PFG, which the Company had agreed to sell in October, 2014, was reclassified as a discontinued operation and removed from the insurance and insurance services segment.
Luxury, a mortgage loan originator, which the Company acquired in January, 2014, was incorporated in the specialty finance segment. The Company had previously included MFCA and Tiptree Direct, which hold the Company’s principal investments, in the specialty finance segment. The results of the principal investments are now included in the corporate and other segment. The Company’s principal investments include CLO subordinated notes, risk mitigation transactions, warehouse holdings, holdings in the Star Asia entities and other corporate investments.
The net income attributable to consolidated CLOs has been allocated to the asset management segment (representing the fees earned from the management of CLOs) and to the corporate and other segment (representing the distributions earned on the CLO subordinated notes and interest-only positions held by the Company and realized and unrealized gains and losses on such debt and positions). The expenses the Company incurs in connection with the management of the CLOs have also been allocated to the asset management segment.
(1) Net income attributable to CLO’s represents the Company’s interest in the CLOs it manages. These interests have been allocated to asset management fees of $11.8 million earned by the Company and net realized and unrealized gains/losses and distributions of $7.8 million received from the subordinated notes and interest-only positions of the CLOs held by the Company.
(1) Net income attributable to CLO’s represents the Company’s interest in the CLOs it manages. These interests have been allocated to asset management fees of $13.2 million earned by the Company and the net realized and unrealized gains/losses and distributions of $15.7 million received from the subordinated notes of the CLOs and interest-only positions held by the Company.
The financial results of our insurance and insurance services segment are comprised of the revenues and expenses of our Fortegra subsidiary since the entity was acquired. The incorporation of full year Fortegra operations will result in a substantial increase in reported segment revenue and expense in 2015. For further discussion of the purchase of Fortegra and the effect of purchase price accounting adjustments made as a result of the acquisition, see Note 4-Business Acquisitions, of the accompanying consolidated financial statements.
Fortegra’s expenses for the period totaled $29.3 million, comprised primarily of interest expense of $637 thousand, payroll and employee commissions expense of $3.5 million, commission expenses of $4.3 million, member benefit claims of $2.7 million, net losses and loss adjustment expense of $3.2 million, depreciation and amortization expenses of $4.3 million and other expenses of $4.0 million.
Fortegra’s payroll and employee commissions expense of $3.5 million includes base salaries, employee commissions and accruals for employee paid time off and bonuses. As of December 31, 2014, Fortegra employed 523 full and part time employees.
During the period, the Company incurred $6.1 million of costs, including consultancy fees and accelerated stock vesting costs, in connection with the Company’s purchase of Fortegra which are not expected to recur. These costs have been included in the insurance and insurance services segment results.
Our specialty finance segment is comprised of Siena, a commercial finance company, which is 62% owned by the Company and Luxury, a mortgage originator which is 67.5% owned by the Company. Siena commenced its operations in April 2013, and Luxury was acquired by the Company in January 2014. Segment results incorporate the revenues and expenses of these subsidiaries since they commenced operations or were acquired.
Siena - year ended December 31, 2014 and nine month period ending December 31, 2013
Siena’s interest income totaled $2.6 million in 2014, compared to $498 thousand in 2013. Total interest income in 2014 consisted of interest income on loans of $1.9 million and amortized origination income of $1.0 million, partly offset by amortization of loan origination expenses of $357 thousand. Interest income in 2013 consisted of interest income on loans of $379 thousand and amortized origination income of $119 thousand. Siena’s average outstanding loan balance was $29.3 million in 2014 and $6.0 million in 2013. The average interest rate earned on the outstanding loans was 6.48% in 2014 and 6.67% in 2013.
Siena’s loan fee income was $1.9 million in 2014, compared to $459 thousand in 2013. Loan fee income in 2014 principally comprised unused line of credit fees of $289 thousand, loan monitoring fees of $491 thousand, collection fees of $213 thousand, consulting fees of $256 thousand and facility cancellation and other fees of $381 thousand. The increase in net interest income and loan fee income was attributable chiefly to the increased volume of loans made in 2014.
Siena’s payroll and employee commission expense was $2.5 million in 2014, compared to $1.7 million in 2013. These expenses were chiefly comprised of wages of $1,253 thousand in 2014 and $904 thousand in 2013, together with bonus expenses of $770 thousand in 2014 and $683 thousand in 2013. Other payroll expenses totaled $445 thousand in 2014 and $145 thousand in 2013, consisting of payroll taxes and employee benefits. The number of Siena employees increased from 7 at the end of 2013 to 13 at the end of 2014.
Professional fees at Siena totaled $448 thousand in 2014 and $292 thousand in 2013. Professional fees included audit, legal, contractor fees, director fees and other professional fees. Siena’s other expenses were $726 thousand in 2014 and $529 thousand in 2013. Other expenses include bad debt expense, bank fees, line of credit fees, technology expense, insurance expense and miscellaneous other offices charges.
Luxury incurred a pre-tax loss of $2.4 million during the year. Revenues earned by Luxury during the eleven months period ended December 31, 2014 were chiefly comprised of gains on loans held for sale of $7.2 million, interest income of $1.0 million on the loans held pending sale to investors and fee income and other income of $1.8 million. Luxury also recorded unrealized gains totaling $664 thousand on derivative and other transactions designed to mitigate the interest rate risk associated with holding mortgages prior to sale to investors.
Interest expense was $809 thousand in the period, representing interest paid on drawings under Luxury’s warehouse lines of credit. Luxury has entered into three warehouse lines of credit agreements totaling $82.5 million. As of December 31, 2014, $27.4 million was outstanding under these lines of credit.
The asset management segment generates fee income from the CLOs under management and from its management of NPPF 1, a portfolio of tax-exempt securities owned by third-party investors.
CLO asset management fees totaled $11.8 million in 2014, compared to $13.2 million in 2013. Although the number of CLOs under management increased from four CLOs as of December 31, 2013 to six CLOs as of December 31, 2014, management fee income declined between 2013 and 2014. The decrease was due principally to the reduction in management fees earned on Telos 1 and Telos 2, which have passed their re-investment period and whose assets are declining, generally resulting in reduced management fees. Fees on Telos 5 and Telos 6, both new in 2014, were earned at a lower rate than the fees generated from Telos 1 and Telos 2. In addition, Telos 5 was launched in May 2014 and Telos 6 in December 2014 which meant that fees from the new CLOs were earned for only a portion of 2014.
Total pre-tax income for the asset management segment was $6.2 million for 2014, compared to $6.9 million in 2013. The decline in net segment income in 2014 was primarily attributable to lower CLO management fees earned in 2014, somewhat offset by lower expenses in 2014.
The real estate segment consists of our Care subsidiary, which primarily acquires and owns seniors housing properties. As of the issuance date of this report, Care’s portfolio consists of 24 properties across 9 states primarily in the Mid-Atlantic and Southern United States. Care’s portfolio is comprised of 5 triple net lease properties, 13 joint venture properties and 6 hybrid triple net lease properties, which are properties where Care owns the real estate and the operator owns the operating company, with the operator paying a contractual annual minimum rent and Care and the operator both sharing in the upside of the property’s net operating income based on agreed metrics.
Care’s investment strategy targets properties and portfolios ranging from $5 million to $250 million with a profile mix of stabilized properties, turnaround properties and development properties. Care’s operating and growth strategy is focused on strategic partnerships with regional operators who are looking for a capital base to grow their current portfolio. This partnership model builds long-term relationships over multiple property transactions and allows operators to focus on facility management while Care focuses on managing capital structure.
Interest expense was $4.1 million in 2014, compared to $1.8 million in 2013. The increase in 2014 was due to additional secured loans financing Care’s purchases of additional properties in 2014. The total amount of loans outstanding under these secured loans was $108.3 million as of December 31, 2014, compared with $82.0 million as of December 31, 2013. Further details of Care’s borrowings are provided in our Liquidity and Capital discussion and in Note 15-Debt, in the accompanying consolidated financial statements.
Other expenses were $5.9 million in 2014, compared to $3.7 million in 2013. Other expenses include property operating expenses, rent and facilities of office premises, office related expenses, management fees to third parties, escrow fees related to mortgage notes payable, property taxes, insurance, and travel related expenses. In 2014, property operating expenses and other office expenses were $2.5 million, rent and facilities expense was $929 thousand, management fees to third parties were $699 thousand, escrow fees were $508 thousand, property taxes were $501 thousand, insurance expense was $308 thousand, start-up costs were $274 thousand, and travel expenses were $118 thousand. In 2013, property operating expenses and other office expenses were $2.5 million, escrow fees were $314 thousand, rent and facilities were $229 thousand, insurance was $212 thousand, and property operating expenses were $131 thousand. The increase in other expenses in 2014 was generally attributable to the expansion in the number of Care’s owned properties in 2013 and 2014.
Revenues and expenses of the corporate and other segment for the year ended December 31, 2014 and 2013, are tabulated below:
Revenues of the corporate and other segment were comprised of realized and unrealized gains on the Company’s principal investments, including: holdings of subordinated notes and interest-only positions issued by CLOs managed by the Company; distributions on those subordinated notes; realized and unrealized gains and losses and interest income from the Company’s portfolio of tax exempt securities; net loss from the short Treasury position and credit derivative risk mitigation transactions; unrealized gain from the Star Asia entities and revenues from the loan warehouse credit facilities established by the Company in anticipation of launching new CLOs.
As of December 31, 2014 and 2013, the Company held total investments at fair value of $97.9 million and $65.4 million respectively, in subordinated notes and interest-only positions issued primarily by CLOs managed by the Company. In 2014, the Company earned a net total of $7.8 million from distributions received and realized and unrealized gains and losses on its holdings of CLO subordinated notes. In 2013, the Company earned a net total of $15.7 million from distributions received and realized and unrealized gains and losses on its holdings of CLO subordinated notes.
The Company has entered into a short Treasury position, and in 2013 also held an interest rate swap position to mitigate the potential negative impact of a general rise in interest rates. The Company has also entered into a credit derivative swap and CDX derivative index positions, buying and selling credit protection on different tranches of risk in differing CDX indices. The credit swap and CDX transactions are designed to mitigate the potential impact of a general deterioration in corporate credit risk.
Net pre-tax results from the risk mitigation transactions was a pre-tax loss of $3.1 million in 2014, compared to a pre-tax gain of $172 thousand in 2013. The Company incurred realized and unrealized losses of $1.2 million in 2014 from its short Treasury and interest rate swap positions and earned realized and unrealized gains of $2.6 million in 2013. Net credit derivative losses on its credit swap and CDX transactions were $1.6 million in 2014, compared to $1.8 million in 2013. Interest expenses incurred in connection with these risk mitigation transactions were $386 thousand in 2014, compared to $695 thousand in 2013.
The Corporate and other segment revenues include income from the Company’s investments in the Star Asia Entities. The Star Asia Entities are Tokyo-based real estate holding companies formed to invest in Asian properties and real estate related debt instruments. The Company earned a total of $3.4 million in 2014, compared to $3.3 million in 2013 from its investments in these entities. The Star Asia Entities revenues in 2014 primarily comprised gains of $2.6 million from Star Asia Opportunity II, LLC’s sale of a property and unrealized gains of $556 thousand from the appreciation in Star Asia Finance, Limited’s shares held by the Company. The Star Asia Entities’ revenue of $3.3 million in 2013 chiefly comprised mark-to-market gains from the Company’s interests in Star Asia Opportunity II, LLC.
Corporate interest expense was $4.3 million in 2014, compared to $1.4 million in 2013. This expense includes the amortization of capitalized costs associated with the Company’s credit agreement with Fortress. Interest expense incurred on the Company’s borrowings under the Fortress line of credit was $4.3 million in 2014, compared to $1.3 million in 2013. Interest expense in 2013 also included $126 thousand paid on a note which was redeemed prior to the end of 2013. Further details of the Company’s borrowings under the Fortress credit agreement are provided in our Liquidity and Capital Resources discussion and analysis and in Note 15-Debt, in the accompanying consolidated financial statements. Corporate operating expenses include payroll, professional fees and other expenses. Payroll expenses, which include salaries, bonuses and benefits totaled $6.4 million in 2014, compared to $6.3 million in 2013. Corporate payroll expense in 2014 was comprised of $665 thousand for the staff and management of the Company’s tax exempt portfolio and $5.8 million of corporate payroll expenses, primarily associated with the head office management, legal and accounting staff. Payroll expenses increased in 2014 as the Company expanded its staff to match the increased scope of its activities.
Management uses EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. We believe that EBITDA and Adjusted EBITDA provide supplemental information useful to investors as it is frequently used by the financial community to analyze performance period to period, to analyze a company’s ability to service its debt and to facilitate comparison among companies. EBITDA and Adjusted EBITDA are not a measurement of financial performance or liquidity under GAAP; therefore, EBITDA and Adjusted EBITDA should not be considered as an alternative or substitute for GAAP. Our presentation of EBITDA and Adjusted EBITDA may differ from similarly titled non-GAAP financial measures used by other companies. We define 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 our financial statements and Adjusted EBITDA as EBITDA adjusted to (i) subtract interest expense on asset-specific debt incurred in the ordinary course of our subsidiaries business operations and (ii) add significant non-recurring costs.
The consolidated non-corporate and non-acquisition related interest expense subtracted from Adjusted EBITDA includes interest expense associated with asset-specific debt at subsidiaries in the Specialty Finance, Real Estate and Corporate and Other segments. For the year ended December 31, 2014, interest expense for the asset-specific debt was $1.5 million for Specialty Finance, $4.1 million for Real Estate, and $1.6 million for Corporate and Other, totaling $7.2 million (as adjusted above). For the year ended December 31, 2013, interest expense for the asset-specific debt was $24 thousand for Specialty Finance, $1.8 million for Real Estate, and $943 thousand for Corporate and Other segments, totaling $2.8 million (as adjusted above).
See Note 5-Dispositions, Asset Held for Sale and Discontinued Operations, in the accompanying consolidated financial statements for further discussion of discontinued operations.
The Company’s principal sources of liquidity are its holdings of cash, cash equivalents and investments and distributions from operating subsidiaries and principal investments, including subordinated notes of CLOs. At December 31, 2014, the Company had unrestricted cash of $52.9 million. We expect to receive a total of approximately $151.5 million of cash (prior to payment of taxes and transaction expenses) upon the sale of PFG. We are required to use $25 million of the proceeds of the sale of PFG to repay borrowings from Fortress described below.
The Company intends to use its cash resources to continue to grow its businesses. Tiptree may seek additional sources of cash to fund acquisitions or investments. These additional sources of cash may take the form of debt or equity and may be at the parent, subsidiary or asset level.
A summary of the long term debt of the Company as of December 31, 2014 is presented below:
(2) The debt outstanding of $47.5 million, net of $743 thousand original issue discount, is $46.8 million.
(3) Fortegra is required to repay the $50 million term loan facility in consecutive quarterly installments of $1.25 million commencing in March 2015.
(4) Fortegra has entered into an interest rate swap agreement that exchanges the floating rate on the trust preferred securities for a fixed rate of 3.47%. Fortegra may redeem the trust preferred securities in whole or part, at a price equal to the full outstanding principal amount plus accrued and unpaid interest.
(5) The payment of interest on Luxury's note due January 2021 is contingent upon Luxury’s performance.
(6) The Care mortgage loans amortize over periods beyond dates due for repayment. Care has also entered into interest rate swap agreements (see Note 14-Derivative Financial Instruments and Hedging).
On December 4, 2014 Fortegra entered into a $140.0 million secured credit agreement with a number of bank lenders, led by Wells Fargo bank, which also acts as administrative agent. The credit agreement provides for a $50 million term loan facility and a $90 million revolving credit facility. As of December 31, 2014, there was $50 million outstanding under the secured term loan and $60 million under the revolving credit facility. The proceeds from the credit agreement were used to complete Tiptree’s acquisition of Fortegra.
Synovus Bank has provided a subsidiary of Fortegra with a $15.0 million revolving credit agreement, of which $7.6 million was outstanding as of December 31, 2014. The proceeds of this facility are used to fund Fortegra’s premium financing business.
Fortegra has issued $35 million of trust preferred securities outstanding, due June 15, 2037. The trust preferred pay interest at a floating rate of 3-month LIBOR plus 4.10%. Fortegra has entered into an interest rate swap that exchanges the floating rate for a fixed rate of 3.47%.
by investing activities in 2014 was largely comprised of proceeds from sales of trading securities, proceeds from loans repaid, and distributions received from partially owned entities. These proceeds were partly offset by purchases of trading securities and loans carried at fair value, cash outlays related to the acquisitions of Fortegra and Luxury, purchases of derivatives and purchases of available for sale securities. Proceeds from sales of trading securities were $589.3 million in 2014, compared with $75.1 million in 2013, an increase of $514.2 million. The increase in the sales of trading securities were largely the result of increased loan warehouse activity in 2014 as compared to 2013. Proceeds from loan repayments were $38.9 million in 2014, which primarily comprised repayments of loans held by Care. Distributions received from partially owned entities were $7.2 million received from Star Asia entities in 2014, compared with $2.7 million received from Care and Star Asia entities in 2013. Purchases of trading securities and loans carried at fair value were $405.5 million in 2014, compared with purchases of $204.6 million in 2013, an increase of $200.9 million. The increase in purchases of trading securities and loans carried at fair value was attributable to increased loan warehouse activity in 2014, as compared to 2013. Cash outlays related to the acquisitions of Fortegra and Luxury totaled $70.5 million in 2014, compared to net amounts of $7.2 million related to acquisitions at Care and the acquisition of Siena in the prior year. Payments related to the purchases of derivatives were $12.5 million in 2014 compared with $2.1 million in 2013. Purchases of available for sale securities were $7.0 million in 2014 and relate to activity at Fortegra.
Cash provided by financing activities for the year ended December 31, 2014 was $363.9 million, compared to $724.2 million in cash provided for the year ended December 31, 2013, a decline of $360.3 million. Cash provided by VIE financing activities was $492.7 million for the period ended December 31, 2014 and $529.6 million for the year ended December 31, 2013. Excluding the activity attributable to VIEs, cash used in financing activities in 2014 was $128.8 million compared to cash provided by financing activities of $194.6 million in 2013, a decline of $323.4 million. The cash used in financing activities in 2014 was largely due to the pay down of loans and mortgage notes payable of $150.3 million, partly offset by proceeds from new loans of $29.1 million. The Company’s warehouse paid down approximately $135.7 million with remaining amounts reflecting the pay down of loans by Tiptree subsidiaries. The $29.1 million in proceeds from loans was largely related to borrowings of $20.5 million and $6.8 million at Tiptree’s subsidiaries Siena and Luxury, respectively.
Mortgage notes payable include mortgage notes entered into by 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 15-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”). The Amendment provides for additional term loans in an aggregate principal amount of $25.0 million to Tiptree and will have the same maturity date, margin above LIBOR, principal repayment terms, and conditions and covenants as the existing term loans under the existing Fortress credit agreement, subject to certain exceptions in the Amendment. Tiptree is required to prepay $25.0 million of the loan upon the closing of the PFG sale (see Note 15-Debt, in the accompanying consolidated financial statements, and Note 25-Subsequent Events, in the accompanying consolidated financial statements, for further detail).
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 2014 was 3.23%.
Tiptree’s subsidiary Siena, issues standby letters of credit for credit enhancements that are required by their borrower’s respective businesses. As of December 31, 2014 there was $5.5 million outstanding relating to these letters of credit.
The consolidated financial statements reflect the consolidated accounts of the Company and (i) its wholly-owned subsidiaries, (ii) subsidiaries in which it has a controlling interest, and (iii) certain VIEs in which Tiptree, through its subsidiaries, is deemed to be the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. This consolidation, particularly with respect to the VIEs, significantly impacts these subsidiaries’ financial statements.
c) Pricing models whose inputs are observable for substantially the full term of the asset or liability; and
The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market, and the current market conditions. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. 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. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Tiptree’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and the consideration of factors specific to the asset. From time to time, Tiptree’s assets and liabilities will transfer between one level to another level. It is Tiptree’s policy to recognize transfers between different levels at the end of each reporting period.
Tiptree utilizes both observable and unobservable inputs into its valuation methodologies. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. In addition, specific issuer information and other market data is used. For broker quotes, quotes are obtained from sources recognized to be market participants. Unobservable inputs may include expected cash flow streams, default rates, supply and demand considerations and market volatility.
We evaluate whether deferred acquisition costs-insurance related are recoverable at year-end, and periodically if deemed necessary, and consider investment income in the recoverability analysis. As a result of our evaluations, no write-offs for unrecoverable deferred acquisition costs were recognized during the year ended December 31, 2014.
We defer certain costs of acquiring new and renewal business related to non-insurance subsidiary transactions. These costs are limited to prepaid direct costs, typically commissions and contract transaction fees, that resulted from successful contract transactions and would not have been incurred by us had the transactions not occurred. These capitalized costs are amortized as the related service and administrative fees are earned.
We evaluate whether deferred acquisition costs - non-insurance related are recoverable at year-end, and periodically if deemed necessary. As a result of our evaluations, no write-offs for unrecoverable deferred acquisition costs were recognized during the year ended December 31, 2014.
Unpaid claims are reserve estimates that are established in accordance with U.S. GAAP using generally accepted actuarial methods. Credit life and AD&D unpaid claims reserves include claims in the course of settlement and incurred but not reported ("IBNR"). Credit disability unpaid claims reserves also include continuing claim reserves for open disability claims. For all other product lines, unpaid claims reserves are bulk reserves and are entirely IBNR. The Company uses a number of algorithms
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 occurs. During the year ended December 31, 2014, we have not incurred a loss with respect to a specific significant service fee contract.
Our payment protection products are sold as complementary products to consumer retail and credit transactions and are thus subject to the volatility of volume of consumer purchase and credit activities. We receive service and administrative fees for administering payment protection products that are sold by our clients, such as credit insurance, debt protection, motor club and warranty solutions. We earn administrative fees for administering debt cancellation plans, facilitating the distribution and administration of warranty or extended service contracts, providing motor club membership benefits and providing related services for our clients. For credit insurance products, our clients typically retain the risk associated with credit insurance products that they sell to their customers through economic arrangements with us. Our payment protection revenue includes revenue earned from reinsurance arrangements with producer owned reinsurance companies ("PORCs") owned by our clients. Our clients
own PORCs that assume the credit insurance premiums and associated risk that they originate in exchange for fees paid to us for ceding the premiums.
In accordance with ASC 740, 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. In accordance with ASC 740, 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, 2014, the consolidated valuation allowance for Tiptree was $2.7 million. The increase and/or decrease in valuation allowance could have a significant negative or positive impact on our current and future earnings. In 2014, the Company recorded a net increase of valuation allowances of $1.5 million as compared to a decrease of $6.8 million in 2013.
The total income tax expense of $4.1 million for the period ended December 31, 2014 is reflected as a component of net income (loss) from continuing operations. This tax expense represents a consolidated total of all of Tiptree’s subsidiaries and excludes $5.5 million related to PFG, which is included in discontinued operations.
For the year ended December 31, 2014, the Company’s effective tax rate on income from continuing operations is equal to 525.5%, which does not bear a customary relationship to statutory income tax rates. Differences from the statutory income tax rates are primarily the result of: (i) non-deductible transaction costs incurred in the Fortegra transactions (ii) the effect of changes in valuation allowance on net operating losses reported by Tiptree Financial, Siena, Luxury, and MFCA, and (iii) the effect of state income taxes required to be reported on a separate legal entity basis resulting in higher aggregate state taxable income than the consolidated pre-tax income from continuing operations.
The Company’s primary tax jurisdiction is the U.S., which currently has a statutory income tax rate of 35%. The Company also operates in several state jurisdictions that have an average combined statutory rate of approximately 5%. The Company is a holding company and several of the subsidiaries file separate federal and state income tax returns, rather than filing tax returns as a single consolidated group with the Company. The U.S. federal and state income tax returns are subject to examination by the Internal Revenue Service and the various state departments of revenue where filings are required.
Luxury enters 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 Luxury’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. In addition, Siena issues standby letters of credit to customers which generally guarantee the borrower’s performance. Other than these commitments to originate and sell loans and letters of credit, 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 1, Telos 2, Telos 3, Telos 4, 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, 2014, Tiptree did not guarantee any obligations of unconsolidated entities, enter into any commitments or express intent to provide additional funding to any such entities.
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013
As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for measuring financial liabilities of its Collateralized Loan Obligations in December 31, 2014 and 2013 due to early adopting ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity.
(1) Amount results from a common control transaction and subsequent reclass.
Tiptree Financial Inc. (Tiptree and, together with its consolidated subsidiaries, collectively, the Company) is a Maryland Corporation that was incorporated on March 19, 2007. Until July 1, 2013, Tiptree previously 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 Company). Tiptree’s primary focus is on five sectors: insurance and insurance services, specialty finance, asset management, real estate, and corporate and other.
The Company completed the acquisition of 67.5% of Luxury in January 2014; therefore, Luxury is consolidated within the Company’s financial statements beginning with the first quarter of 2014 and reported in Tiptree’s specialty finance segment.
In July 2013, Care Inc. completed a transaction with Tiptree Financial Partners, L.P. (TFP) in which Care Inc. contributed substantially all of its assets to Operating Company in exchange for common units in Operating Company representing an approximately 25% interest in Operating Company, and TFP contributed substantially all of its assets (excluding shares of Tiptree’s Class A Common Stock owned by TFP) to Operating Company in exchange for common units in Operating Company representing an approximately 75% interest in Operating Company and the same number of shares of Tiptree’s newly classified Class B Common Stock (Contribution Transactions).
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. The estimates and assumptions most susceptible to change are the valuation of securities, loans, derivative positions, deferred income taxes and acquired assets and liabilities. Although these and other estimates and assumptions are based on the best available estimates, actual results could differ materially from management’s estimates.
Business combinations are accounted for using the purchase method with the related net assets and results of operations included in the Company’s consolidated financial statements as of the respective acquisition date. The assets acquired may consist of a book of business, management contracts, customer relationships, non-compete agreements, trade names, 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.
The results of operations of a business of the Company that have either been disposed of or are classified as held-for-sale are reported in discontinued operations if: (i) the operations and cash flows of the component have been or will be eliminated from the ongoing operations of the Company as a result of the disposal transaction; and (ii) the Company will not have any significant continuing involvement in the operations of the component after the disposal transaction. The Company presents the operations of business that meet the criteria for reporting 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 ceased depreciation on assets transferred.
The Company considers all highly liquid investments of sufficient credit quality with maturities of three months or less to be cash equivalents. Cash and cash equivalents consist of U.S. denominated cash on hand, cash held in banks and investments in money market funds. The Company’s restricted cash primarily consists of cash that is collateral for any U.S. Treasury short position held as well as unremitted premiums received from agents and insurers, fiduciary cash for reinsurers and pledged assets for the protection of policy holders in various state jurisdictions. The cash held by CLOs is restricted for use by the individual CLOs and cannot be distributed to the Company.
Securities classified as available for sale are 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. Securities held as available for sale securities are recorded at fair value, with unrealized gains/(losses), net of related tax effects, reported as other comprehensive income.
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 recognizes all stand-alone derivatives on the consolidated balance sheets at fair value. The changes in the fair values of the derivative financial instruments are reported in the consolidated statements of operations. The Company uses interest rate swaps and credit derivatives as part of its risk management strategy to manage interest rate risk and cash flow risk that may arise in connection with the variable interest rate provision of the Company's preferred trust securities and accounts for this derivative as a cash flow hedge. The Company is exposed to certain risks in connection with its mortgage banking operations at Luxury. The Company is exposed to interest rate risk for certain interest rate lock commitments (IRLCs) until a purchaser for the related underlying loans is identified. The fair value of IRLCs is subject to change primarily due to changes in market interest rates.
Changes in fair value associated with the effective portion of a derivative instrument designated as a qualifying cash flow hedge are recognized initially in other comprehensive income (loss). When the cash flows for which the derivative is hedging materialize and are recorded in income or expense, the associated gain or (loss) from the hedging derivative previously recorded in AOCI is recognized in earnings. If a cash flow hedge is de-designated because it is no longer highly effective, or if the hedge relationship is terminated, the cumulative gain or loss on the hedging derivative to that date will continue to be reported in AOCI unless the hedged forecasted transaction is no longer expected to occur, at which time the cumulative gain or loss is recorded into earnings.
Substantially all loans originated by the Company are held for sale to permanent investors. The Company has elected to record all mortgage loans held for sale at fair value. The fair value of loans held for sale is determined using quoted prices (level 2 inputs) and is determined on a loan by loan basis. These loans are considered sold when the Company surrenders control of the loans to the purchaser, with standard representations and warranties. Losses related to recourse provisions, if any, are accrued as a liability at the time such losses are determined. The Company does not retain any rights or obligations to service the loans following the closing of sales. Interest income on mortgage loans held for sale is recognized as earned and is only accrued if deemed collectible. Gain on sale income from these loans, represents the difference between the fair value and the selling price of the related loan sold as well as any fee income earned at origination.
based on internal models and other unobservable inputs and the Company classified these leveraged loans as Level 3. The changes in fair values of investments in loans are reported in the consolidated statements of operations.
Certain loans held for investment are held 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.
The Company defers nonrefundable loan origination and commitment fees collected on originated loans and amortizes the net amount as an adjustment of the yield over the estimated life of the loan. If a loan is prepaid, the net deferred amount is recognized in the consolidated statements of operations at that time. Interest and fees on loans include prepayment fees and late charges collected.
Fortegra has various reinsurance agreements in place whereby the amount of risk in excess of Fortegra’s retention goals is reinsured by unrelated domestic and foreign insurance companies. Fortegra remains liable to policyholders in the event that the assuming companies are unable to meet their obligations. Reinsurance receivables include amounts related to paid benefits, unpaid benefits and prepaid reinsurance premiums. Reinsurance receivables are based upon estimates and are reported on the consolidated balance sheets separately as assets, as reinsurance does not relieve Fortegra of its legal liability to policyholders. Fortegra is required to pay losses even if a reinsurer fails to meet its obligations under the applicable reinsurance agreement. Management continually monitors the financial condition and agency ratings of Fortegra's reinsurers and believes that the reinsurance receivables accrued are collectible. Balances recoverable from reinsurers and amounts ceded to reinsurers relating to the unexpired portion of reinsured policies are presented as assets. Experience refunds from reinsurers are recognized based on the underwriting experience of the underlying contracts.
The Company initially records all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite lived intangibles and other intangibles, in accordance with ASC 805, Business Combinations. Goodwill, indefinite-lived intangibles and other intangibles are subsequently accounted for in accordance with ASC 350, Intangibles-Goodwill and Other and ASC 360, Impairment or Disposal of Long-Lived Assets. The initial measurement of goodwill and intangibles requires judgment concerning estimates of the fair value of the acquired assets and liabilities. Goodwill ($95,347 at December 31, 2014) and indefinite-lived intangible assets ($13,000 at December 31, 2014) are not amortized but subject to tests for impairment annually or if events or circumstances indicate it is more likely than not they may be impaired. Other intangible assets are amortized over their estimated useful lives and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount.
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 2014.
In-place lease values attributable to the Company’s real estate segment are based upon the evaluation of the specific characteristics of each property acquired and the respective tenant’s lease. Factors considered include estimates of carrying costs during hypothetical expected lease-up periods and market conditions. In estimating carrying costs, the Company includes estimates of lost rents at estimated market rates during the hypothetical expected lease-up periods, which are dependent upon local market conditions and expected trends.
The Company’s intangible assets related to the insurance and insurance services segment are assets of Fortegra Financial acquired in December 2014. The carried amounts are based on preliminary valuations developed applying generally accepted valuation practices. These preliminary valuations are subject to review and finalization within the 12-month measurement period subsequent to the acquisition date. The Company amortizes finite-lived intangible assets in a manner consistent with the discounted cash flow models that support their initial values, using estimated weighted average lives for each asset type.
In accordance with ASU 2014-13, the Company can elect to measure both the financial assets and the financial liabilities of its CLOs in its consolidated financial statements using the more observable of the fair value of the financial assets or the fair value of the financial liabilities. The notes payable of the Company’s CLOs are measured using the fair value of the financial assets. Upon adoption of ASU 2014-13, the notes are measured as (i) the sum of the fair value of the financial assets and the carrying value of any nonfinancial assets held temporarily, less (ii) the sum of the fair value of any beneficial interests retained by the Company (other than those that represent compensation for services) and the Company’s carrying value of any beneficial interests that represent compensation for services.
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, 2014, no deficiency reserve was recorded.
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 be recorded if anticipated contract benefits, deferred acquisition costs and contract service costs exceed the recorded deferred revenues and anticipated investment income. As of December 31, 2014, no deficiency reserve was recorded.
The Company defers certain costs of acquiring new and renewal business related to non-insurance subsidiary transactions. These costs are limited to prepaid direct costs, typically commissions and contract transaction fees, that resulted from successful contract transactions and would not have been incurred by the Company had the transactions not occurred. These capitalized costs are amortized as the related service and administrative fees are earned.
termination payments as a component of rental revenue in the period received, provided that there are no further obligations under the lease. Amortization expense of above-market leases reduces rental revenue on a straight-line basis over the non-cancelable term of the lease. Taxes, insurance and reserves collected from tenants are separately shown as reimbursable income and corresponding payments are included in reimbursed property expenses included as components of other income and other expenses respectively in the consolidated statements of operations.
Level 1 - Unadjusted, quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
The types of financial assets and liabilities carried at level 2 are valued based on one or more of the following:
Pricing models whose inputs are observable for substantially the full term of the asset or liability;
The following is a description of the valuation methodologies used for financial assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation 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 or 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 from measurement period to 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.
The Company utilizes observable and unobservable inputs within its valuation methodologies. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. In addition, specific issuer information and other market data is used. For broker quotes, quotes are obtained from sources recognized to be market participants. Unobservable inputs may include: expected cash flow streams, default rates, supply and demand considerations and market volatility.
Trading Assets: Trading assets consist primarily of privately held equity securities, exchange-traded equity securities, CLOs, collateralized debt obligations (CDOs), loans, derivative assets and tax exempt securities. The fair value of privately held equity securities are either 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.
Available for sale securities: Available for sale securities consist primarily of U.S. Treasury securities and obligations of U.S. government authorities and agencies, municipal securities, corporate securities, certificates of deposit and equity securities.
Available for sale securities are generally classified within either Level 1 or Level 2 of the fair value hierarchy. The estimated fair values presented for the Company's available for sale investment portfolio are based on prices provided by an independent pricing service and a third party investment manager. The prices provided by these services are based on quoted market prices, when available, non-binding broker quotes, or matrix pricing. The independent pricing service and the third party investment manager provide a single price or quote per security. The Company obtains an understanding of the methods, models and inputs used by the independent pricing service and the third party investment manager, and has controls in place to validate that the amounts provided represent fair values.
U.S Treasury securities: Fair values were obtained from an independent pricing service and a third party investment manager. The prices provided by the independent pricing service are based on quoted market prices, when available, non-binding broker quotes, or matrix pricing and fall under Level 2 of the fair value hierarchy.
Obligations of U.S. government authorities and agencies: Fair values were obtained from an independent pricing service and a third party investment manager. The prices provided by the independent pricing service are based on quoted market prices, when available, non-binding broker quotes, or matrix pricing and fall under Level 2 of the fair value hierarchy.
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.
The Company uses certain of its IRS as part of its risk management strategy to manage interest rate risk and cash flow risk that may arise in connection with the variable interest rate provision of the Company's preferred trust securities. These derivatives are classified as cash flow hedges. The Company’s U.S. Treasury short position is priced through dealer indicative quotes and as such is classified as Level 2.
Debt: The fair value of notes payable is determined based on contractual cash flows discounted at market rates for mortgage notes payable and either dealer quotes or contractual cash flows discounted at market rates for other notes payable.
The Company has determined that the measurement period for restricted shares awarded to employees occurs at grant date. The Company initially measures the cost of an award of restricted shares as the fair value of the restricted shares on the date awarded and subsequently measures the cost of the restricted shares over the vesting period, which is generally three years. The compensation costs are charged to expense over the vesting period with a corresponding credit to capital.
Net losses and loss adjustment expenses include actual claims paid and the change in unpaid claim reserves, net of amounts ceded. Incurred claims are impacted by loss frequency, which is the 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, legislation, economic conditions, morbidity patterns and the attitudes of claimants towards settlements.
Unpaid claims are reserve estimates that are established in accordance with U.S. GAAP using generally accepted actuarial methods. Credit life and AD&D unpaid claims reserves include claims in the course of settlement and incurred but not reported ("IBNR"). Credit disability unpaid claims reserves also include continuing claim reserves for open disability claims. For all other product lines, unpaid claims reserves are bulk reserves and are entirely IBNR. The Company uses a number of algorithms in establishing its unpaid claims reserves. These algorithms are used to calculate unpaid claims as a function of paid losses, earned premium, target loss ratios, in-force amounts, unearned premium reserves, industry recognized morbidity tables or a combination of these factors.
The unpaid claims reserves represent the Company's best estimates, generally involving actuarial projections at a given time. Actual claim costs are dependent upon a number of complex factors such as changes in doctrines of legal liabilities and damage awards. These factors are not directly quantifiable, particularly on a prospective basis. The Company periodically reviews and updates its methods of making such unpaid claims reserve estimates and establishing the related liabilities
based on our actual experience. The Company has not made any changes to its methodologies for determining unpaid claims reserves in the periods presented.
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. The Company’s subsidiaries PFG, Siena Capital Finance Acquisition Corp., Luxury Mortgage Corp., MFCA Funding, Fortegra and TAMCO Manager, Inc. file both federal and state returns. 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 23-Income Taxes.
The Company presents both basic and diluted earnings per common share in its consolidated financial statements and footnotes thereto. Basic earnings per common share (Basic EPS) excludes dilution and is computed by dividing net income or loss allocable to common stock holders by the weighted average number of common shares, including vested restricted share units, outstanding for the period. Diluted earnings per common share (Diluted EPS) reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares where such exercise or conversion would result in a lower earnings per share amount.
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 share-based payment awards that contain non-forfeitable rights to distributions or distribution equivalents (whether paid or unpaid) are participating securities and 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.
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 after December 15, 2014, 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 has elected to early adopt this new accounting guidance as it pertains to the CLOs it consolidates and has elected to apply it retrospectively to all relevant prior periods. Please see Note 13-CLOs and Consolidated Variable Interest Entities, for more details.
The following recently issued accounting standards are applicable to the Company and have not yet been implemented:
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this standard affects any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This standard is effective for the Company January 1, 2017 and the Company is evaluating the effect upon its financial statements.
In June 2014, the FASB issued ASU 2014-10, Development Stage Entities (Topic 915) - Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. The amendments in ASU 2014-10 affect reporting entities that have interests in entities that are development stage entities as there will be an elimination of the exception to the sufficiency-of-equity-at-risk criterion, allowing the reporting entities to apply consistent guidance for transactions that are economically similar. The guidance applied will be the same for determining whether an entity is a variable interest entity and whether the variable interest entity should be consolidated. ASU 2014-10 is effective for the first quarter of 2015 for the Company, and the Company is evaluating the effect upon its financial statements.
In June 2014, the FASB issued ASU 2014-12 Compensation - Stock Compensation (Topic 718) - Accounting for Share-Based Payments when the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015 for the Company and the Company is evaluating the effect upon its financial statements.
Also presented as re-classifications are those items associated with PFG, which have been classified as held for sale as of December 31, 2014. Further, this transaction qualifies to be treated as discontinued operations (see Note 5-Dispositions, Assets Held for Sale and Discontinued Operations).
In accordance with ASC Topic 805, “Business Combinations”, 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.
In December 2014, the Company completed the acquisition of Fortegra, paying $211,740 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. For disclosure purposes this transaction is considered a significant acquisition and as such the Company is providing enhanced disclosures. The primary reason for the Company’s acquisition of Fortegra is to expand its insurance and insurance services operations.
The following unaudited supplemental pro forma information as of December 31, 2014 and 2013 in the table below presents the Company's consolidated financial information as if Fortegra had been acquired on January 1, 2013. The unaudited
The amounts in the unaudited supplemental pro forma results in the above table have been calculated after applying the Company's accounting policies and adjusting the results of the acquired company to reflect certain adjustments. The unaudited supplemental pro forma consolidated results reflect the historical financial information of the Company and Fortegra, adjusted for discontinued operations from PFG and the effect of change in accounting principle in 2013 (see Note 3 -Out of Period Adjustments, Change in Accounting Principles and Re-classifications. The unaudited pro forma results are adjusted for the following pre-tax amounts:
•Administrative service fees decreased by $6,733 and $19,921 for the years ending December 31, 2014 and 2013, respectively, related to the downward adjustment of deferred revenue from book value to fair value for the liability assumed on the January 1, 2013 acquisition date. This reduction results in a decrease in revenue to be earned over the period.
•Interest expense increased $4,090 and $4,248 for the years ending December 31, 2014 and 2013, respectively, attributable to the carrying of an additional $120,000 in debt under the Credit Agreement, reduced quarterly by $1,250 mandatory principal payments, using an estimated annual interest rate of 3.16%. In addition, interest expense included $515 for each of the years ending December 31, 2014 and 2013, respectively, of annual amortization of deferred loan origination costs. The Credit Agreement provides for variable interest; a 1/8th percentage point change in the interest rate would have resulted in an adjustment to pre-tax income of approximately $141 and $148 for the years ending December 31, 2014 and 2013, respectively.
•Depreciation and amortization decreased by $2,769 and increased by $28,502 for the years ending December 31, 2014 and 2013, respectively, to reflect the amortization of intangibles and depreciation of capitalized assets acquired.
•For the year ended December 31, 2014, the Company adjusted supplemental proforma earnings by $8,895 to exclude acquisition related costs.
Recording of the Preliminary Value of Assets Acquired and Liabilities Assumed
(1) Includes $809 of unsettled liabilities associated with Fortegra’s previous discontinued operations, which is included as a component of liabilities held for sale and discontinued operations within the Company’s consolidated balance sheet.
As of the acquisition date, the fair values of notes receivable, accounts and premiums receivable, and reinsurance receivables approximated their book values. The gross contractual amounts for notes receivable totaled $19,957 and $41,170 for accounts and premiums receivable. The Company estimates that contractual amounts receivable of $1,957 of notes receivable and $408 of accounts and premiums receivable may not be collected.
The following table shows the preliminary values recorded by the Company, as of the acquisition date, for finite-lived intangible assets, included in the insurance and insurance services segment, and the range of their estimated amortization period associated with the Fortegra acquisition:
The acquisition of Fortegra is being treated as a stock purchase for tax purposes and any goodwill and identified intangible assets recorded by the Company in connection with the acquisition will not be deductible for tax purposes.
The following table presents the final determination of fair value amounts for the identifiable assets acquired, liabilities assumed, and goodwill recorded for Luxury:
The fair value of the NCI component was calculated by determining the fair value of Luxury’s tangible net assets on the acquisition date and multiplying it by the NCI’s proportional ownership in Luxury of 32.5%.
The Company has classified its PFG subsidiary as held for sale as of December 31, 2014 as the transaction meets all the requirements to be classified in this manner according to ASC 360 -Property, Plant and Equipment. This transaction is described in further detail in Note 2-Summary of Significant Accounting Policies. The pending sale of PFG further meets the requirements of ASC 205- Presentation of Financial Statements to be classified as discontinued operations. The Company has as a result reclassified the income and expense attributable to PFG to income from discontinued operations, net for the years ended December 31, 2014 and 2013.
The Company has reclassified income and expenses from discontinued operations related to the PFG transaction and the sale of the Bickford property. Expenses related to Bickford include an allocation of interest expense based on property carrying values and cost of debt. The following table represents detail revenues and expenses of discontinued operations in the consolidated statements of operations for the periods presented:
Refer to Note 17-Fair Value of Financial Instruments, for information regarding the leveling of assets and liabilities held for sale.
Available for sale securities associated with assets held for sale of $17,409, had an amortized cost of $17,154 as of December 31, 2014. These securities had unrealized gains of $285 and unrealized losses of $30. There were twenty-four securities that were in an unrealized loss position for more than one year with a fair value of $2,828, an amortized cost of $2,843 and associated unrealized losses of $15 as of December 31, 2014.
Debt associated with liabilities held for sale was $83,348. This debt carries a weighted average interest rate of 12.66% and matures on July 13, 2022. During the years ended December 31, 2014 and 2013, interest expense of $11,475 and $12,430 was recorded, respectively.
The absence of cash flows from discontinued operations, on a going forward basis, is not expected to have a material impact upon the Company’s future liquidity and capital resources as the acquisition of Fortegra is expected to provide future liquidity.
As of December 31, 2014, the Company has $809 classified as liabilities from discontinued operations associated with Fortegra’s dispositions as of December 31, 2013.
Fortegra, which was acquired in December, 2014, was added to the insurance and insurance services segment. In October 2014, the Company entered into an agreement to sell PFG. Accordingly, the 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 2013 and 2014.
Luxury, a mortgage loan originator, which the Company acquired in January, 2014, was incorporated in the specialty finance segment. The Company had previously included Tiptree Direct and MFCA in the specialty finance segment, The results of Tiptree Direct and MFCA are now included in the corporate and other segment.
The real estate segment previously included investments in Star Asia entities. These investments are now reported in the corporate and other segment. The net income attributable to consolidated CLOs has been allocated to the asset management segment (representing the fees earned from the management of CLOs) and to the corporate and other segment (representing the distributions earned on the CLO subordinated notes and interest-only positions held by the Company and realized and unrealized gains and losses on such debt and positions). The expenses the Company incurs in connection with the management of the CLOs have also been allocated to the asset management segment. For further discussion of the Company’s interests in the CLOs its manages, please refer to Note 13-CLOs and Consolidated Variable Interest Entities, in the accompanying consolidated financial statements.
For Insurance and Insurance Services, the main drivers of revenue are earned premiums, net and service and administrative fees.
For the period ended December 31, 2014, the Company incurred $6,121 of charges, including consultancy fees and accelerated stock vesting costs, in connection with the Company’s purchase of Fortegra and which are not expected to recur. These charges have been included in the insurance and insurance services segment results.
For Specialty Finance, the main drivers of revenue are gain on the sale of loans held for sale, net, loan fees earned and investment interest.
Asset Management operations primarily comprise Telos Asset Management’s (TLAM) management of CLOs and Muni Capital Management’s (MCM) management of Non-Profit Preferred Funding Trust I (NPPF I). Both TLAM and MCM are subsidiaries of TAMCO, an SEC-registered investment advisor owned by the Company. NPPF I is a structured tax-exempt pass-through entity that holds tax-exempt bonds for the benefit of unaffiliated investors
Real Estate operations include Care LLC, a wholly-owned subsidiary of Tiptree which has a geographically diverse portfolio of seniors housing properties including assisted-living, independent-living, memory care and skilled nursing in the U.S.
Revenue for this segment includes largely rental revenue and investment interest.
The tabular information that follows shows components of revenue, expense, and profit or loss, for each of the operating segments for the years ended December 31, 2014 and 2013 and total assets as of December 31, 2014 and 2013.
proportionate share of MCM’s expenses to the asset management segment relating to its management of NPPF I. The remaining expenses not allocated are related to MFCA and have been allocated to the corporate and other segment.
The Company does not intend to sell the investments that were in an unrealized loss position at December 31, 2014, and management believes that it is more likely than not that the Company will be able to hold these securities until full recovery of their amortized cost basis for fixed maturity securities or cost for equity securities. The unrealized losses were attributable to changes in interest rates and not credit-related issues. As of December 31, 2014, based on the Company's review, none of the fixed maturity or equity securities were deemed to be other-than-temporarily impaired based on the Company's analysis of the securities and its intent to hold the securities until recovery. There have been no other-than-temporary impairments recorded by the Company in 2014.
Purchases of available for sale securities were $7,026 for the year ended December 31, 2014. Proceeds from maturities of available for sale securities were $1,192 for the year ended December 31, 2014. Proceeds from the sale of available for sale securities for the year ended December 31, 2014 were $783 with associated gains of $4.
The following table presents the Company’s loan portfolio, measured at amortized costs:
Care, through indirect subsidiaries of Care, made a loan to the lessees of one of its properties. The loan is secured by a pledge of outstanding equity interest in the entities that are the lessees. The cost basis of the loan at December 31, 2014 was approximately $700, which equals its carrying value.
In February 2013, Care acquired 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, 2014 and 2013 was approximately $3,865 and $3,561, respectively. As of December 31, 2014, these notes were all performing.
The following table presents the effect of reinsurance on premiums written and earned by Fortegra for the following period:
At December 31, 2014, 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 Great Western Insurance Company (A. M. Best Rating: B++). The related receivables of London Life International Reinsurance Corporation are collateralized by assets held in trust accounts and letters of credit due to their offshore relationships. At December 31, 2014, Fortegra does not believe there is a risk of loss as a result of the concentration of credit risk in the reinsurance program.
Affiliates of Care entered into a joint venture to own and operate an additional seniors housing community with affiliates of Heritage. Affiliates of Care own an 80% interest in the joint venture, while affiliates of Heritage own the remaining 20% interest and continue to provide management services to the communities under a management contract. For the year ended December 31, 2014, rental revenue and net income from this acquisition were $224 and $3, respectively.
During the fourth quarter of 2014, the Company completed its assessment of the allocation of the fair value of the real estate acquired in the Heritage and Greenfield joint ventures (including land, buildings, equipment, and intangibles) in accordance with ASC 805 Business Combinations.
On June 28, 2013, Care completed the sale of its membership interests in Care YBE Subsidiary LLC (Care YBE), which owned fourteen senior living facilities (Bickford Portfolio) to an affiliate of National Health Investors Inc. (Buyer) for proceeds of $44,021 and a net gain of $15,463, which is classified as a gain on sale from discontinued operations. See Note 5-Dispositions, Assets Held for Sale and Discontinued Operations, for further detail. The Bickford Portfolio, developed and managed by affiliates of Bickford Senior Living Group, L.L.C., contained 643 units with six properties located in Iowa, five in Illinois, two in Nebraska and one in Indiana.
(1) Represents an intangible with an indefinite useful life. Impairment tests are performed at least annually on these assets.
Balances as of December 31, 2014 and 2013, for intangible assets ($149,932 and $153,636 respectively) and goodwill ($3,088 and $3,088 respectively) associated with PFG, have been classified as held for sale. The insurance and insurance services segment as of December 31, 2014, relates solely to those amounts associated with Fortegra which the Company acquired on December 4, 2014.
The table below represents the assets and liabilities of the consolidated CLOs that are included in the Company’s consolidated balance sheet as of the dates indicated:
As described in Note 2-Summary of Significant Accounting Policies, Tiptree has elected to adopt ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity. This update prescribes a measurement alternative for valuing the notes payable of the CLOs. Specifically, since management has determined that the fair value of the financial liabilities are less observable than the fair value of the financial assets, ASU 2014-13 allows Tiptree to value the notes payable as (1) the sum of the fair value of the financial assets and the carrying value of any nonfinancial assets held temporarily, less (2) the sum of the fair value of any beneficial interests retained by Tiptree.
(3) Tranche B-1 Notes in Telos 5 have a fixed rate of 4.45% over the life of the CLO.
As summarized in the table below, the application of the measurement alternative 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:
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 is exposed to credit risk when there is an unfavorable change in the value of investments as a result of adverse movements in the underlying credit spreads and enters into these contracts as a buyer of protection so as to minimize the credit risk exposure of its investment portfolio.
Credit Default Swap Indices (CDX) are credit derivatives that reference multiple names through underlying baskets or portfolios of single name credit default swaps. The Company held four CDX contracts as of December 31, 2014, with a notional amount of $599,308 ($299,608 of sold protection and $299,700 of bought protection). The Company enters into these contracts as both a buyer of protection and seller of protection to manage the credit risk exposure of its investment portfolio. The Company is required to deposit cash collateral for these positions equal to an initial 2.25% of the notional amount of the sold protection side, subject to increase based on additional maintenance margin as a result of decreases in value. As of December 31, 2014, total margin was $6,750. The Company entered into a CDX contract during December 2013, with a notional amount of $20,000. During June 2014, the Company sold the position and recognized a loss of $1,136.
Credit derivatives are included as a component of trading assets, at fair value, and are shown net of any right to reclaim cash collateral or obligation to return cash collateral.
The Company is exposed to certain risks in connection with its mortgage banking operations at Luxury. The Company is exposed to interest rate risk for certain interest rate lock commitments (IRLCs) until a purchaser for the related underlying loans is identified. The fair value of IRLCs is subject to change primarily due to changes in market interest rates. The notional amount of the Company’s IRLCs that were matched with best efforts lock commitments with investors was $79,627 and the notional amount of the Company’s IRLCs that were matched with mandatory forward sales contracts was $7,772 as of December 31, 2014, with a combined associated fair value of $793. The Company hedges the mandatory forward sales contracts with TBA Mortgage Backed Security instruments. The notional amount of these open hedge instruments was $6,500 and the notional amount of the closed not yet settled hedge instruments was $2,500 as of December 31, 2014. As of December 31, 2014, the IRLCs were included as a component of trading assets, at fair value, on the Company’s consolidated balance sheet.
On June 24, 2013 the Company terminated an interest rate swap contract with a notional amount of $20,000. In November and December 2013, the Company entered into six new interest rate swaps with a combined notional amount of $43,988 in order to hedge interest rate risk associated with its real estate portfolio. All of these swaps have the same counterparty. These swaps are included as a component of trading liabilities, at fair value on the Company’s consolidated balance sheet as of December 31, 2014 and a component of trading assets as of December 31, 2013. The fair value of these interest rate swaps at December 31, 2014 and 2013 were $(833) and $52, respectively.
The following tables identify the fair value amounts of the Company’s stand-alone derivative instruments, categorized by primary underlying risk:
The following tables identify the unrealized gain/(loss) amounts, categorized by primary underlying risk, for the following periods:
Below is a table identifying the components of the net credit derivative revenue/(loss) as shown on the Company’s consolidated statements of operations for following periods:
Fortegra has an interest rate swap with a counterparty pursuant to which Fortegra swapped the floating rate portion of its outstanding preferred trust securities to a fixed rate. This swap is designated as a cash flow hedge and expires in June 2017.
As of December 31, 2014, the notional amount of this instrument was $35,000, with a fair value of $(2,081), an unrealized loss net of tax of $1,353, a variable rate of interest of 0.24% and a fixed rate of 3.47%.
As of December 31, 2014, the gain recognized in AOCI on the derivative-effective portion was $127, with a loss reclassified from AOCI into income-effective portion of $97. The amount estimated to be reclassified to earnings from AOCI during the next 12 months is $1,077. These net losses reclassified into earnings are primarily expected to increase net interest expense related to the respective hedged item.
The following table summarizes the balance of the Company’s debt holdings excluding notes payable of consolidated CLOs at (See Note 13-CLOs and Consolidated Variable Interest Entities, for notes payable of the consolidated CLOs):
Interest expense of $11,898 and $4,160 was incurred on the Company’s debt for the year ended December 31, 2014 and 2013, respectively.
The following table present the future maturities of the Company’s long-term debt (excluding Preferred Notes Payable) as of:
Operating Company believes it was in compliance with all of the financial covenants contained in the Credit Agreement as of December 31, 2014.
On July 25, 2013 Siena closed on a line of credit with Wells Fargo Bank. This revolving line is for $65,000 with an interest rate of LIBOR plus 250 basis points and a maturity date of October 17, 2016.
As of December 31, 2014, Luxury has three separate warehouse lines of credit in place and the total maximum aggregate amount Luxury may borrow on these three warehouse lines of credit is $82,500. The credit agreements pay a floating rate of LIBOR plus 2.75% (with a minimum LIBOR rate of 3.00%). Luxury’s three 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. As of December 31, 2014, Luxury believes it was in compliance or had received waivers of compliance with certain financial covenants. Luxury’s ability to borrow under the warehouse line of credit agreements is not adversely affected by the waivers. The waivers are valid through and including December 31, 2014.
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 the 7th anniversary of the acquisition on January 31, 2021.
Fortegra was in compliance with the covenants required by the respective Credit Agreement in effect at December 31, 2014.
At December 31, 2014, Fortegra believes it was in compliance with the covenants required by the Line of Credit.
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. The carrying amount of the notes represents the accreted value from the initial consolidation and is recognized through the measurement date using the effective interest method or a method that approximates the effective interest method. See Note 13-CLOs and Consolidated Variable Interest Entities, for additional information.
The table below summarizes the Company’s contractual obligations by period that payments are due as of:
On January 26, 2015, Tiptree entered into a First Amendment to its existing Fortress credit agreement (the Amendment). The Amendment provides for additional term loans in an aggregate principal amount of $25,000 to Tiptree and will have the same maturity date, margin above LIBOR, principal repayment terms, and conditions and covenants as the existing term loans under the existing Fortress credit agreement, subject to certain exceptions in the Amendment. Tiptree is required to prepay $25,000 of the loan upon the closing of the PFG sale. See Note 25-Subsequent Events, for further detail.
In addition, Tiptree’s subsidiary Siena issues standby letters of credit for credit enhancements that are required by their borrower’s respective businesses. As of December 31, 2014 there was $5,453 outstanding relating to these letters of credit.
Refer to Note 15-Debt, for information regarding the Company’s debt obligations.
Tiptree’s Fortegra subsidiary is a defendant in Mullins v. Southern Financial Life Insurance Co., which was filed on February 2, 2006, in the Pike Circuit Court, in the Commonwealth of Kentucky. A class was certified on June 25, 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 law fraud. The action seeks compensatory and punitive damages, attorney fees and interest. Plaintiffs filed a Motion for Sanctions on April 5, 2012 in connection with Fortegra's efforts to locate and gather certificates and other documents from Fortegra's agents. While the court did not award sanctions, it did order Fortegra to subpoena certain records from its agents. Although Fortegra appealed the order on numerous grounds, the Kentucky Supreme Court ultimately denied the appeal in April 2014. Consequently, Fortegra has retained a special master to facilitate the collection of certificates and other documents from Fortegra's agents. The parties are currently conducting discovery in preparation for trial on September 8, 2015.
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, results of operations or cash flows 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. Tiptree may record loss contingencies as developments warrant.
For the year ended December 31, 2014, $9,796 was transferred into Level 3 for non-CLO assets and were related to investments in loans and tax exempt securities. For the year ended December 31, 2014, CLO assets of $974,261 were transferred from Level 2 to Level 3. This was primarily due to the limited depth underlying the prices of corporate loans as well as changes to the depth supporting those prices at different measurement dates. For the year ended December 31, 2013, $43,896 was transferred from Level 2 to Level 3 for CLO assets and were primarily corporate loans. For assets held for sale $24,643 was transferred related to hedge funds held in separate accounts. For the year ended December 31, 2014, there were no transfers between Level 1 and Level 2 of the fair value hierarchy
ASC Topic 820, as amended by ASU 2011-04, requires disclosure of quantitative information about the significant unobservable inputs used in the valuation of assets and liabilities classified as Level 3 within the fair value hierarchy. 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 reasonably available to the Company. As such, the disclosure provided below provides quantitative information only about the significant unobservable inputs used in the valuation of certain tax-exempt municipal securities.
The following tables show the fair values and carrying values of the Company’s financial assets and liabilities and the fair value hierarchy level(s) associated with these assets and liabilities as of:
Pursuant to Operating Company’s limited liability operating agreement, TFP has the right to redeem common units of Operating Company (including any common units issued upon exercise of the warrants described above) for an equal number of shares of Class A common stock of Tiptree (and an equal number of shares of Class B common stock held by TFP will be canceled). Tiptree may instead, at its election, deliver a cash amount (or combination of cash and Class A common stock) based on the fair market value of the Class A common stock on the redemption date. On July 18, 2014, TFP notified its limited partners that the Company will allow them to directly exchange TFP units for Class A common stock (at a rate of 2.798 shares of Class A common stock per TFP partnership unit). As of December 31, 2014, an aggregate of 21,198,510 Class A shares have been issued in exchange for 7,576,308 TFP units. The issuance of Tiptree Financial Inc. Class A shares and corresponding cancellation of Class B shares in exchange for the TFP units was accounted for as a $258,096 adjustment within non-controlling interest and a net $249,515 within additional paid-in capital after adjustments to taxable basis are applied.
Activity in accumulated other comprehensive income/(loss) (AOCI), net of tax, for the year ended December 31, 2014 and 2013, was as follows:
The table above includes activity for the year ended December 31, 2013 that relates to discontinued operations of PFG. For the year ended December 31, 2014, $123 of the period change related to discontinued operations of PFG and the remainder related to other activity at Tiptree.
The Board adopted the Tiptree 2013 Omnibus Incentive Plan (2013 Equity Plan) on August 8, 2013. The general purpose of the 2013 Equity Plan is to attract, motivate and retain selected employees, consultants and directors for the Company, to
Immediately vested shares of common stock issued to the Company’s independent directors in respect to their annual retainer fees have been issued under the 2007 Equity Plan and the 2013 Equity Plan. During the year ended December 31, 2014, the Company issued 27,288 immediately vested shares of Class A common stock with an aggregate fair value of $208 to the Company’s independent directors as part of their annual retainer. In addition, during the year ended December 31, 2014, the Company issued an aggregate of 28,869 shares of immediately vested shares to executives and service providers as incentive compensation.
In June 2007, the Company adopted the Care Investment Trust Inc. Manager Equity Plan, which will automatically expire on the 10th anniversary of the date it was adopted. As of December 31, 2014, 134,629 common shares remain available for future issuances. No shares have been issued since March 30, 2012 from this plan.
A holder of the restricted share units, as per the terms of the restricted stock unit agreement governing the awards, have all of the rights of a shareholder, including the right to vote and receive distributions. The restricted share units 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.
As of December 31, 2014, the total unrecognized compensation cost related to restricted units granted was $103, which is expected to be recognized as compensation expense over a weighted average period of approximately one year.
Restricted stock unit expense was $233 and $73 for the years ended December 31, 2014 and 2013, respectively. These expenses are included within payroll expense in the consolidated statements of operations.
On June 30, 2012, TAMCO, TFP and Tricadia entered into a Transition Services Agreement in connection with the internalization of the management of Tiptree. Pursuant to this agreement, Tricadia provides TAMCO and its affiliates, including TFP, with the services of designated officers as well as certain back office, administrative, information technology, insurance, legal and accounting services. The Transition Services Agreement was assigned to the Company in connection with the Contribution Transactions. The Company pays Tricadia specified prices per service. The Company owed a total fee to Tricadia of $1,329 and $1,684 for 2014 and 2013, respectively. For the years ended December 31, 2014 and 2013, the Company accrued for 154,044 shares and issued 194,868 shares of Class A common stock to Tricadia under the Transition Services Agreement in respect of services rendered.
TFP and BackOffice 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 the services of certain back office, administrative and accounting services to the Company. 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 $413 and $379 in 2014 and 2013, respectively. The Administrative Services Agreement has successive one year terms but may be terminated by the Company or BOSG upon 60 days prior notice.
As of December 31, 2014, the IRS positions have an aggregate notional amount of $78,988 and a fair value of $(2,914). The counterparty for the IRS positions are First Niagara Bank and Wells Fargo Bank, N.A.
The total income tax expense of $560 for the period ended December 31, 2013 was reflected as a component of net income (loss) from continuing operations. This tax expense represented a consolidated total of all of Tiptree’s subsidiaries and excludes $6,090 related to PFG, which is included in discontinued operations. In addition, Tiptree incurred approximately $2,137 of current federal and state income tax expense as a result of the gain on sale of the Bickford Portfolio (see Notes 5-Dispositions, Assets Held for Sale and Discontinued Operations and 11-Real Estate). A significant portion of the gain was reduced by available net operating loss carryforwards that were previously unrecorded as a result of Care, Inc.’s historical 0% statutory income tax rate in effect as of December 31, 2012 and June 30, 2013, prior to the Contribution Transaction. The tax associated with the Bickford Portfolio gain is included with tax expense from continuing operations, rather than with discontinued operations because it arose as a result of Tiptree’s termination of REIT status, described below.
As a result of the Contribution Transaction on July 1, 2013, Tiptree is no longer qualified as a REIT. Pursuant to the Internal Revenue Code, when a corporation loses REIT status within a tax year it becomes taxable retroactively to the first day of
the tax year. As of July 1, 2013, an adjustment of $2,583 was made to the Company’s deferred tax assets as a result of the Company no longer qualifying as a REIT.
For the twelve months ended December 31, 2013, the Company’s effective tax rate on income from continuing operations was equal to 3.44%, which does not bear a customary relationship to statutory income tax rates. Differences from the statutory income tax rates are primarily the result of: (i) income and (loss) attributable to non-taxable entities which do not result in income tax expense or (benefit) to the Company; (ii) the one-time effect of the Company’s change from nontaxable to taxable status which must be reported as part of the income tax provision on continuing operations; and (iii) the effect of changes in valuation allowance on net operating losses reported by Siena and MFCA.
Separate returns are filed for Tiptree and each of the Company’s subsidiaries that are required to file returns (PFG, Siena Capital Finance Acquisition Corp., Luxury Mortgage Corp., Fortegra Financial Corp., MFCA Funding, Care HSL TRS Holdings, and TAMCO Manager Inc.). These subsidiaries file returns in various state jurisdictions, and as such may have state tax obligations. As needed, the Company will take all necessary steps to comply with any tax withholding requirements.
As of December 31, 2014, the Company had total U. S. Federal net operating loss carryforwards (“NOLs”) equal to $7,710 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 as of:
Valuation allowances have been established for net operating loss carryforwards and other deferred assets generated by MFCA Management, Siena, 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, 2014, the consolidated valuation allowance for Tiptree was $2,708. As of December 31, 2013, the consolidated valuation allowance for Tiptree was $1,257. In 2014, the company recorded a net increase in its valuation allowances equal to $1,451, compared with a decrease in its valuation allowance of $6,833 in 2013. Note that these valuation allowance totals exclude the valuation allowances recorded at PFG in the amount of $375 and $254 for 2014 and 2013, respectively, which are not included due to the re-classification of PFG to assets held for sale.
The Company’s primary tax jurisdiction is the United States, which currently has a statutory income tax rate equal to 35%. The Company also operates in several state jurisdictions that have an average combined statutory rate equal to approximately 5%. Both the U.S. federal rate and the statutory rates are before the consideration of rate reconciling items. As of December 31, 2014 and 2013, the Company had no material unrecognized tax benefits or accrued interest and penalties. The Company’s policy is to account for interest as a component of interest expense and penalties as a component of other expense. Federal tax years 2011 through 2013 were open for examination as of December 31, 2014.
On January 1, 2015, Fortegra exercised an option to purchase the 37.6% ownership interest in ProtectCELL it did not own. Fortegra made an initial payment of $3,000, and will make a final payment later in 2015 for the remainder of the option price, to be calculated based on ProtectCELL's final audited results for the year ended December 31, 2014.
On February 9, 2015, affiliates of Care formed a joint venture to own and operate five seniors housing communities with affiliates of Royal Senior Care Management LLC (“Royal”). Care owns an 80% interest in the joint venture, while affiliates of Royal own the remaining 20% interest and provide management services to the communities under a management contract. In connection with the acquisition, Care and Royal secured a $22,500, 5 year loan, (subject to a holdback) which includes 36 months of interest only payments and a $2,000 earn out feature.
On March 30, 2015, affiliates of Care acquired six seniors housing communities for $54.5 million. The properties are leased to affiliates of Greenfield Holdings, LLC who will operate the properties. In connection with the acquisition, Care secured a $39.5 million, 10 year loan (subject to a holdback), which includes 18 months of interest only payments.