Our principal executive office is located at 780 Third Avenue, 21st Floor, New York, New York 10017. We and our subsidiaries lease properties throughout the United States, all of which are used as administrative offices. We believe that the terms of their leases at each of our subsidiaries are sufficient to meet our present needs and we do not anticipate any difficulty in securing additional space, as needed, on acceptable terms.
Tiptree is a holding company focused on enhancing shareholder value by generating consistent and growing earnings at our operating companies. Our consolidated subsidiaries are currently engaged in the following businesses - specialty insurance, asset management, senior living and specialty finance. We selectively manage our specialty insurance segment investments across multiple asset classes, sectors and geographies, which we believe distinguishes us from many other insurance companies. We evaluate our performance primarily by the comparison of our shareholder’s long-term total return on capital, as measured by Adjusted EBITDA and growth in book value per share plus dividends paid.
In furtherance of our strategy to grow sustainable earnings and Adjusted EBITDA, during 2016, we:
returned $47.8 million to shareholders and limited partners through $43.8 million of share buy-backs and $4.0 million of dividends paid.
We currently have four reporting segments: specialty insurance, asset management, senior living, and specialty finance. Corporate and other primarily contains corporate expenses not allocated to the operating businesses. See Note-(5) Operating Segment Data, in the notes to the accompanying consolidated financial statements for detailed information regarding our segments. Since different factors affect the financial condition and results of operation of each segment, the following discussion is presented on both a consolidated and segment basis.
Our specialty insurance results primarily depend on the appropriateness of our pricing, underwriting, risk retension and the accuracy of our methodology for the establishment of reserves for future policyholder benefits and claims, the returns on and values of invested assets, and our ability to estimate contract renewals and run-off. While our insurance operations have historically maintained a high percentage of fees to total revenue and a relatively stable combined ratio which support steady earnings, changing business and economic factors could generate different results than we have historically seen. In our senior living operations, the ability to raise rents and charge for additional services along with the potential impact that inflation may have on the costs of operations could impact margins and the value of the real estate. In our asset management segment, improving business conditions and growing corporate loan demand, especially from small to medium sized businesses has generally supported growth in AUM. Slowing economic growth and/or economic uncertainty could reduce business investment and loan demand, slowing the growth in AUM and associated fees. While economic conditions are generally expected to continue on a positive trend, with interest rates gradually rising as inflation is expected to pick up modestly, and unemployment remaining relatively low, any downward trend or increased volatility and uncertainty in these economic factors could impact our results negatively.
of our subsidiaries have also entered into interest rate swap agreements to fix all or a portion of their interest rate exposure which are currently designated as hedging relationships for accounting purposes.
The following is a summary of consolidated financial results for the years ended December 31, 2016, 2015 and 2014. Management uses Adjusted EBITDA and book value per share, as exchanged, as measurements of operating performance which are non-GAAP measures. Management believes the use of Adjusted EBITDA provides supplemental information useful to investors as it is frequently used by the financial community to analyze financial performance, and to analyze a company’s ability to service its debt and to facilitate comparison among companies. Adjusted EBITDA is also used in determining incentive compensation for the Company’s executive officers. Adjusted EBITDA is not a measurement of financial performance or liquidity under GAAP and should not be considered as an alternative or substitute for GAAP net income. Book value per share, as exchanged assumes full exchange of the limited partners units of TFP for Tiptree Class A common stock. Management believes the use of this financial measure provides supplemental information useful to investors as it is frequently used by the financial community to analyze company growth on a relative per share basis.
For the year ended December 31, 2016, the Company reported revenues of $567.2 million, an increase of $128.7 million or 29.4% from the year ended December 31, 2015. The primary drivers of the increase in revenues were improvements in earned premiums, service and administrative fees and investment income in our specialty insurance segment, increases in management incentive fees and returns on associated investments in our asset management segment, improvement in rental income attributable to acquisitions of senior housing properties and increased mortgage volume.
For the year ended December 31, 2015, income from continuing operations was a loss of $13.8 million, compared to a loss of $3.4 million in 2014. The key drivers of income from continuing operations were higher depreciation and amortization from new investments in our senior living operations, realized and unrealized losses on CLO subordinated note investments of $25.9 million, lower distributions received on CLO subordinated notes due to sales of CLO subordinated notes in the second quarter of 2015, and higher corporate expenses associated with our effort to improve our controls and financial reporting infrastructure, offset in part by improved profitability from the addition of a full year of Fortegra results, growth in specialty finance volumes and margins, and increased rental income in our senior living operations. In addition, in the year ended December 31, 2014, there was a one-time gain of $7.9 million from the repayment of a loan in our senior living segment, which impacted the year over year comparison.
Effective December 31, 2016, Tiptree realigned the principal investments formerly reported in the corporate and other segment into their new reportable segments to align with the Company’s operating strategy. The table below reflects the credit and equity investments contributed to our insurance subsidiary in the specialty insurance segment and the CLO subordinated notes and related warehouse income in the asset management segment for the years ended December 31, 2016, 2015 and 2014.
Fortegra is a specialty insurance company that offers asset protection products through niche commercial and personal lines of insurance. We also offer administration and fronting services for our self-insured clients who own captive producer owned reinsurance companies (“PORCs”). Our specialty insurance business generates revenues primarily from net earned premiums, service and administrative fees, ceding commissions and investment portfolio income.
Pre-tax income was $32.0 million in the year ended December 31, 2015, an increase over the 2014 operating results of $35.2 million. The primary drivers of the improvement in year-over-year results was the addition of Fortegra’s full year results, versus one month of results for 2014. In addition, approximately $6.1 million of acquisition related costs were included in the 2014 results.
Revenues are generated by the sale of the following insurance products: credit protection, warranty, programs, services and other. Credit protection products include credit life, credit disability, credit property, involuntary unemployment, and accidental death and dismemberment. Warranty products include mobile device protection, furniture and appliance service contracts and auto service contracts. Programs are primarily personal and commercial lines and other property-casualty products. Services and other revenues principally represent investment income, unrealized and realized gains and losses, fees for insurance sales and business process outsourcing services, and interest for premium financing, and also include the impact to fee income, ceding commissions, and commissions expense from the purchase accounting effect of VOBA related to the insurance contracts.
Total revenues were $394.2 million for the year ended December 31, 2016, up $63.3 million, or 19.1% over the prior year period. The increase was primarily driven by an increase in earned premiums of $63.2 million, or 38.0%, an increase of $2.8 million, or 2.7%, in service and administrative fees, which were partially offset by decreases in ceding commissions of $18.4 million and other income of $5.5 million. The revenues on the investment portfolio, including net investment income and realized and unrealized gains, were $27.7 million for the year ended December 31, 2016 compared to $6.5 million in the 2015 period, an increase of $21.2 million.
Total revenues, excluding the impact of VOBA, were up $46.4 million, driven by increases in earned premiums of $63.2 million, and increases in net investment income and gains of $21.2 million, which were partially offset by reductions in service and administrative fees of $11.1 million, reductions in ceding commissions of $21.4 million and a decrease in other income of $5.5 million. Further details by product are provided below.
Total expenses include policy and contract benefits, commissions expense and operating expenses. For the year ended December 31, 2016, total expenses were $347.4 million compared to $298.9 million in 2015. The primary drivers of the increase were policy and contract benefits and commission expense as net written premiums increased over 2015.
There are two types of expenses for claims payments under insurance and warranty service contracts which are included in policy and contract benefits: member benefit claims and net losses and loss adjustment expenses. Member benefit claims represent the costs of services and replacement devices incurred in car club and warranty protection service contracts. Net losses and loss adjustment expenses represent actual insurance claims paid, changes in unpaid claim reserves, net of amounts ceded, and the costs of administering claims for credit life and other insurance lines, such as non-standard auto. Incurred claims are impacted by loss frequency, which is a measure of the number of claims per unit of insured exposure, and loss severity, which is based on the average size of claims. Factors affecting loss frequency and loss severity include changes in claims reporting patterns, claims settlement patterns, judicial decisions, economic conditions, morbidity patterns and the attitudes of claimants towards settlements. For 2016, policy and contract benefits
were $106.8 million, up $20.5 million from the prior year primarily as a result of increased net written business in our credit protection and program products.
Commission expense is incurred on most product lines, the majority of which are retrospective commissions paid to distributors and retailers selling our products, including credit insurance policies, motor club memberships, mobile device protection and warranty service contracts. Credit insurance commission rates are, in many cases, set by state regulators and are also impacted by market conditions and retention levels. Total commission expense for year ended December 31, 2016 was $147.3 million compared to $105.8 million in 2015. The primary drivers of the increase were VOBA, as highlighted in the table above, along with the commission expense associated with the credit business re-assumed in October.
Operating expenses are composed of employee compensation and benefits, interest expense, depreciation and amortization expenses and other expenses. The primary driver of the period-over-period decrease in operating expenses was attributable to lower depreciation and amortization expense as a result of the decline in VOBA purchase accounting impact from the amortization of the fair value attributed to the insurance policies and contracts acquired, which was $3.3 million for the year ended December 31, 2016 versus $19.3 million in the comparable 2015 period. In addition, employee compensation and benefits were $37.9 million for 2016, down $0.8 million from 2015 as a result of actions taken throughout 2015 to reduce headcount. Interest expense of $9.2 million in 2016 increased by $2.3 million versus the prior year, primarily from increased asset based borrowings on certain investments within the investment portfolio. Other expenses for the year ended December 31, 2016 were $33.0 million, up $1.6 million from 2015 primarily as a result of increased premium taxes as written and earned premiums grew.
Gross written premiums represents total premiums from insurance policies that we write during a reporting period based on the effective date of the individual policy. Net written premiums are gross written premiums less that portion of premiums that we cede to third party reinsurers or the PORCs under reinsurance agreements. The amount ceded to each reinsurer is based on the contractual formula contained in the individual reinsurance agreements. Net earned premiums are the earned portion of our net written premiums. We earn insurance premiums on a pro-rata basis over the term of the policy. At the end of each reporting period, premiums written that are not earned are classified as unearned premiums, which are earned in subsequent periods over the remaining term of the policy.
partners and reinsurers is reflected in a reduction in commissions paid. In order to better explain to investors the net financial impact of the risk retained by the Company of the insurance contracts written and the impact on profitability, we use the Non-GAAP metric - As Adjusted Underwriting Margin. For the same reasons that we adjust our combined ratio for the effects of purchase accounting, VOBA impacts can also mask the actual relationship between revenues earned and the offsetting reductions in commissions paid, and thus the period over period net financial impact of the risk retained by the Company. As such, we believe that presenting underwriting margin provides useful information to investors and aligns more closely to how management measures the underwriting performance of the business.
As adjusted underwriting margin for the year ended December 31, 2016 was $107.7 million, down from $110.1 million in 2015. Credit protection as adjusted underwriting margin was $64.8 million, an increase from 2015 results by $3.4 million or 5.6%. Credit protection products continue to provide opportunities for steady growth through a combination of expanded product offerings and new clients. As adjusted underwriting margin for warranty products was $23.8 million for 2016, down $8.0 million or 25.2% from 2015. We continue to experience dampening effects from our mobile protection products given competitive pressures. Programs as adjusted underwriting margin for 2016 was $9.1 million, up 64.2% from 2015, due to increased earned premiums and service and administrative fees. Our programs continue to provide opportunity for growth through expanded product offerings, new clients and geographic expansion. Services and other contributed $10.0 million in 2016, down $1.3 million from 2015 as certain business processing services are in run-off.
Fiscal year 2014 is not presented given the comparative ratios are less meaningful with only one month of results and the inclusion of acquisition related expenses.
The combined ratio for 2016 was 87.9% which was an increase from 77.9% in 2015. This increase was primarily driven by VOBA purchase accounting impacts which are outlined by line item in the “VOBA Impacts” table above. These relative changes from 2015 to 2016 included a year-over-year increase in revenues of $16.9 million, which was more than offset by year-over-year increase in commission expense of $34.4 million, both due to the impact of VOBA. The combined impact of these drivers caused the combined ratio to deteriorate. The as adjusted combined ratio, which excludes these purchase accounting impacts, was 89.5% for 2016, compared to 87.4% for 2015 with the increase driven primarily by the reduction in underwriting margins mentioned above.
In managing our investment portfolio we analyze net investments and net portfolio income, which are non-GAAP measures. Our presentation of net investments equals total investments plus cash and cash equivalents minus asset based financing of investments. Our presentation of net portfolio income equals net investment income plus realized and unrealized gains and losses and minus interest expense associated with asset based financing of investments. Net investments and net portfolio income are used to calculate average annualized yield, which management uses to analyze the profitability of our investment portfolio. Management believes this information is useful since it allows investors to evaluate the performance of our investment portfolio based on the capital at risk and on a non-consolidated basis. Our calculation of net investments and net portfolio income may differ from similarly titled non-GAAP financial measures used by other companies. Net investments and net portfolio income are not measures of financial performance or liquidity under GAAP and should not be considered a substitute for total investments or net investment income. See “-Non-GAAP Reconciliations” for a reconciliation to GAAP total investments and investment income.
(1) Loans, at fair value, net of asset based debt, see “-Non-GAAP Reconciliations”, for a reconciliation to GAAP financials.
(2) Average Annualized Yield % represents the ratio of net investment income, realized and unrealized gains (losses) less investment portfolio interest expense to the average of the prior five quarters total investments less investment portfolio debt plus cash. NM% represents “not meaningful” as the results in the table represent one month of Fortegra income.
Net investments have grown 31.0% from $268.9 million at year ended December 31, 2015 to $352.3 million at year ended December 31, 2016, through a combination of internal growth, increased retention of premiums written, and assets contributed by the Company to further capitalize Fortegra.
Our net investment income includes interest and dividends earned on our invested assets. We report net realized gains and losses on our investments separately from our net investment income. Net realized gains occur when we sell our investment securities for more than their costs or amortized costs, as applicable. Net realized losses occur when we sell our investment securities for less than their costs or amortized costs, as applicable, or we write down the investment securities as a result of other-than-temporary impairment. We report net unrealized gains (losses) on securities classified as available-for-sale separately within accumulated other comprehensive income on our balance sheet. For loans, at fair value, and equity securities classified as trading securities, we report unrealized gains (losses) within net realized gains (losses) on investment on the consolidated statement of income.
for 2015, primarily driven by increases in incentive compensation as a result of higher management and incentive fees. Net income attributable to consolidated CLOs was up $27.1 million primarily as unrealized losses from 2015 were recovered through unrealized gains in 2016, as discussed in further detail below.
For the year ended December 31, 2016, as adjusted revenues were $33.4 million compared to a loss of $0.1 million in the same period in 2015. The increases were driven primarily by increased management and incentive fees of $1.5 million, increased distributions of $1.0 million, and a reduction in losses of $31.7 million. The increased management fees and distributions were primarily due to the launch of Telos 7 combined with incentive fees from our older vintage CLOs. The reduction in the realized and unrealized losses were due to a recovery of the marked-to-market position on our CLOs and CLO warehouse in the 2016 period of $2.6 million as compared to the unrealized losses taken in 2015 of $29.1 million. Given the recovery in CLO values throughout 2016, and the volatility in subordinated notes, management has reduced the Company’s exposure by selling its subordinated notes in Telos 5 on January 23, 2017 for total consideration of $15.9 million.
For 2015, as adjusted revenues were a loss of $0.1 million compared to revenue of $26.6 million in 2014. The lower management fees were due to the runoff of Telos 1 and Telos 2, which were past their reinvestment period and lower fees on later CLOs. The Company realized GAAP losses from the sale of its subordinated notes issued by Telos 2 and Telos 4 during 2015, which generated
We operate our senior living segment through Care which is focused on investing in seniors housing properties including senior apartments, independent living, assisted living, memory care and, to a lesser extent, skilled nursing facilities. As of December 31, 2016, Care’s portfolio consists of 29 properties across 11 states primarily in the Mid-Atlantic and Southern United States comprised of 13 Triple Net Lease (“NNN”) Properties and 16 Managed Properties.
such, the increased number of properties generated higher rental and other income in 2015 compared with 2014, but on a lag relative to the additional depreciation, amortization and interest expenses as a consequence of the growth and additional capital investment in the newer properties.
Expenses for the year ended December 31, 2016 were $66.6 million, compared with $55.7 million for 2015, an increase of $10.9 million or 19.6%. The primary increases period-over-period include property operating expenses of $8.2 million (including employee compensation and benefits and other expenses), interest expense of $1.9 million, payroll and other costs of $1.2 million, partially offset by a reduction in depreciation and amortization expenses of $0.4 million, which also included a decrease in amortization of in-place leases acquired. The increase in property operating expenses was primarily attributable to consolidation of the expenses of the five Managed Properties acquired in the first quarter of 2015, and the three acquired in the first and third quarters of 2016. The Company is party to interest rate swaps in order to hedge interest rate exposure associated with its real estate holdings. These instruments swap fixed to floating rate cash streams in order to maintain the economics on the mortgage debt. As a result of movements in interest rates over the year ended December 31, 2016, an unrealized loss was recorded in other expenses for $1.2 million for swaps that had not been previously designated as hedging relationships.
Expenses for 2015 were $55.7 million, compared with $26.1 million for 2014, an increase of $29.6 million or 113.2%. Interest expense was $6.8 million for 2015, compared with $4.1 million for 2014. Payroll expenses were $18.5 million for 2015 compared with $8.1 million for 2014. Depreciation and amortization expenses were $14.5 million in 2015, compared with $7.2 million in 2014. Other expenses, which include property operating expenses, office expenses, property acquisition costs, professional fees and property taxes, were $15.8 million for 2015, compared with $6.8 million for 2014. The increase in expenses was primarily attributable to consolidation of the expenses of the nine Managed Properties added in the fourth quarter of 2014 and first quarter of 2015 and an increase in amortization of in-place leases acquired.
In addition to Adjusted EBITDA, we also evaluate performance of our senior living segment based on net operating income (“NOI”), which is a non-GAAP measure. NOI is a common non-GAAP measure in the real estate industry used to evaluate property level operations. We consider NOI an important supplemental measure to evaluate the operating performance of our senior living segment because it allows investors, analysts and our management to assess our unlevered property-level operating results and to compare our operating results between periods and to the operating results of other senior living companies on a consistent basis. Agreements with our operators are structured such that they are incentivized to grow NOI, and it is a significant component in determining the compensation paid to Care’s management team. We define NOI as rental and related revenue less property operating expense. Property operating expenses and resident fees and services are not relevant to Triple Net Lease Properties since we do not manage the underlying operations and substantially all expenses are passed through to the tenant. Our calculation of NOI may differ from similarly titled non-GAAP financial measures used by other companies. NOI is not a measure of financial performance or liquidity under GAAP and should not be considered a substitute for pre-tax income.
NOI was $22.1 million for the year ended December 31, 2016, compared with $16.1 million in the prior year period, an increase of $6.0 million or 37.5%. The primary drivers of improvement in NOI in both periods was an increase in rental revenue partially offset by increased property operating expenses. As mentioned earlier, several of our recent acquisitions included properties that the Company and its operating partners are enhancing through renovation projects and other capital upgrades in an effort to grow revenue and to allow them to operate more efficiently. As indicated in the table above, NOI margins on Managed Properties improved from 24.6% in the year ended December 31, 2015 to 27.8% for year ended December 31, 2016. As the more recently acquired facilities ramp up and stabilize, we expect our results to reflect additional NOI margin improvements.
Adjusted EBITDA was $10.5 million for the year ended December 31, 2016, compared to $6.6 million in the year ended December 31, 2015, driven primarily increases in NOI partially offset by increased interest expense on new acquisitions.
For the year ended December 31, 2016, pre-tax income was $8.2 million compared with $6.3 million for 2015. Revenues were $95.4 million for 2016, compared with $55.0 million for 2015, an increase of $40.4 million or 73.5%. Expenses were $87.3 million in 2016,
Pre-tax income was $6.3 million for 2015, compared with a net loss of $2.0 million for 2014. The key drivers of the increase were higher loan volume, including the impact from the acquisition of Reliance. Revenues were $55.0 million for 2015, compared with $15.2 million for 2014, an increase of $39.8 million or 262%. Expenses were $48.7 million in 2015, compared with $17.2 million in 2014, an increase of $31.5 million or 183%. Higher revenues more than offset higher expenses resulting in improving operating margins.
Revenues are comprised of gain on sale of mortgages originated and sold to investors, gains and losses on the mortgage pipeline of interest rate lock commitments and mortgage loans held for sale and their associated hedges, and net interest income and fees associated with our commercial lending products and the mortgage origination business.
Increased revenues were partially offset by higher expenses, which increased from $48.7 million for the year ended December 31, 2015 to $87.3 million for 2016. Expenses are composed of payroll and employee commissions, interest expense, professional fees and other expenses. The primary driver of higher expenses for 2016 was a combination of the inclusion of Reliance for the full year, higher payroll and other employee expenses as the Company increased the number of loan officers, plus higher marketing costs to support the higher number of sales personnel. During 2016, the specialty finance headcount increased from 485 to 595, or by 22.7%. In addition to the increase in headcount and marketing expenses, the change in the fair value of the contingent earn-out liability at Reliance represented an increase in expense year-over-year of $2.6 million.
Corporate and other incorporates revenues from non-core legacy principal investments and expenses including interest expense on the holding company credit facility and employee compensation and benefits, professional fees and other expenses.
For the year ended December 31, 2016, the Company recorded a loss of $31.1 million compared with a loss of $34.4 million for the 2015 period, an increase in pre-tax income of $3.3 million. The key drivers of year-over-year reduction in loss were $4.0 million higher revenues from realized gains on the sale of certain legacy principal investments, which were partially offset by increases in corporate expenses of $0.7 million primarily related to professional services.
Expenses include holding company interest expense, employee compensation and benefits, professional fees and other expenses. Corporate employee compensation and benefits expense includes the expense of management, legal and accounting staff. Other expenses primarily consisted of audit and professional fees, insurance, office rent and other expenses.
From 2014 to 2015, expenses increased by $16.1 million driven by $9.5 million of employee compensation and benefits, $1.0 million of interest expenses and $5.6 million of other expenses. Increases in employee compensation was a result of the separation expense mentioned previously, in addition to increasing corporate headcount to improve the reporting and controls infrastructure. The increase in other expenses was primarily driven by incremental consulting spend related to the evaluation and remediation of material weaknesses.
Adjusted EBITDA was a loss of $27.9 million for the year ended December 31, 2016 compared to a loss of $23.2 million in the prior year period. The decrease in Adjusted EBITDA was driven by the same factors that impacted pre-tax income, combined with EBITDA adjustments to reflect the timing of cash outflow for payments to a former executive. See “-Non-GAAP Reconciliations” for a reconciliation to GAAP pre-tax income.
The total income tax expense of $11.0 million for the year ended December 31, 2016, $1.4 million for the year ended December 31, 2015 and $4.1 million for the year ended December 31, 2014 is reflected as a component of income (loss) from continuing operations. For the year ended December 31, 2016, the Company’s effective tax rate on income from continuing operations was equal to 25.3%, which does not bear a customary relationship to statutory income tax rates. The effective tax rate for the year ended December 31, 2016 is lower than the U.S. federal statutory income tax rate of 35.0%, primarily due to $4.0 million of discrete tax benefits for the period, primarily related to the tax restructuring that resulted in a consolidated corporate tax group effective January 1, 2016. See Note-(1) Organization, in the accompanying consolidated financial statements. The Company’s effective tax rate before the restructure benefit was equal to 34.7% for the full year 2016.
For the year ended December 31, 2014, the Company’s effective tax rate on income from continuing operations was equal to 525.5%, which does not bear a customary relationship to statutory income tax rates. Differences from the statutory income tax rate are primarily due to state income taxes, non-deductible transaction costs incurred in connection with the Fortegra acquisition, and the effect of changes in valuation allowance on net operating losses reported by Tiptree Inc., Siena Capital Finance Acquisition Corp., Luxury and MFCA Funding, Inc.
The Company completed the sale of PFG during the second quarter of 2015. As such, there was no income from discontinued operations in the year ended December 31, 2016 compared to $22.6 million and $7.9 million for the year ended December 31, 2015 and 2014, respectively. For further information relating to the sale of PFG see Note-(4) Dispositions, Assets Held for Sale & Discontinued Operations, in the accompanying consolidated financial statements.
Balance Sheet Information - as of December 31, 2016 compared to the year ended December 31, 2015
The consolidated non-corporate and non-acquisition related interest expense is subtracted from EBITDA to arrive at Adjusted EBITDA. This includes interest expense associated with asset-specific debt at subsidiaries in the specialty insurance, asset management, senior living and specialty finance segments.
Significant relocation costs for discontinued operations included expenses incurred in connection with the move of one of our subsidiaries’ physical location from New Jersey to Philadelphia for the year ended December 31, 2014.
Underwriting margin is a measure of the underwriting profitability of our specialty insurance segment. It represents net earned premiums, service and administrative fees, ceding commissions and other income less policy and contract benefits and commission expense. We use the combined ratio as an insurance operating metric to evaluate our underwriting performance, both overall and relative to peers. Expressed as a percentage, it represents the relationship of policy and contract benefits, commission expense (net of ceding commissions), employee compensation and benefits, and other expenses to net earned premiums, service and administrative fees, and other income. The following table provides a reconciliation between as adjusted underwriting margin and pre-tax income for the fiscal years ended December 31, 2016 and 2015.
The following table provides a reconciliation between segment NOI and pre-tax income (loss) for the fiscal years ended December 31, 2016, 2015 and 2014.
(1) NOI Margin % is the relationship between segment NOI and rental and related revenue.
The following table provides a reconciliation between asset management segment revenues and non-GAAP, as adjusted revenues for the fiscal years ended December 31, 2016, 2015 and 2014.
Our principal sources of liquidity are our holdings of unrestricted cash, cash equivalents and other liquid investments and distributions from operating subsidiaries, including subordinated notes of CLOs, income from our investment portfolio and sales of assets and investments. We intend to use our cash resources to continue to grow our businesses. We 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. We are a holding company and our liquidity needs are primarily for interest payments on the Fortress credit facility, compensation, professional fees, office rent and insurance costs.
Our approach to debt is generally to use non-recourse (other than customary carveouts, including fraud and environmental liability), asset specific debt where possible that is amortized by cash flows from the underlying business or assets financed. Our mortgage businesses rely on short term uncommitted sources of financing as a part of their normal course of operations. To date, we have been able to obtain and renew uncommitted warehouse credit facilities. If we were not able to obtain financing, then we may need to draw on other sources of liquidity to fund our mortgage business. See Note-(13) Debt, net for additional information regarding our mortgage warehouse borrowings.
Summary Consolidated Statements of Cash Flows - Year Ended December 31, 2016, December 31, 2015 and December 31, 2014
Cash provided by continuing operations (excluding VIEs) was $45.3 million for the year ended December 31, 2016. The primary sources of cash from continuing operations included mortgage sales outpacing originations, an increase in unearned premiums and policy liabilities in our specialty insurance segment as a result of credit protection and specialty products, and an increase in revenues in our senior living segment as a result of increased investments in properties during the period. The primary uses of cash from continuing operations included increases in notes and accounts receivable and reinsurance receivables in our specialty insurance segment as written policies increased significantly, and a decrease in deferred revenue in our specialty insurance segment.
Cash used in investing activities from continuing operations (excluding VIEs) was $244.5 million for the year ended December 31, 2016. The primary drivers included investments in NPLs and corporate loans, investments in senior living properties in our specialty insurance and senior living segments, and increases in loans in the specialty finance segment.
Cash used in operating activities - discontinued operations was $6.2 million for the year ended December 31, 2015. The primary driver of the cash used was a decrease in future policy benefits payable.
Cash provided by investing activities - VIEs was $33.6 million for the year ended December 31, 2015. The primary driver of the use of cash in investing activities - VIEs was investments in new loans in the CLOs, more than offset by repayments and sales.
Cash provided by financing activities (excluding VIEs) was $240.1 million for the year ended December 31, 2015. The primary sources of cash included increased borrowings at Siena to fund loan growth, borrowings on mortgage warehouse lines and increases in borrowings at Care to fund property acquisitions.
Cash provided by financing activities - VIEs was $8.6 million for the year ended December 31, 2015. The primary driver of the sources of cash in financing activities - VIEs was a net increase in debt on the CLOs.
Cash used in financing activities - discontinued operations was $5.0 million for the year ended December 31, 2015. The primary driver of the cash used was the repayment of debt outstanding.
Cash used in investing activities - discontinued operations was $3.0 million for the year ended December 31, 2014. The primary driver of cash provided from investing activities - discontinued operations was the repayment of policy holder loans, partially offset by the purchase of property, plant and equipment.
Cash provided by financing activities - VIEs was $497.8 million for the year ended December 31, 2014. The primary driver of the sources of cash in financing activities - VIEs was an increase in CLO liabilities.
Non-recourse CLO notes payable principal is payable at stated maturity, 2021 for Telos 1, 2022 for Telos 2, 2024 for Telos 3 and Telos 4, 2025 for Telos 5, 2027 for Telos 6 and 2025 for Telos 7.
See Note -(13) Debt, net, in the accompanying consolidated financial statements for additional information.
Minimum rental obligation for Tiptree, Care, MFCA, Siena, Reliance, Luxury and Fortegra office leases. The total rent expense for the Company for the year ended December 31, 2016, 2015 and 2014 was $6.4 million, $5.8 million and $1.5 million, respectively.
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 Fortegra 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.
Commissions are paid to distributors and retailers selling credit insurance policies, motor club memberships, mobile device protection, and warranty service contracts, and are generally deferred and expensed in proportion to the earning of related revenue. Credit insurance commission rates, in many instances, are set by state regulators and are also impacted by market conditions. In certain instances, credit insurance commissions are subject to retrospective adjustment based on the profitability of the related policies. Under these retrospective commission arrangements, the producer of the credit insurance policies receives
The initial measurement of goodwill and intangibles requires judgment concerning estimates of the fair value of the acquired assets and liabilities. Goodwill (and indefinite-lived intangible assets 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.
Further disclosure on our off-balance sheet arrangements as of December 31, 2016 is presented in the “Notes to Consolidated Financial Statements” in “Part II. Item 8. Financial Statements and Supplementary Data” of this filing as follows:
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tiptree Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Tiptree Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016 and our report dated March 13, 2017, expressed an unqualified opinion on those consolidated financial statements.
A VIE is required to be consolidated only by its primary beneficiary, which is defined as the party who has the power to direct the activities of a VIE that most significantly impact its economic performance and who has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. Generally, Tiptree’s consolidated VIEs are entities which Tiptree is considered the primary beneficiary through its controlling financial interest.
The Company’s Consolidated Statements of Cash Flows for the year ended December 31, 2015 has been revised for immaterial corrections and errors related to the presentation of our activities from Discontinued Operations and business acquisitions. These corrections resulted in an overall decrease in cash provided by operating activities of approximately $4,500, a net increase in cash used by investing activities of approximately $1,400, which consists of an increase in cash used by of approximately $9,200 in continuing operations and an adjustment of approximately $7,800 to reflect cash of a disposed business, and an increase in cash provided by financing activities of approximately $5,900. Such changes had no impact on the ending cash balance as of December 31, 2015.
As a result of changes in presentation, certain prior year amounts have been reclassified to conform to the current presentation. These reclassifications had no effect on the reported results of operations. The primary difference in the presentation of the Consolidated Financial Statements from the prior year is the aggregation of investments on the Consolidated Balance Sheets and the summation of the net investment income of our specialty insurance business in the Consolidated Statements of Operations. In addition certain immaterial balances have been combined.
In certain instances, the Company may acquire less than 100% ownership of an entity, resulting in the recording of a non-controlling interest. The measurement of assets and liabilities acquired and non-controlling interest is initially established at a preliminary estimate of fair value, which may be adjusted during the measurement period based upon the results of a valuation study applicable to the business combination.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Grants of subsidiary RSUs exchangeable into Class A common Stock of the Company are accounted for as liabilities based upon their expected settlement method. Changes in fair value of the awards are recognized in earnings for the relative amount of cumulative compensation cost. The Company uses the straight-line method to recognize compensation expense for the time vesting RSUs over the requisite service periods, beginning on the grant date. The Company uses the graded-vesting method to recognize compensation expense for the performance vesting RSUs. Changes in fair value of shares underlying liability awards are recognized in earnings to the extent of the accumulated amortization. Compensation expense will be recognized to the extent that it is probable that the performance condition will be achieved. The Company reassesses the probability of satisfaction of the performance condition for the performance vesting RSUs for each reporting period.
The Company presents both basic and diluted earnings per Class A common share in its consolidated financial statements and footnotes thereto. Basic earnings per Class A common share (Basic EPS) excludes dilution and is computed by dividing net income or loss available to common stock holders by the weighted average number of common shares outstanding, including vested restricted share units, for the period. Diluted earnings per Class A 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.
AFS securities include those debt and equity securities that management may sell as part of its asset/liability management strategy or in response to changes in interest rates, resultant prepayment risk or other factors. AFS securities are held at fair value on the Consolidated Balance Sheet with changes in fair value, net of related tax effects, recorded in the accumulated other comprehensive income (AOCI) component of stockholders’ equity in the period of change. Upon the disposition of an AFS security, the Company reclassifies the gain or loss on the security from accumulated other comprehensive income (loss) to net realized and unrealized gains (losses) on the Consolidated Statements of Operations.
Mortgage loans held for sale represent loans originated and held until sold to secondary market investors. Such loans are typically warehoused for a period after origination or purchase before sale into the secondary market. Servicing rights are generally released upon sale of mortgage loans in the secondary market. The Company has elected to measure all mortgage loans held for sale at fair value. These loans are considered sold when the Company surrenders control to the purchaser. The gains or losses on sales of such loans, net of any accrual for standard representations and warranties, are reported in operating results as a component of net realized and unrealized gains (losses) in the Consolidated Statement of Operations in the period when the sale occurs.
The Company has elected the fair value option for NPLs as we have concluded that fair value timely reflects the results of our investment performance. As substantially all of our loans were non-performing when acquired, we generally look to the estimated fair value of the underlying property collateral to assess the recoverability of our investments. We primarily utilize the local broker price opinion (BPO) but also consider any other comparable home sales or other market data, as considered necessary, in estimating a property’s fair value. For further discussion on the observable and unobservable inputs to the model and determination of fair value of NPLs, see Note-(7) Fair Value of Financial Instruments.
Investments in real estate, net are carried at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis using estimated useful lives not to exceed 40 years for buildings and 9 years for building improvements and other fixed assets.
Real estate properties are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If such reviews indicate that the asset is impaired, the asset’s carrying amount is
NPLs are reclassified to REO once the Company has obtained legal title to the property upon completion of a foreclosure sale or the borrower has conveyed all interest in the property to satisfy that loan through completion of a deed in lieu of foreclosure. Because the company elected the fair value option for NPLs, upon recognition as REO the property fair value is estimated using market values and, if the property meets held-for-sale criteria, it is initially recorded at fair value less costs to sell as its new cost basis. Subsequently, the property is carried at (i) the fair value of the asset minus the estimated costs to sell the asset or (ii) the initial REO value, whichever is lower. Adjustments to the carrying value of REOs are recorded in net realized and unrealized gains (losses).
Through the specialty insurance business, the Company has various reinsurance agreements in place whereby the amount of risk in excess of its retention goals is reinsured by unrelated domestic and foreign insurance companies. The Company is required to pay losses even if a reinsurer fails to meet its obligations under the applicable reinsurance agreement. 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 the Company of its legal liability to policyholders. Management continually monitors the financial condition and agency ratings of the Company’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 evaluates whether deferred acquisition costs - non-insurance policy related are recoverable at year-end. As a result of the Company's evaluations, no write-offs for unrecoverable deferred acquisition costs were recognized during the years ended December 31, 2016, 2015 and 2014, respectively.
Anticipated future loss development patterns form a key assumption underlying these analyses. Generally, unpaid claims reserves, and associated incurred losses, 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 may include changes in claims reporting patterns, claims settlement patterns, judicial decisions, legislation, economic conditions, morbidity patterns and the attitudes of claimants towards settlements.
The unpaid claims reserves represent the Company's best estimates at a given time, based on the projections and analyses discussed above. 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.
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, 2016 and 2015, respectively, no deficiency reserves were recorded.
Service Fees. Service fee revenue is recognized as the services are performed. These services include fulfillment, software development, and claims handling for our customers. Collateral tracking fee income is recognized when the service is performed and billed. Management reviews the financial results under each significant contract on a monthly basis. Any losses that may occur due to a specific contract would be recognized in the period in which the loss is determined probable. During the years ended December 31, 2016, 2015 and 2014, respectively, the Company did not incur a loss with respect to a specific significant service fee contract.
Rental revenue from residents in properties owned by Care but managed by a management company pursuant to a management agreement (Managed Properties) are recognized monthly as services are provided, as lease periods for residents are short-term in nature. The Company recognizes rental revenue from triple net leases on a straight-line basis over the non-cancelable term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. Renewal options in leases with rental terms that are higher than those in the primary term are excluded from the calculation of straight-line rent if the renewals are not reasonably assured. The Company commences rental revenue recognition when the tenant takes control of the leased space. The Company recognizes lease termination payments as a component of rental revenue in the period received, provided that there are no further obligations under the lease. Revenue related to rental revenue is primarily attributable to services provided to the occupants of our senior living properties.
Commissions are paid to distributors and retailers selling credit insurance policies, motor club memberships, mobile device protection, and warranty service contracts, and are generally deferred and expensed in proportion to the earning of related revenue. Credit insurance commission rates, in many instances, are set by state regulators and are also impacted by market conditions. In certain instances, credit insurance commissions are subject to retrospective adjustment based on the profitability of the related policies. Under these retrospective commission arrangements, the producer of the credit insurance policies receives a retrospective commission if the premium generated by that producer in the accounting period exceeds the costs associated with those policies, which includes the Company's administrative fees, claims, reserves, and premium taxes. The Company analyzes the retrospective commission calculation periodically for each producer and, based on the analysis associated with each such producer, the Company records a liability for any positive net retrospective commission earned and due to the producer or, conversely, records a receivable, net of allowance, for amounts due from such producer for instances where the net result of the retrospective commission calculation is negative. Commissions payable are included in other liabilities and accrued expenses.
In January 2014, the FASB issued ASU 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40), Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure. This amendment clarifies when an in substance repossession or foreclosure has occurred. Additionally, this amendment requires disclosure of the amount of foreclosed residential real estate property held and the recorded investment in consumer mortgage loans collateralized
by residential real estate that are in the process of foreclosure. The adoption of ASU 2014-04 did not have a material impact on the Company's consolidated financial statements.
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 was effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. ASU 2014-13 provides for a measurement alternative whereby a company can measure both the financial assets and financial liabilities of its CLOs using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. The Company elected to early adopt ASU 2014-13 for the year ended December 31, 2014 as it pertains to the CLOs it consolidates and elected to apply it retrospectively to all relevant prior periods. The application of this new guidance resulted in adjustments to certain balances in the previously issued consolidated financial statements for the year ended December 31, 2014, as well as for the interim periods ended March 31, 2014, June 30, 2014, and September 30, 2014.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which amends the consolidation requirements in the FASB Accounting Standards Codification 810, Consolidation. ASU 2015-02 makes targeted amendments to the current consolidation guidance for VIEs, which could change consolidation conclusions. This pronouncement was effective on January 1, 2016, with early adoption is permitted. The Company elected to early adopt ASU 2015-02 for the year ended December 31, 2015 as it pertains to the CLOs it consolidates and elected to apply it effective January 1, 2015. The application of this amended guidance resulted in adjustments to certain balances in the previously issued consolidated financial statements for the interim periods ended March 31, 2015, June 30, 2015 and September 30, 2015. See Note (12) Assets and Liabilities of Consolidated CLOs.
In April 2015, the FASB issued ASU 2015-05, Intangibles -Goodwill and Other -Internal-Use Software (Subtopic 350-40), which will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance as to whether an arrangement includes the sale or license of software. The adoption of this standard did not have a material impact on the consolidated financial statements.
In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which eliminates the requirement for entities to categorize within the fair value hierarchy investments for which fair values are measured at net asset value (NAV) per share (FASB ASC Subtopic 820-10). ASU 2015-07 also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the NAV per share practical expedient, instead limiting disclosures to investments for which the entity has elected the expedient. ASU 2015-07 was effective for the Company on January 1, 2016 and retrospective adoption is required. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) - Intra- Entity Transfers of Assets Other Than Inventory (ASU 2016-16), which requires that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this standard eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments in this standard do not include new disclosure requirements; however, existing disclosure requirements might be applicable. ASU 2016-16 is effective for public companies for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company elected to early adopt this standard during the quarter ended December 31, 2016. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
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. On July 9, 2015, the FASB decided to delay the effective date of ASU 2014-09 by one year. This standard was originally effective for the Company on January 1, 2017. Reporting entities may choose to adopt the standard as of the original effective date. The deferral results in ASU 2014-09 being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently evaluating the effect on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 supersedes the previous leases standard, Leases (Topic 840). The standard is effective on January 1, 2019, with early adoption permitted. The Company is currently evaluating the effect on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, which clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815, does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The standard is effective for financial statements
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarify the implementation guidance on principal versus net considerations. The effective date and transition requirements for this standard are the same as the effective date and transition requirements of ASU 2014-09. The Company is currently evaluating the effect on its consolidated financial statements.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. The Update includes targeted improvements based on input the FASB received from the Transition Resource Group for Revenue Recognition and other stakeholders. The Update seeks to proactively address areas in which diversity in practice potentially could arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). The Company is currently evaluating the effect on its consolidated financial statements.
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides guidance on collectability, noncash consideration, and completed contracts at transition. Additionally, the amendments in this Update provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). The Company is currently evaluating the effect on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted, including the adoption in an interim period. The amendments in this Update should be applied using a retrospective transition method to each period presented. The Company is currently evaluating the effect on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held Through Related Parties that Are Under Common Control, which amends the consolidation guidance on how a reporting entity, that is the single decision maker of a VIE, evaluates whether it is the primary beneficiary of a VIE. This new guidance is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the effect on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which addresses classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 requires an entity’s reconciliation of the beginning-of-period and end-of-period total amounts shown on the statement of cash flows to include in cash and cash equivalents amounts generally described as restricted cash and restricted cash equivalents. The ASU does not define restricted cash or restricted cash equivalents, but an entity will need to disclose the nature of the restrictions. ASU 2016-18 is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the effect on its consolidated financial statements.
In December 2016, the FASB issued ASU 2016-19, Technical Corrections and Improvements. ASU 2016-19 clarifies guidance, corrects errors and makes minor improvements affecting a variety of topics in the ASC. Most of the amendments are not expected to have a significant effect on practice, but some of them could change practice for some entities. The Company is currently evaluating the effect on its consolidated financial statements.
On June 30, 2016 and December 31, 2016, the Company finalized the determination of the fair value of the assets acquired and the liabilities assumed for acquisitions completed in the first and third quarter of 2016, respectively. The adjustments to the amounts recorded in prior periods was an increase of $132 to real estate, net with an offsetting decrease of $132 to intangible assets, net related to in-place leases. Additionally, the change to the provisional amounts resulted in a decrease in depreciation and amortization of $67.
On December 4, 2014, the Company completed the acquisition of Fortegra for total consideration of $211,740 comprised of cash of $91,740 and borrowings of $120,000 in exchange for 100% ownership. Fortegra’s products include payment protection products, motor club memberships, service contracts, device and warranty services, as well as administration services to business partners, including insurance companies, retailers, dealers, insurance brokers and agents and financial services companies. The primary reason for the Company’s acquisition of Fortegra is to expand its insurance and insurance services operations.
The unaudited supplemental pro forma results were prepared for comparative purposes only and do not purport to be indicative of the results of operations had the acquisition of Fortegra occurred at January 1, 2014, nor is it indicative of any future operating results of the Company.
The Company classified its Philadelphia Financial Group (PFG) subsidiary as held for sale as of December 31, 2014. At the time of such classification, the pending sale of PFG also met the requirements to be classified as a discontinued operation. The sale of PFG was completed on June 30, 2015.
The Company received total cash of $142,837 at the time of sale and two future payments on the first and second anniversary of closing totaling approximately $7,341. The gain on the sale net of tax, was approximately $15,619, which is classified as a gain on sale from discontinued operations. As a result, the Company has reclassified the income and expenses attributable to PFG to income from discontinued operations, net for the years ended December 31, 2015 and 2014.
Specialty Insurance operations are conducted through Fortegra Financial Corporation (Fortegra), an insurance holding company. Fortegra underwrites and provides specialty insurance products, primarily in the United States, and is a leading provider of credit insurance and asset protection products. Fortegra’s diverse range of products and services include products such as mobile protection, extended warranty and service, debt protection and credit insurance and select niche personal and commercial lines insurance. The specialty insurance segment also includes results related to our corporate loans and non-performing residential mortgage loans.
The tables below present the components of revenue, expense, pre-tax income (loss), and segment assets for each of the operating segments for the following periods:
All of the Company’s investments in available for sale securities as of December 31, 2016 and December 31, 2015 are held by a subsidiary in the specialty insurance business. The following tables present the Company's investments in available for sale securities:
The Company does not intend to sell the investments that were in an unrealized loss position at December 31, 2016, 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, 2016, 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 for the three year period ended December 31, 2016.
Corporate loans that have been pledged as collateral totaled $175,365 at December 31, 2016 and $240,441 at December 31, 2015. Corporate loans primarily include syndicated leveraged loans held by the Company, which consist of $175,558 and $233,861 in loans as of December 31, 2016 and December 31, 2015, respectively. As of December 31, 2016 and December 31, 2015, the unpaid principal balance on these loans was $176,808 and $242,693, respectively.
As of December 31, 2016 and December 31, 2015, the difference between fair value of the Corporate loans and the unpaid principal balance was $1,250 and $8,832, respectively.
Asset backed loans that have been pledged as collateral totaled $119,558 at December 31, 2016 and $55,814 at December 31, 2015. As of December 31, 2016 and December 31, 2015, the Company held $113,138 and $51,831, respectively, of loans receivable, net, attributable to a subsidiary in our specialty finance business. Our subsidiary structures asset-based loan facilities in the $1,000 to $25,000 range for small to mid-sized companies. Collateral for asset-backed loan receivables, as of December 31, 2016 and December 31, 2015, consisted primarily of inventory, equipment and accounts receivable. Management reviews collateral for these loans on at least a monthly basis or more frequently if a draw is requested and management has determined that no impairment existed as of December 31, 2016. As of December 31, 2016, there were no delinquencies in the portfolio and all loans were classified as performing.
For the year ended December 31, 2016, the Company acquired two senior living facilities accounted for as asset acquisitions, with $17,777 of real estate acquired, and $3,308 of identifiable intangible assets related to in-place leases which will be amortized over approximately 12 years. These two properties are in addition to the three acquisitions disclosed in Note-(3) Acquisitions, which were accounted for as business combinations.
Interest income, and dividends related to available for sale securities, at fair value.
The following table presents the components of net investment income related to our specialty insurance business recorded on the Consolidated Statements of Operations:
The following table presents the components of net realized and unrealized gains (losses) recorded on the Consolidated Statements of Operations:
Net unrealized gains recognized during the years ended December 31, 2016, 2015 and 2014 on equity securities, trading, at fair value still held at December 31, 2016, 2015 and 2014 was $6,032, $256 and $0, respectively.
The Company’s fair value measurement is based primarily on a market approach, which utilizes prices and other relevant information generated by market transactions involving identical or comparable financial instruments. Sources of inputs to the market approach include third-party pricing services, independent broker quotations and pricing matrices. Management analyzes the third party valuation methodologies and its related inputs to perform assessments to determine the appropriate level within the fair value hierarchy and to assess reliability of values. Further, management has a process in place to review all changes in fair value that occurred during each measurement period. Any discrepancies or unusual observations are followed through to resolution through the source of the pricing as well as utilizing comparisons, if applicable, to alternate pricing sources. In addition, the Company utilizes an income approach to measure the fair value of NPLs, as discussed below.
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.
principal or interest is not fully collectible. NPLs are included in loans, at fair value and fall under Level 3 of the fair value hierarchy.
All transfers are deemed to occur at end of period. Transfers between Level 2 and 3 were a result of subjecting third-party pricing on both CLO and Non-CLO assets to various liquidity, depth, bid-ask spread and benchmarking criteria as well as assessing the availability of observable inputs affecting their fair valuation.
Purchases and transfers into Level 3 for 2015 have been restated to reflect assets purchased during a period as purchased rather than transfered. This change had no impact on the total amount of Level 3 assets.
The following is quantitative information about Level 3 significant unobservable inputs used in fair valuation. Disclosure of this information is not required in circumstances where a valuation (unadjusted) is obtained from a third-party pricing service and the information regarding the unobservable inputs is not readily available to the Company.
Notes and accounts receivable: To the extent that carrying amounts differ from fair value, fair value is determined based on contractual cash flows discounted at market rates for similar credits. Categorized as Level 2 of the fair value hierarchy.
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. Categorized as Level 3 of the fair value hierarchy.
Additionally, the following financial assets and liabilities on the Consolidated Balance Sheets are not carried at fair value, but whose carrying amounts approximate their fair value:
Accounts and premiums receivable, net, retrospective commissions receivable and other receivables: The carrying amounts approximate fair value since no interest rate is charged on these short duration assets. Categorized as Level 2 of the fair value hierarchy. See Note-(8) Notes and Accounts Receivable, net.
The Company’s senior living business owns a 75% interest in a managed property. In connection therewith, subsidiaries of the senior living business received notes from affiliates of the 25% partner. The cost basis of these notes at December 31, 2016 and December 31, 2015 was approximately $3,862 and $3,807, respectively. As of December 31, 2016, all of these notes were performing.
Accounts and premiums receivable, net, retrospective commissions receivable and other receivables are primarily trade receivables from the specialty insurance segment that are carried at their approximate fair value. The Company has established a valuation allowance against its accounts and premiums receivable of $225 and $165 as of December 31, 2016 and December 31, 2015, respectively.
Includes a non-cash transaction, as part of a reinsurance contract cancellation, that resulted in a reduction of $92,854 in reinsurance receivable, offset by an increase of $88,857 in assets and a decrease of $3,997 in liabilities.
The following table presents the aggregate amount included in reinsurance receivables that is comprised of the three largest receivable balances from unrelated reinsurers:
At December 31, 2016, the three unrelated reinsurers from whom our specialty insurance business has the largest receivable balances were: London Life Reinsurance Corporation (A. M. Best Rating: A rated); MFI Insurance Company, LTD (A. M. Best Rating: Not rated) and Frandicso Property and Casualty Insurance Corporation (A. M. Best Rating: Not rated). The related receivables of these reinsurers are collateralized by, assets on hand, assets held in trust accounts and letters of credit. At December 31, 2016, the Company does not believe there is a risk of loss due to the concentration of credit risk in the reinsurance program given the collateralization.
The following table presents identifiable finite- and indefinite-lived intangible assets, accumulated amortization, and goodwill by segment:
The following table presents the activity in goodwill, by segment, and includes the retrospective adjustments made to the balance of goodwill to reflect the effect of the final valuation adjustments made for acquisitions, the reduction to goodwill attributable to discontinued operations and any impairment related charges:
The Company conducts annual impairment tests of its goodwill as of December 31. For the year ended December 31, 2016, no impairment was recorded on the Company’s goodwill or intangibles. As of December 31, 2015, the Company recorded an impairment of $699 associated with Luxury within the Specialty Finance segment as a result of qualitative and quantitative procedures associated with our annual impairment testing. For the year ended December 31, 2014, no impairment was recorded on the Company’s goodwill or intangibles.
The following table presents the activity, by segment, in finite and indefinite-lived other intangible assets and includes the retrospective adjustments made to the balance to reflect the effect of any final valuation adjustments made for acquisitions, the reduction attributable to discontinued operations and any impairment related charges:
Credit Default Swap Indices (CDX) are credit derivatives that reference multiple names through underlying baskets or portfolios of single name credit default swaps. The Company enters into these contracts as both a buyer of protection and seller of protection to manage the credit risk exposure of its investment portfolio. The Company is required to deposit cash collateral for these positions equal to an initial 2.25% of the notional amount of the sold protection side, subject to increase based on additional maintenance margin as a result of decreases in value. As of December 31, 2016, the total margin was $6,750.
Foreign currency forward contracts are used as a foreign currency hedge where the Company has an obligation to either make or take a foreign currency payment at a future date. If the date of the foreign currency payment and the last trading date of the foreign currency forwards contract are matched, the Company has in effect “locked in” the exchange rate payment amount. The Company, through its subsidiary Siena, has entered into a foreign exchange forward contract hedge on its foreign loans receivable. The Company has not elected hedge accounting on such transactions.
The Company enters into interest rate lock commitments (IRLCs) in connection with its mortgage banking activities to fund residential mortgage loans with certain terms at specified times in the future. IRLCs that relate to the origination of mortgage loans that will be classified as held-for-sale are considered derivative instruments under applicable accounting guidance. As such, these IRLCs are recorded at fair value with changes in fair value typically resulting in recognition of a gain when the Company enters into IRLCs. In estimating the fair value of an IRLC, the Company assigns a probability that the loan commitment will be exercised and the loan will be funded (“pull through”). The fair value of the commitments is derived from the fair value of related mortgage loans, net of estimated costs to complete. Outstanding IRLCs expose the Company to the risk that the price of the loans underlying the commitments might decline from inception of the rate lock to funding of the loan. To manage this risk, the Company utilizes forward delivery contracts and TBA mortgage backed securities to economically hedge the risk of potential changes in the value of the loans that would result from the commitments.
The Company is exposed to interest rate risk when there is an unfavorable change in the value of investments as a result of adverse movements in the market interest rates. The Company enters into interest rate swaps (IRS) to protect against such adverse movements in interest rates. The Company is required to post collateral for the benefit of the counterparty. This is included in other assets in the Consolidated Balance Sheets.
A subsidiary in our specialty insurance business has one IRS with a counterparty, pursuant to which our subsidiary swapped the floating rate portion of its outstanding preferred trust securities to a fixed rate. This IRS is designated as a cash flow hedge and expires in June 2017. As of the December 4, 2014 acquisition date, the IRS was considered a new hedging relationship, and was redesignated as a hedge.
Subsidiaries in our senior living business have nine IRSs with the same counterparty as the lender, pursuant to which our subsidiary swapped the floating rate portion of its outstanding debt to a fixed rate. These IRSs are designated as cash flow hedges and expire between November 30, 2017 and August 1, 2023.
The following table presents the fair value and the related outstanding notional amounts of the Company's cash flow hedging derivative instruments and indicates where the Company records each amount in its Consolidated Balance Sheets:
The Company’s beneficial interests and maximum exposure to loss related to the consolidated CLOs are limited to (i) ownership in the subordinated notes and related participations in management fees of the CLOs and (ii) accrued management fees. Although these beneficial interests are eliminated upon consolidation, the application of the measurement alternative results in the net amount of the CLOs shown above to be equivalent to the beneficial interests retained by the Company as illustrated in the below table:
The following table summarizes the balance of the Company’s debt holdings, net of discounts and deferred financing costs, excluding notes payable of consolidated CLOs. See Note-(12) Assets and Liabilities of Consolidated CLOs:
(1) Asset based revolving financing is generally recourse only to specific assets and related cash flows.
(2) The weighted average coupon rate for asset based revolving financing was 3.53% and 2.35% at December 31, 2016 and December 31, 2015, respectively.
The following table presents the future maturities of the unpaid principal balance on the Company’s long-term debt as of:
The following narrative is a summary of certain of the terms of our debt agreements for the years ended December 31, 2015 and December 31, 2016:
On September 18, 2013, Tiptree’s intermediate holding company entered into a corporate Credit Agreement. The obligations under the Credit Agreement are secured by liens on substantially all of the otherwise unencumbered assets of such holding company. The principal amount of the loan is to be repaid in quarterly installments, the amount of which may be adjusted based on the net leverage ratio (as defined in the Credit Agreement) at the end of each fiscal quarter. The Credit Agreement is subject to a LIBOR floor of 1.25%.
On December 4, 2014, a subsidiary in our specialty insurance business and its subsidiaries entered into an amended and restated $140,000 secured credit agreement which is secured by liens on substantially all of the assets of the specialty insurance business. In addition, such credit agreement is subject to certain leverage and distribution covenants. This agreement provides for a $50,000 term loan facility and a $90,000 revolving credit facility. Our specialty insurance business and its subsidiaries are required to repay the aggregate outstanding principal amount of the initial $50,000 term loan facility in consecutive quarterly installments of $1,250, which commenced in March 2015. As of December 31, 2016 and 2015 the maximum borrowing capacity under such agreement was $130,000 and $135,000, respectively, and the outstanding amount borrowed was $105,500 and $91,500, respectively.
A subsidiary in our specialty finance business has a subordinated promissory note with an affiliate who owns the non-controlling interest of our subsidiary. The note has a maturity date of April 9, 2020 or six months following maturity of the asset based revolving financing held by the same entity. The note may be prepaid following the first anniversary of issuance but there is a prepayment premium of 3.00% prior to the second anniversary of issuance, 2.00% after the second but before the third anniversary and 1.00% after the third but before the fourth anniversary.
A subsidiary in our specially finance business issued a series of notes to pay several former shareholders as part of the acquisition by the Company. Payments are subject to cash available for distribution based on the profitability of the subsidiary subject to stipulations governed by the note agreements.
As of December 31, 2016, the Company is in compliance with the representations and covenants for outstanding borrowings or has obtained waivers for any events of non-compliance.
The following table presents information about incurred and paid loss development and average claim duration as of December 31, 2016, net of reinsurance, as well as cumulative claim frequency and the total of incurred-but-not-reported liabilities plus expected development on reported claims included within the net incurred claims amounts. The cumulative number of reported claims represents open claims, claims closed with payment, and claims closed without payment. It does not include an estimated count of unreported claims. The number of claims is measured by claim event. The Company considers a claim that does not result in a liability as a claim closed without payment.
(1) - The information presented for the years 2014 and 2015 is presented as unaudited supplemental information.
The following table presents unaudited supplementary information about average historical claims duration as of December 31, 2016 for short-duration contracts:
The following table presents the components of other assets as reported in the Consolidated Balance Sheets:
The following table presents the components of other liabilities and accrued expenses as reported in the Consolidated Balance Sheets:
As of December 31, 2016 and December 31, 2015, there were 34,983,616 (including the shares of Class A common stock held by subsidiaries of Tiptree) and 34,899,833 shares of Class A common stock issued and outstanding, respectively. As of December 31, 2016 and December 31, 2015, there were 8,049,029 shares of Class B common stock issued and outstanding, respectively, all of which are owned by TFP as a fiduciary for the limited partners of TFP. As a result of the tax reorganization on January 1, 2016, these shares of Class B common stock are accounted for as treasury stock in Tiptree’s financial statements.
TFP owns a warrant to purchase 652,500 shares of Class A common stock at $11.33 per share which is immediately exercisable and expires on September 30, 2018. Such an exercise would be accounted for as treasury stock held at TFP and would have no impact on Tiptree’s financial statements.
Tricadia Capital Management LLC owns an option to purchase 540,000 TFP common units at $15.00 per common unit which is immediately exercisable and expires on June 12, 2017 (Tricadia Option). The Tricadia Option was amended as of January 31, 2017 solely so that TFP can, at its option, deliver shares of the Company’s Class A common stock on an as exchanged basis of 2.798 shares for each TFP common unit. Such contract is equivalent to an option on 1,510,920 shares of Class A common stock at a strike price of $5.36.
The Company paid cash dividends per share during the periods presented as follows:
The Company adopted the Tiptree 2013 Omnibus Incentive Plan (2013 Equity Plan) on August 8, 2013, which permits the grant of stock units, stock, and stock options up to a maximum of 2,000,000 shares of Class A common stock. The general purpose of the 2013 Equity Plan is to attract, motivate and retain selected employees and directors for the Company, to provide them with incentives and rewards for performance and to better align their interests with the interests of the Company’s stockholders. Unless otherwise extended, the 2013 Equity Plan terminates automatically on the tenth anniversary of its adoption.
Excludes shares granted under the Company’s subsidiary incentive plans that are exchangeable for Tiptree Class A common stock.
A holder of the restricted stock units (RSUs) receive distributions. Generally, the RSUs shall vest and become nonforfeitable with respect to one-third of Tiptree shares granted on each of the first, second and third anniversaries of the date of the grant, and expensed using the straight-line method over the requisite service period. The restricted stock is subject to forfeiture as set forth in the agreement governing the award and receives distributions and has the right to vote.
The following table summarizes changes to the issuances of Class A common stock, restricted stock, and RSUs under the 2013 Equity Plan for the periods indicated:
Includes 130,946 of immediately vested Class A common stock with a grant date fair value of approximately $750 to settle compensation accrued during the year ended December 31, 2015.
Certain of Tiptree’s subsidiaries have established RSU programs under which they are authorized to issue RSUs or their equivalents, representing equity of such subsidiaries to certain of their employees. Such awards are accounted for as a liability. These RSUs are subject to performance-vesting criteria based on the performance of the subsidiary (performance vesting RSUs) and time-vesting subject to continued employment (time vesting RSUs). Following the service period, such vested RSUs may be exchanged at fair market value, at the option of the holder, for Tiptree Class A common stock under the 2013 Omnibus Incentive Plan. The Company has the option, but not the obligation to settle the exchange right in shares or cash.
Option awards have been granted to the Executive Committee with an exercise price equal to the fair market value of our common stock on the date of grant; those option awards have a 10-year term and are subject the recipient’s continuous service, a market requirement, and generally vest over five years beginning on the 3rd anniversary of the grant date. Options granted during the year ended December 31, 2016 contained a market requirement that, at any time during the option term, the 20-day volume weighted average stock price must exceed the December 31, 2015 book value per share. The market requirement may be met any time before the option expires and it only needs to be met once for the option to remain exercisable for the remainder of its term. If the market requirement is not met, but the service condition is met, the full amount of the compensation expense will be recognized over the appropriate vesting period.
The following table presents the Company's stock option activity for the current period:
The following table presents the total time-based and performance-based stock-based compensation expense and the related income tax benefit recognized on the Consolidated Statements of Operations:
On June 30, 2012, TAMCO, TFP and Tricadia Holdings LP (Tricadia) entered into a transition services agreement (TSA) in connection with the internalization of the management of Tiptree. Pursuant to the TSA, Tricadia provides the Company with the services of its Executive Chairman as well as certain administrative and information technology. The TSA was assigned to the Company in connection with the Contribution Transactions. The Company pays Tricadia specified prices per service which are detailed in the table below.
TFP and Back Office Services Group, Inc. (BOSG) entered into an administrative services agreement on June 12, 2007 (Administrative Services Agreement), which was assigned to Tiptree on July 1, 2013 in connection with the Contribution Transactions, under which BOSG provides certain back office, administrative and accounting services to the Company and it’s subsidiaries. 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. The Administrative Services Agreement has successive one year terms but may be terminated by either the Company or BOSG upon 60 days prior notice.
Represents cash bonuses and grant date fair value of immediately vested stock granted to Tricadia or its employees providing services to Tiptree pursuant to the TSA.
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 2.5%. Both the U.S. federal rate and the state statutory rates are before the consideration of rate reconciling items. A reconciliation of the expected federal income tax expense on income from continuing operations using the 35% federal statutory income tax rate to the actual income tax expense and resulting effective income tax rate is as follows for the periods indicated below:
As of December 31, 2016, the Company had total U. S. Federal net operating loss carryforwards (NOLs) arising from continuing operations. The following table presents the U.S. Federal NOLs by tax year of expiration:
In addition to the U.S. Federal NOLs, Tiptree and its subsidiaries have NOLs in various state jurisdictions totaling $3,896. Included in that amount are NOLs of approximately $1,991 that management has concluded will expire unutilized based on existing positive and negative evidence. As such, a full valuation allowance for that amount has been established.
As of December 31, 2016, the Company had no material unrecognized tax benefits or accrued interest and penalties. This is consistent with the tax years ending December 31, 2015 and December 31, 2014 as well. Federal tax years 2012 through 2015 were open for examination as of December 31, 2016.
law fraud. The action seeks compensatory and punitive damages, attorney fees and interest. Plaintiffs filed a Motion for Sanctions in April 2012 in connection with Fortegra's efforts to locate and gather certificates and other documents from Fortegra's producers. The court did not award sanctions and Fortegra has retained a special master to facilitate the collection of certificates and other documents from Fortegra's producers. In January 2015, the trial court issued an Order denying Fortegra’s motion to decertify the class, which was upheld on appeal. Following a February 2017 hearing, the court denied Fortegra’s Motion for Summary Judgment as to certain disability insurance policies. The court has not yet ruled on Fortegra’s Motion for Summary Judgment as to certain life insurance policies, and a hearing is currently set for March 2017. No trial or additional hearings are currently scheduled.
The Company considers such litigation customary in the insurance industry. In management's opinion, based on information available at this time, the ultimate resolution of such litigation, which it is vigorously defending, should not be materially adverse to the financial position of the Company. It should be noted that large punitive damage awards, bearing little relation to actual damages sustained by plaintiffs, have been awarded in certain states against other companies in the credit insurance business. At this time, the Company cannot estimate a range of loss that is reasonably possible.
The Company and its subsidiaries are parties to other legal proceedings in the ordinary course of business. Although Tiptree’s legal and financial liability with respect to such proceedings cannot be estimated with certainty, the Company does not believe that these proceedings, either individually or in the aggregate, are likely to have a material adverse effect on the Company’s financial position.
On March 9, 2017, the Company’s board of directors declared a quarterly cash dividend of $0.03 per share to Class A stockholders with a record date of March 27, 2017, and a payment date of April 3, 2017.