The Company has identified internal control deficiencies that in the aggregate resulted in material weaknesses as of December 31, 2015 that have not been fully remediated and tested. See “Item 9A. Controls and Procedures” below for more details.
A significant portion of our assets, including our CLO subordinated notes, are held at fair value and changes in fair value of these assets is reported quarterly as unrealized gains and losses in revenues. In 2015 we experienced $17.5 million of unrealized losses on our Telos 5 and Telos 6 CLO subordinated notes and related participations in management fees as we determined fair value to be a significant discount to their face amount at issuance in 2014.
During 2015, concerns about global growth prospects, liquidity, lower oil prices and the expectation of higher interest rates negatively affected credit markets. Beginning in the third quarter of 2015, we began to see signs of dislocation in the CLO market place. Secondary market broker bid/ask quotes on CLO subordinated notes widened at the end of the third quarter and widened even more by the end of the fourth quarter.
On January 1, 2015, Fortegra exercised an option to acquire the remainder of ProtectCELL, which is now 100% owned by Fortegra.
During the second quarter, the Company sold its investments in the subordinated notes issued by Telos 2 and Telos 4 to partly fund the diversification of its principal investments and to recycle capital from existing CLOs into a warehouse facility with the objective of creating new CLOs to increase asset management fees. The sales generated net cash of $39.7 million and realized losses of $8.0 million.
On June 30, 2015, the Company completed the sale of its PFG subsidiary for proceeds to the Company of $142.8 million at closing and future payments over the next two years totaling approximately $7.3 million. The sale resulted in a pre-tax gain of approximately $27.2 million and an after tax gain of $15.6 million in 2015, which is classified as a gain on sale from discontinued operations. The Company has reclassified the income and expenses attributable to PFG to income from discontinued operations, net for 2014 and 2015.
During 2015, the Company made an aggregate of $39.7 million principal investments in pools of NPLs. In the first quarter of 2016, the Company purchased an additional $8.0 million in NPLs, bringing the Company’s total investment in NPLs to $47.7 million as of the date of this report. Further details of the Company’s principal investments in NPLs are contained in our corporate and other segment.
In the fourth quarter of 2015, the Company and its subsidiaries purchased approximately 1.4 million common shares of RAIT, a publicly traded multi-strategy commercial real estate investment trust, for an aggregate of $3.5 million. In the first quarter of 2016, the Company and its subsidiaries purchased an additional approximately 5.2 million common shares of RAIT for an aggregate of $12.6 million.
(1) For further information relating to the Company’s Adjusted EBITDA, including a reconciliation to GAAP net income, see“-Non-GAAP Financial Measures” below.
The Company had a net loss before taxes from continuing operations of $12.4 million for the year ended December 31, 2015, which was a decrease of $13.2 million from 2014. The key drivers of pretax results from continuing operations were higher depreciation and amortization from new investments in real estate at Care, 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 Fortegra, growth in specialty finance volumes and margins, and increased rental income in our real estate operations. In addition, in the twelve months ended December 31, 2014, there was a one-time gain of $7.9 million from the repayment of the Westside Loan, which impacted the year over year comparison.
For the year ended December 31, 2015, the Company reported revenues of $440.1 million, an increase of $359.8 million from the year ended December 31, 2014. The primary driver of the increase in revenues was the addition of Fortegra. Other key drivers were the improvement in volume and margins at our specialty finance segment, including from the addition of Reliance, increased rental income from our real estate segment, offset in part by the elimination of the one-time gain mentioned above from the prior year period, and the realized and unrealized losses on CLO subordinated note investments.
For the year ended December 31, 2015, the Company had expenses of $445.7 million, an increase of $346.6 million from the year ended December 31, 2014. The primary driver of the increase in expenses was the addition of Fortegra. Other key drivers were higher payroll and commission expense due to higher volume overall in our specialty finance segment, including from the addition of Reliance, increased operating expenses and depreciation and amortization associated with our increased investments in our real estate segment, increases in corporate payroll and professional expenses to improve our reporting and controls infrastructure and separation payments of $6.5 million.
The Company reported total Adjusted EBITDA for the year ended December 31, 2015 of $58.4 million, a decrease of $0.5 million from the year ended December 31, 2014. The primary drivers of the decrease in this metric were the same factors that impacted Adjusted EBITDA from continuing operations combined with the positive impact of the gain on sale from our sale of PFG, partially offset by the loss of income from discontinued operations in the second half of the year.
Since we acquired Fortegra on December 4, 2014, the results of Fortegra are only reflected for approximately one month in our 2014 insurance and insurance services segment results. Since we acquired Reliance on July 1, 2015, the results of Reliance are only reflected for six months in our 2015 mortgage business results. The results of PFG, which was sold on June 30, 2015, are presented in discontinued operations for the first six months of 2015. Discussion of the changes in revenues, expenses and net income is presented below and in more detail, in our segment analysis.
Segment Assets as of - December 31, 2015 and December 31, 2014
Insurance and Insurance Services segment - operating results for the year ended December 31, 2015
The following table presents our insurance and insurance services segment results on a GAAP basis and a pro forma basis adjusted to eliminate the effects of purchase price accounting adjustments.
(5) Represents additional premium tax and other acquisition expenses that would have been recorded without purchase accounting; values of deferred acquisition costs were eliminated in purchase accounting.
Insurance and insurance services segment pre-tax income was $29.8 million in the year ended December 31, 2015, an increase
Insurance and insurance services segment revenues are generated by the sale of the following products and services: credit protection, warranty, specialty products and other. Credit protection products include the following types of insurance: credit life, credit disability, credit property, involuntary unemployment, and accidental death and dismemberment. Warranty products include cell phone warranty, furniture and appliance service contracts and auto service contracts. Specialty products are primarily non-standard auto rebate insurance such as tire/wheel or windshield coverage. Services and other revenues principally represent fees for insurance sales and business process outsourcing services, and interest for premium and mobile device plan financing offset by reductions in fee income, ceding commissions, and commissions expense due to recording the purchase accounting effect of VOBA related to insurance contracts. The net revenue impact of VOBA, which is additive to net revenue, is substantially offset by increased amortization expense recorded in depreciation and amortization expense.
There are two types of income adjustments for claims payments under insurance and warranty service contracts: 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.
Member benefits claims and net losses and loss adjustment expenses, combined were $86.3 million for the year ended December 31, 2015, with claims up year over year. The increase over the prior year was a function of growth in earned premiums in credit life and non-standard auto and motor club partially offset by lower claims in mobile devices.
Payroll and employee commissions expense are the largest component of expenses and are composed of base salaries, employee commissions and accruals for employee paid time off and bonuses. Payroll and employee commission expense was $38.8 million for the year ended December 31, 2015, down from the prior year as a result of cost reduction efforts.
For information relating to Fortegra’s debt and interest expenses, please refer to Note 17-Debt, of the accompanying financial statements.
Insurance and insurance services segment adjusted EBITDA was $41.1 million for the year ended December 31, 2015. The key drivers of Adjusted EBITDA year over year growth was higher credit insurance and specialty products revenues and lower operating expenses, adjusted for the impact of purchase accounting effects, partially offset by lower warranty revenues driven by competition in the cell phone warranty business.
Specialty Finance segment - operating results for the year ended December 31, 2015 and December 31, 2014
The specialty finance segment is comprised of Siena, a commercial finance company, which is 62% owned by the Company and our mortgage origination business, which is conducted through two entities, Reliance, a mortgage originator, which is 100% owned as of July 1, 2015 and Luxury, a mortgage originator which is 67.5% owned by the Company.
Specialty finance segment 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.
Segment revenues were $55.0 million for 2015, compared with $15.2 million for 2014, an increase of $39.8 million or 262%. Segment 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, driven by the scalability of our lending business.
Siena’s pre-tax net income was $2.5 million for 2015, compared with pre-tax net income of $120 thousand for 2014. The improvement in Siena’s results in 2015 were primarily the result of increased loan originations, higher utilization rates of facilities by borrowers and higher fee income. The combination produced average earning assets of $56.0 million for the year ended December 31, 2015, compared with $29.3 million for 2014, an increase of 91%. Siena’s improved results were primarily driven by higher interest income on the loans it makes to small and medium sized U.S. companies and increased fee income associated with the Company’s lending activities.
Siena’s expenses were $7.6 million in 2015, compared with $4.4 million in 2014, an increase of $3.2 million or 73%. Siena’s expenses are comprised primarily of payroll and employee commissions, interest and other expenses. Growth in expenses was
at a slower pace than the increase in lending volume as a result of scale in the business, and was partially impacted by the relocation of the corporate headquarters to accommodate Siena’s growth.
Total origination volume increased from $538.7 million in the year ended December 31, 2014 to $1,243.7 million in the year ended December 31, 2015. Funded volume increased at a faster pace than brokered volume primarily due to the fact that the substantial majority of Reliance’s volume is in this category.
Agency and FHA/VA originations have significantly higher net revenue margin than jumbo and brokered volumes. The improvement in product mix and margins were a significant driver of improved profitability in the mortgage business in addition to the increased volume as net revenue margins (in bps) grew faster than expenses.
Real Estate segment - operating results for the year ended December 31, 2015 and December 31, 2014
We evaluate performance of our real estate segment based on net operating income (“NOI”). We consider NOI as an important supplemental measure used to evaluate the operating performance of our real estate segment because it allows investors, analysts and our management to assess our unleveraged property-level operating results and to compare our operating results between periods and to the operating results of other real estate companies on a consistent basis. We define NOI as total revenue less property operating expense. Property operating expenses and resident fees and services are not relevant to Care’s Triple Net Lease Properties since Care does not manage the underlying operations and substantially all expenses are passed through to the tenant. The following tables present revenues and expenses, which include amounts attributable to non-controlling interests, by property type in our real estate segment for the year ended December 31, 2015 and 2014, respectively.
Care’s total revenues were $46.1 million for 2015, compared with $29.3 million for 2014, an increase of $16.8 million or 57%. Excluding the one-time $7.9 million gain from the repayment of the Westside Loan in 2014. Care’s total revenue increased $24.7 million or 115% year over year. Rental income in 2015 was $43.1 million, compared with $19.7 million for 2014, an increase of $23.4 million or 119% from the prior year. Care earned other income of $3.2 million in 2015, compared to $1.1 million in 2014. Other income was comprised of resident fees and reimbursable escrow earnings. The increase in rental revenue and other income was mainly due to the addition of nine Managed Properties, including the properties managed by Royal which were added in the first quarter of 2015 and properties managed by Greenfield and an additional property managed by Heritage which were added in the fourth quarter of 2014.
The Company’s asset management segment generates fee income from the CLOs under management and from its management of NPPF 1, a portfolio of tax-exempt securities owned by third-party investors. Total fee earning AUM of our asset management segment were $1.9 billion, of which $1.8 billion was attributable to the CLO business and $148.6 million was attributable to NPPF 1, compared to $2.1 billion as of December 31, 2014, of which $1.9 billion was attributable to the CLO business and $175.2 million was attributable to NPPF 1. AUM for 2015 excludes AUM for Telos 7 of $167.8 million and AUM for Telos Credit Opportunities Fund of $78.7 million, in each case as of December 31, 2015. The Company’s AUM in CLOs decreased approximately $130.0 million over the prior period, whereas the AUM from NPPF 1 declined by $26.6 million as it is in run-off. For a review of the inter-segment allocation of revenues from CLOs under management, please refer to “-Net Income attributable to CLOs managed by the Company - for the years ended December 31, 2015 and December 31, 2014” below. Other management fee income in the table above represents the fees earned from the management of the NPPF 1 portfolio by our Muni Capital Management subsidiary. The financial information relating to the Company’s CLOs may not be comparable in 2015 and 2014 because of the Company’s adoption of a new accounting policy. The Company de-consolidated Telos 1, Telos 2, Telos 3 and Telos 4 in 2015 but did not restate 2014 or other prior periods. See Note 16-Assets and Liabilities of Consolidated CLOs.
Net Income attributable to CLOs managed by the Company - for the year ended December 31, 2015 and December 31, 2014
Including the net income from our deconsolidated CLOs, pre-tax net loss from the Company’s CLO business was $720 thousand for 2015, compared with pre-tax net income of $19.5 million in 2014. The primary driver of the decline in 2015 of $17.9 million of higher realized and unrealized losses incurred on the Company’s holdings of CLO subordinated notes. The lower management fees were due to the runoff of Telos 1 and Telos 2, which are 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 net cash proceeds of $39.7 million and tax losses of approximately $12.5 million. The unrealized loss in 2015 was
As of December 31, 2015 and December 31, 2014, the Company held investments at fair value of $10.0 million and $13.2 million, respectively, in portfolios of tax-exempt securities managed by the Company. In the year ended December 31, 2015, the Company earned realized and unrealized gains of $0.2 million on these portfolios, compared with $1.0 million in the year ended December 31, 2014. Interest income earned from these portfolios was $0.6 million in the year ended December 31, 2015, compared to $1.7 million in 2014. The decline in interest income is due to the reduced size of the portfolios in 2015. The decline in the realized and unrealized gains was due to a relatively flat marked-to-market in 2015 compared with a large unrealized gain in the year ended December 31, 2014 as a result of the movement in interest rates during that period.
The Company also commenced its credit opportunities strategy in 2015 with the purchase of a pool of loans of middle-market borrowers. The Company has leveraged its principal investment of $25.0 million with an asset based secured credit facility, whereby the Company may borrow up to $125.0 million. The Company bears the first loss on any defaults in the pool of loans. As of December 31, 2015 the Company had drawn $54.9 million of the facility. Net income from the credit opportunities strategy was $1.9 million for the year ended December 31, 2015.
The Company holds a short Treasury position to mitigate the potential negative impact of a general rise in interest rates. In addition, the Company also holds a credit default swap and credit derivative index (“CDX”) positions, buying and selling credit protection on different tranches of risk in differing CDX indices. The credit default swap and CDX transactions are designed to mitigate the potential impact of a general deterioration in corporate credit risk. As credit market conditions deteriorated in the second half of 2015, gains of $1.0 million were partially offset by $416 thousand of interest expense. This compared favorably with total net loss for the year ended December 2014 of $3.1 million.
Corporate revenues include income from the Company’s investments in the Star Asia Entities. The Star Asia Entities are Tokyo-based real estate holding companies formed to invest in Asian properties and real estate related debt instruments. The Company incurred an unrealized loss of $115 thousand on these investments in the year ended December 31, 2015, compared to unrealized gains and other income of $3.4 million in the year ended December 31, 2014 from its investments in these entities.
Other expenses were $14.3 million in the year ended December 31, 2015 and $8.8 million in the year ended December 31, 2014. Other expenses primarily consisted of professional fees, insurance, shareholder support, office rent and other office costs and travel expenses. Other expenses increased in 2015 as a result of a combination of increased audit and SOX compliance expenses due to increased compliance costs associated with being an accelerated filer combined with the additional integrations and other costs from on-boarding the new acquisitions.
The Company completed its sale of PFG during the second quarter of 2015. Net income from PFG discontinued operations was $22.6 million in the first half of 2015, which includes the net gain on the sale of PFG of $15.6 million after provision for taxes. As such, income from discontinued operations was $7.0 million, excluding the gain on the sale of PFG, in the first half of 2015 compared to $3.5 million for the first half of 2014. For further information relating to the sale of PFG see Note 4-Dispositions, Assets Held for Sale and Discontinued Operations, in the accompanying consolidated financial statements.
Tiptree Financial’s total assets were $2.5 billion as of December 31, 2015, compared to $8.2 billion as of December 31, 2014. The $5.7 billion decline in assets is primarily attributable to the completion of the sale of PFG and the corresponding removal of PFG separate account assets as of June 30, 2015 and deconsolidation of our four CLOs, partially offset by the acquisition of Reliance.
Management uses EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. The Company believes that consolidated EBITDA and Adjusted EBITDA on a consolidated basis and for each segment provide supplemental information useful to investors as it is frequently used by the financial community to analyze performance period to period, to analyze a company’s ability to service its debt and to facilitate comparison among companies. The Company believes segment EBITDA and Adjusted EBITDA provides additional supplemental information to compare results among our segments. Beginning in 2016 the Company Adjusted EBITDA will also be used in determining incentive compensation for the Company’s executive officers. EBITDA and Adjusted EBITDA are not a measurement of financial performance or liquidity under GAAP; therefore, EBITDA and Adjusted EBITDA should not be considered as an alternative or substitute for GAAP. The Company’s presentation of EBITDA and Adjusted EBITDA may differ from similarly titled non-GAAP financial measures used by other companies. The Company defines EBITDA as GAAP net income of the Company adjusted to add consolidated interest expense, consolidated income taxes and consolidated depreciation and amortization expense as presented in its financial statements and Adjusted EBITDA as EBITDA adjusted to (i) subtract interest expense on asset-specific debt incurred in the ordinary course of its subsidiaries’ business operations, (ii) adjust for the effect of purchase accounting, (iii) add back significant acquisition related costs, (iv) adjust for significant relocation costs and (v) significant one-time expenses.
EBITDA and Adjusted EBITDA - Year Ended December 31, 2015 and December 31, 2014.
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 insurance and insurance services, specialty finance, real estate and corporate and other segments. For the year ended December 31, 2015, interest expense for the asset-specific debt was $0.3 million for insurance and insurance services, $3.4 million for specialty finance, $6.8 million for real estate and $1.4 million for corporate and other, totaling $11.9 million. For the year ended December 31, 2014, interest expense for the asset-specific debt was $1.6 million for specialty finance, $4.1 million for real estate, and $1.6 million for corporate and other segments, totaling $7.3 million.
Tiptree’s purchase of Fortegra resulted in a number of purchase accounting adjustments being made as of the date of acquisition, which included setting deferred cost assets to a fair value of zero, modifying deferred revenue liabilities to their respective fair values, and recording a substantial intangible asset representing the value of the acquired insurance policies and contracts. Following the purchase accounting adjustments, current period expenses associated with deferred costs were more favorably stated by $47.1 million and current period income associated with deferred revenues were less favorably stated by $22.9 million. Thus, the purchase accounting effect related to Fortegra, increased EBITDA in 2015 by $24.2 million above what the historical basis of accounting would have generated. The impact of this purchase accounting adjustments have been reversed to reflect an adjusted EBITDA without such purchase accounting effect.
Tiptree’s purchase of Reliance also resulted in a purchase accounting adjustment which consists of a $1.3 million fair value adjustment on the contingent consideration for the acquisition.
See Note 4-Dispositions, Asset Held for Sale and Discontinued Operations, in the accompanying consolidated financial statements for further discussion of discontinued operations.
Significant relocation costs for discontinued operations included expenses incurred in connection with the move of PFAS’s physical location from New Jersey to Philadelphia for the year ended December 31, 2014.
We expect our cash and cash equivalents and distributions from operating subsidiaries and principal investments and our subsidiaries access to financing to be adequate to fund our operations for at least the next 12 months.
Tiptree’s approach to debt is to use non-recourse, asset specific debt where possible that is amortized by cash flows from the underlying business or assets financed. Operating Company has a credit facility with Fortress to provide working capital and
Summary Consolidated Statements of Cash Flows - Year Ended December 31, 2015 and December 31, 2014
The amounts associated with operating, investing and financing activities for the year ended December 31, 2015 and 2014 from discontinued operations are presented as a component of the Company’s Consolidated Statements of Cash Flows.
Cash used in continuing operations (excluding VIEs) was $20.9 million for the year ended December 31, 2015. The primary sources of cash from continuing operations were: the inclusions of Fortegra and increased revenues at Care as a result of increased investments in properties during the period. The primary uses of cash from continuing operations were: increased balances in mortgage loans held for sale as a result of higher volume in our mortgage segment, from both the inclusion of Reliance and improved industry conditions, payment of taxes primarily related to the gain on sale of PFG, loan growth at Siena, and an increase in corporate expenses due to our investment in our controls and reporting infrastructure.
Cash provided by operating activities - VIEs was $20.9 million for the year ended December 31, 2015. The primary source of cash from operating activities - VIEs were the net gain on the sale of loans within the CLOs and retained cash from the CLOs.
Cash used in operating activities - discontinued operations was $6.4 million for the year ended December 31, 2015. The primary driver of the cash used was the repayment of policy liabilities, offset by net income from operations.
Cash provided by financing activities for continuing operations (excluding VIEs) was $234.2 million for the year ended December 31, 2015. The primary drivers of the cash provided were: borrowings on the mortgage warehouse facilities to fund the growth in mortgage volume, the addition of Reliance, borrowings at Care to fund its investments in real estate, and borrowings at Siena to fund its loan growth, collectively offset by the repayment of debt at Fortegra.
Cash used in continuing operations (excluding VIEs) was $14.4 million for the year ended December 31, 2014. The primary sources of cash from continuing operations (excluding VIEs) were: operating cash generated at Care, a $7.9 million gain on the repayment of a loan, repayments of tax exempt securities, and net proceeds from the issuance of subordinated notes in Telos 5. The primary uses of cash from continuing operations were: loan growth at Siena, increased balances in mortgage loans held for sale as a result of higher volume in our mortgage segment, increase in cash payments for other liabilities and accrued expenses.
Cash provided by operating activities - discontinued operations was $16.0 million for the year ended December 31, 2014. The primary driver of the cash provided was an increase in payables related to policy terminations and income from operations.
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 was the repayment of policy holder loans, partially offset by the purchase of property, plant and equipment.
Fortegra has $35.0 million of fixed/floating rate trust preferred securities due June 15, 2037. The trust preferred securities bear interest at a floating rate of 3-month LIBOR plus the annual base rate of 4.10%. Interest is payable quarterly. In 2012, Fortegra entered into an interest rate swap that exchanges the floating rate for a fixed rate, as further described in Note 15-Derivative Financial Instruments and Hedging. The Company may redeem the trust preferred securities, in whole or in part, at a price equal to the full outstanding principal amount of such trust preferred securities outstanding plus accrued and unpaid interest.
On April 9, 2015, Siena entered into a $3.5 million subordinated promissory note with Solaia Credit Strategies LLC, an affiliate of Solaia Capital Management LLC, which owns approximately 38% of Siena. $1.5 million of this note was funded on April 9, 2015 and the remainder was funded on May 14, 2015. The note has a maturity of April 9, 2020 or six months following maturity of the Wells Fargo facility described above. The note has an interest rate of 12.50%. Siena may prepay the note following the first anniversary of issuance but is required to pay a prepayment premium expensed as a percentage of the prepayment amount as follows: 3% prior to the second anniversary of issuance; 2% after the second but before the third anniversary and 1% after the third but before the fourth anniversary.
On December 4, 2014, Fortegra entered into an amended and restated $140.0 million secured credit agreement (the “Credit Agreement”) among: (i) Fortegra and its wholly owned subsidiary LOTS Intermediate Co. (“LOTS”), as borrowers (Fortegra and LOTS, collectively, the “Borrowers”); (ii) the initial lenders named therein; and (iii) Wells Fargo Bank, National Association, as administrative agent, swingline lender, and issuing lender. The Credit Agreement provides for a $50.0 million term loan facility and a $90.0 million revolving credit facility. Subject to earlier termination, the Credit Agreement terminates on December 4, 2019. The weighted average rate paid for the year ended December 31, 2015 was 3.17%. The Borrowers are required to repay the aggregate outstanding principal amount of the initial $50.0 million term loan facility in consecutive quarterly installments of $1.25 million commencing March 2015.
The Company’s significant accounting policies are described in Note 2-Summary of Significant Accounting Policies. As disclosed in Note 2, the preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. The Company believes that the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult , subjective and complex judgments. Further information can be found in the notes to the consolidated financial statements related to the
following: valuation of assets where quoted market prices are not available can be found under “Fair Value Measurement” in Note 2-Summary of Significant Accounting Policies; policies related to goodwill and intangible assets can be found in Note 2-Summary of Significant Accounting Policies-Goodwill and Identifiable Intangible Assets, Net; and additional information on income taxes can be found under Note 23-Income Taxes. The consolidated financial statements prepared under GAAP for all periods presented include retroactive adjustments to comparative periods to reflect the combinations under common control described in Note 1-Organization, related to TAMCO and the Contribution Transactions. All intercompany items have been eliminated for these periods.
Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.
Level 3 - Significant inputs that are unobservable inputs for the asset or liability, including Tiptree’s own data and assumptions that are used in pricing the asset or liability.
Certain loans originated by the Company within its specialty finance segment are asset backed loans held for investment and are carried at amortized cost. An allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when the Company believes the uncollectibility of a loan balance is confirmed. Management reviews its methodology for its calculation of its loss provision as deemed necessary which is at least on an annual basis.
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, 2015 and December 31, 2014, respectively.
Rental revenue from residents in 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 Lease Properties in accordance with ASC Topic 840, Leases which requires that revenue be recognized on a straight-line basis over the non-cancelable term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. Renewal options in leases with rental terms that are higher than those in the primary term are excluded from the calculation of straight line rent if the renewals are not reasonably assured. The Company commences rental revenue recognition when the tenant takes control of the leased space. The Company recognizes lease termination payments as a component of rental revenue in the period received, provided that there are no further obligations under the lease.
In accordance with ASC 740, the Company establishes valuation allowances for deferred tax assets when, in its judgment, it concludes that it is more likely than not that the deferred tax assets will not be realized. These judgments are based on projections of future income, including tax-planning strategies, by individual tax jurisdiction. Changes in economic conditions and the competitive environment may impact the accuracy of the Company’s projections. In accordance with ASC 740, on a quarterly basis, the Company assesses the likelihood that its deferred tax assets will be realized and determines if adjustments to the Company’s valuation allowance is appropriate. As a result of this assessment, as of December 31, 2015, the consolidated valuation allowance for Tiptree was $1.0 million. The increase and/or decrease in valuation allowance could have a significant negative or positive impact on our current and future earnings. In 2015, the Company recorded a net decrease of valuation allowances of $1.7 million as compared to an increase of $1.5 million in 2014.
In connection with our acquisitions, assets acquired and liabilities assumed were recorded at fair value as of the acquisition date. The accounting for acquisitions requires the identification and measurement of all acquired tangible and intangible assets and assumed liabilities at their respective fair values as of the acquisition date. In measuring the fair value of net tangible and identified intangible assets acquired, management uses information obtained as a result of pre-acquisition due diligence, marketing, leasing activities and independent appraisals. The determination of fair value involved the use of significant judgment and estimation.
The Company initially records all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite lived intangibles and other intangibles, in accordance with ASC 805 Business Combinations. Goodwill, indefinite-lived intangibles and other intangibles are subsequently accounted for in accordance with ASC 350 Intangibles-Goodwill and Other and ASC
360 Impairment or Disposal of Long-Lived Assets. The initial measurement of goodwill and intangibles requires judgment concerning estimates of the fair value of the acquired assets and liabilities. Goodwill (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.
Key judgments in accounting for intangibles include useful life and classification between goodwill and indefinite-lived intangibles or other intangibles requiring amortization. Indefinite-lived intangible assets are evaluated for impairment at least annually by comparing their fair values, estimated using discounted cash flow analyses, to their carrying values. Other amortizing intangible assets are evaluated for impairment if events and circumstances indicate a possible impairment. Such evaluation of other intangible assets is initially based on undiscounted cash flow projections. See Note 2-Summary of Significant Accounting Policies, in the accompanying consolidated financial statements for further detail.
We have audited the accompanying consolidated balance sheets of Tiptree Financial Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
As discussed in Note 2 to the consolidated financial statements, the Company has elected to early adopt ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which resulted in the deconsolidation of several collateralized loan obligations entities as of January 1, 2015.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Tiptree Financial Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2016 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses related to ineffective process level controls over financial statement accounts at the Care Investment Trust LLC managed properties (“Care Managed Properties”) and Luxury Mortgage Corp. and Subsidiary (“Luxury”); insufficient knowledgeable resources with responsibilities for processes and internal controls over financial reporting at its Care Managed Properties and Luxury; inadequate monitoring activities over the Care Managed Properties and Luxury; and ineffective management review controls over income taxes, business combinations, and the consolidated statement of cash flows have been identified and included in management’s assessment.
In our opinion, because of the effect of the aforementioned material weaknesses on the achievement of the objectives of the control criteria, Tiptree Financial Inc. has not maintained effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We do not express an opinion or any other form of assurance on management’s statements referring to corrective actions taken after December 31, 2015, relative to the aforementioned material weaknesses in internal control over financial reporting.
Tiptree consolidates those entities in which it has an investment of 50% of voting rights or more or has control over significant operating, financial and investing decisions of the entity as well as those entities deemed to be variable interest entities (VIEs) in which Tiptree is determined to be the primary beneficiary. VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity risk for the entity to finance its activities without additional subordinated financial support from other parties. 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 contractual relationship as the collateral manager and its direct ownership interests that are potentially significant to the entity.
Reserves for unpaid losses and loss adjustment expenses, estimated future claims and losses, potential litigation and other claims
Valuation of contingent share issuances for compensation and purchase consideration, including estimates of number of shares and vesting schedules
Revenue recognition including, but not limited to, the timing and amount of insurance premiums, service, administration fees, and loan origination fees and
In certain instances, the Company may acquire less than 100% ownership of an entity, resulting in the recording of a non-controlling interest. The 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.
The results of operations of a business of the Company that have either been disposed of or are classified as held-for-sale are reported in discontinued operations if the disposal of the business represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results as a result of recent accounting guidance Accounting Standards Update (ASU) 2014-08 Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. For such businesses that have been disposed of prior to December 15, 2014, the Company presents the operations of the business as discontinued operations, and retrospectively reclassifies operating results for all prior periods presented. The Company carries assets and liabilities held for sale at the lower of carrying value on the date the asset is initially classified as held for sale or fair value less costs to sell. At the time of reclassification to held for sale, the Company ceased recording depreciation on assets transferred.
The guidance in ASC 825, Financial Instruments, provides a fair value option election that allows entities to make an irrevocable election of fair value as the initial and subsequent measurement attribute for certain eligible financial assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are reported in net realized and unrealized gains (losses) within the Consolidated Statements of Operations. The decision to elect the fair value option is determined on an instrument-by-instrument basis and must be applied to an entire instrument and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to this guidance are required to be reported separately in our Consolidated Balance Sheets from those instruments using another accounting method.
Derivative instruments are used in the overall strategy to manage exposure to market risks primarily related with fluctuations in interest rates. As a matter of policy, derivatives are not used for speculative purposes. Derivative instruments are measured at fair value on a recurring basis and are included in Other assets or Other liabilities and accrued expenses in the Consolidated Balance Sheets.
The Company determines the measurement period for restricted shares awarded to employees on the grant date. The Company initially measures the cost of an award of restricted shares as the fair value of the restricted shares on the date of grant and subsequently recognizes the cost of the restricted shares over the vesting period. The compensation costs are charged to expense over the vesting period with a corresponding credit to additional paid-in capital.
Compensation cost is recognized for stock options issued to employees, based on the fair value of these awards at the date of grant. Compensation cost is recognized over the required service period, generally defined as the vesting period. There were no issuances of stock option awards during the years ended December 31, 2015 and December 31, 2014.
The Company evaluates tax positions taken or expected to be taken in the course of preparing its tax returns to determine whether the tax positions are “more likely than not” of being sustained by the applicable tax authority. The Company’s tax benefit or tax expense is adjusted accordingly for tax positions not deemed to meet the more likely than not threshold. The Company’s policy is to account for interest as a component of interest expense and penalties as a component of other expense.
The Company considers all highly liquid investments of sufficient credit quality with maturities of three months or less to be cash equivalents. Cash and cash equivalents consist of U.S. denominated cash on hand, cash held in banks and investments in money market funds.
Investments in loans, at fair value is substantially comprised of (i) non-performing residential loans (NPLs) and (ii) middle market leveraged loans held by the Company as principal investments. Changes in their fair value are reported within net realized and unrealized gains (losses) in our Consolidated Statements of Operations.
The Company has purchased portfolios of NPLs which are valued on an individual basis and which we seek to (i) convert into real estate owned property (REO) through the foreclosure or other resolution process that can then be sold, or (ii) modify and resell at higher prices if circumstances warrant.
When loans are converted into real estate through foreclosure or other resolution process (e.g., through a deed-in-lieu of foreclosure transaction), the REO is recorded in Other assets.
Certain loans originated by the Company within its specialty finance segment are asset backed loans held for investment and are carried at amortized cost. The Company periodically reviews these loans for impairment. Impairment losses are taken for impaired loans based on the fair value of collateral on an individual loan basis. When it is probable that the Company will be unable to collect all amounts contractually due, the loan would be considered impaired.
carriers. The Company earns interest on the premium cash during the period of time between receipt of the funds and payment of these funds to insurance carriers. The Company maintains an allowance for doubtful accounts based on an estimate of uncollectible accounts.
Through the insurance and insurance services segment, 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.
Investments in real estate 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 in accordance with ASC 360, Impairment or Disposal of Long-Lived Assets. If such reviews indicate that the asset is impaired, the asset’s carrying amount is written down to its fair value. There were no material impairments on the Company’s real estate investments for the years ended December 31, 2015 and 2014, respectively.
The Company initially records all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite lived intangibles and other intangibles, in accordance with ASC 805, Business Combinations. Goodwill, indefinite-lived intangibles and other intangibles are subsequently accounted for in accordance with ASC 350, Intangibles-Goodwill and ASC 360,
Impairment or Disposal of Long-Lived Assets. The initial measurement of goodwill and intangibles requires judgment concerning estimates of the fair value of the acquired assets and liabilities. Goodwill 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. The Company carries intangible assets, which represent customer and agent relationships, trade names, insurance licenses (certificates of authority granted by individual state departments of insurance), the value of in-force insurance policies acquired, software acquired or internally developed, and leases in-place. Management has deemed the insurance licenses to have indefinite useful life. Costs incurred to renew or maintain insurance licenses are recorded as operating costs in the period in which they arise. See Note 13-Goodwill and Intangible Assets, Net.
Unpaid claims are undiscounted reserve estimates of future payments for claims that have occurred on or before the balance sheet date and are covered events under the terms and conditions of insurance contracts. These reserves are established in accordance with U.S. GAAP using a variety of generally accepted actuarial methods such as the chain ladder method, the Bornhuetter-Ferguson method and expected loss ratio method. The Company conducts its actuarial analyses on a basis gross of reinsurance. The same estimates used as a basis in calculating the gross unpaid claims reserves are then used as the basis for calculating the net unpaid claims reserves, which take into account the impact of reinsurance.
Credit life and AD&D unpaid claims reserves include claims in the course of settlement and incurred but not reported (IBNR). Credit disability unpaid claims reserves also include continuing claim reserves for open disability claims. For all other product lines, unpaid claims reserves include case reserves for reported claims and bulk reserves for IBNR claims. 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, reported incurred losses, target loss ratios, and in-force amounts or a combination of these factors.
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
In accordance with applicable statutory insurance company regulations, the Company’s recorded unpaid claims reserves are evaluated by appointed independent third-party actuaries, who perform this function in compliance with the Standards of Practice and Codes of Conduct of the American Academy of Actuaries. The independent actuaries perform their actuarial analyses annually and prepare opinions, statements, and reports documenting their determinations. In addition, this documentation and the Company’s actuarial work products are made available to the Company’s independent auditors for their separate review of reserves. For 2015, both parties found the Company’s reserves to be adequate.
Deferred revenues represent the portion of income that will be earned in the future attributable to motor club memberships, mobile device protection plans, and other non-insurance service contracts that are earned over the respective contract periods using Rule of 78's, modified Rule of 78's, pro rata, or other methods as appropriate for the contract. A deficiency reserve would be recorded if anticipated contract benefits, deferred acquisition costs and contract service costs exceed the recorded deferred revenues and anticipated investment income. As of December 31, 2015 and December 31, 2014, no deficiency reserves were recorded.
Administrative Fees. Administrative fee revenue includes the administration of credit insurance, debt cancellation programs, motor club programs, and warranty programs. Related administrative fee revenue is recognized consistent with the earnings recognition pattern of the underlying insurance policies, debt cancellation contracts and motor club memberships being administered, using Rule of 78's, modified Rule of 78's, pro rata, or other methods as appropriate for the contract. Management
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. These amendments change the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. In addition, ASU 2014-08 requires expanded disclosures about discontinued operations that will provide financial statement users with more information. ASU 2014-08 is effective for the first quarter of 2015 for the Company. The effects of applying the revised guidance will vary based upon the nature and size of future disposal transactions. It is expected that fewer disposal transactions will meet the new criteria to be reported as discontinued operations. The adoption of ASU 2014-08 did not have an impact on the Company's consolidated financial position, results of operations and cash flows.
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. ASU 2015-02 will be effective for the Company on January 1, 2016 and 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 new guidance resulted in adjustments to certain balances in the previously Consolidated Balance Sheets, Consolidated Statements of Operations, and Consolidated Statements of Cash Flows for the interim periods ending March 31, 2015, June 30, 2015 and September 30, 2015. See Note 16-Assets and Liabilities of Consolidated CLOs.
or disclosed in the notes. ASU 2015-16 becomes effective for fiscal years and interim reporting periods beginning after December 15, 2015, with early adoption permitted for financial statements that have not been issued. The Company elected to early adopt ASU 2015-16 for the year ended December 31, 2015 as it pertains acquisitions in the year ended December 31, 2015. The application of this new guidance will have no impact to Consolidated Balance Sheets, Consolidated Statements of Operations, and Consolidated Statements of Cash Flows for any periods previously reported, though will impact the recording of measurement period adjustments prospectively.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this standard affects any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This standard was originally effective for the Company on January 1, 2017. On July 9, 2015, the FASB decided to delay the effective date of ASU 2014-09 by one year. 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 reviewing ASU 2014-09 and is assessing the potential effects on its consolidated financial position, results of operations and cash flows.
In June 2014, the FASB issued ASU 2014-12 Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period shall be treated as a performance condition. ASU 2014-12 will be effective for the Company on January 1, 2016. The Company is currently reviewing ASU 2014-12 and is assessing the potential effects on its consolidated financial position, results of operations and cash flows.
In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. The pronouncement eliminates the concept of extraordinary items from GAAP. However, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. ASU 2015-01 will be effective for the annual and interim periods beginning after December 15, 2015 with early adoption permitted. The Company does not anticipate that the adoption of this standard will have a material impact on its Consolidated Balance Sheets, results of operations and cash flows.
On July 1, 2015, the Company completed the acquisition of Reliance First Capital, LLC (Reliance) for total consideration of $24,441 which was comprised of cash of $7,500, 1,625,000 shares of its Class A common stock (market value of $11,960 at the time of issuance), an earn-out to issue additional shares valued at $2,200, and a working capital adjustment of $2,781 in exchange for 100% ownership. Reliance is a residential mortgage originator operating in 32 states with fulfillment operations conducted through several retail call centers and Reliance’s corporate headquarters and are focused on Government-sponsored enterprise (GSE) and Federal Housing Administration and the U.S. Department of Veterans Affairs (FHA/VA) mortgage loans. The primary reason for the Company’s acquisition of Reliance is to expand its mortgage origination operations. The results of Reliance, from its closing date, are included in the Company’s specialty finance segment and was considered an acquisition of a business in accordance with ASC 805.
For the period from acquisition until December 31, 2015, revenue and net income were $22,934 and $2,019, respectively.
On February 9, 2015, affiliates of Care and affiliates of Royal Senior Care Management LLC (Royal) entered into an agreement to acquire five seniors housing communities for $29,251 (which includes a deposit of $587 paid in the fourth quarter of 2014). This acquisition was financed with $22,500 of mortgage debt (of which $19,943 was drawn at close, with the remainder to be held back to finance future capital expenditure projects) and the remainder paid with cash on hand. The mortgage debt carries a variable rate of 30-Day LIBOR + 2.75% and matures on February 1, 2020. The amount of the mortgage debt may be increased one year after closing by an additional $2,000 subject to meeting certain terms and conditions. Affiliates of Care paid $23,401 for an 80% interest while affiliates of Royal paid for the remaining 20% interest. Affiliates of Royal also provide management services to the communities under management contracts. The primary reason for the Company’s acquisition of the senior housing communities is to expand its real estate operations.
On March 30, 2015, affiliates of Care acquired six seniors housing communities for $54,536 (which includes a deposit of $1,490 paid in the fourth quarter of 2014). The acquisition was financed with $39,500 of mortgage debt (of which $38,700 was drawn at close with, the remainder to be held back to finance future capital expenditure projects) and the remainder paid with cash on hand. The mortgage debt carries a fixed rate of 4.25% and matures on April 1, 2025. The properties are leased to affiliates of Greenfield Holdings, LLC that operate the properties. The primary reason for the Company’s acquisition of the senior housing communities is to expand its real estate operations.
For the period from acquisition until December 31, 2015, revenue and the net loss in the aggregate for the Royal and Greenfield II portfolios were $11,802 and $2,496, respectively.
The following table summarizes the acquisition date fair value of identifiable assets acquired and liabilities assumed in connection
with the acquisitions completed for the year ended December 31, 2015, in accordance with the acquisition method of accounting:
On December 18, 2014, affiliates of Care and affiliates of Heritage Senior Living, LLC (Heritage) acquired an additional seniors housing community for $3,847 (which includes a deposit of $2,561 paid in the fourth quarter of 2013). Affiliates of Care paid $3,077 for an 80% interest while affiliates of Heritage paid for the remaining 20% interest. Affiliates of Heritage provide management services to the communities under a management contract. The primary reason for the Company’s acquisition of the senior housing communities is to expand its real estate operations. The purchase of the Heritage portfolio is considered an acquisition of a business in accordance with ASC 805.
For the period from acquisition until December 31, 2014, revenue and net loss in the aggregate for the Greenfield and Heritage portfolios were $2,312 and $626, respectively.
The following table summarizes the acquisition date fair value of identifiable assets acquired and liabilities assumed in connection with the acquisitions completed for the year ended December 31, 2014, in accordance with the acquisition method of accounting:
(1) Includes $809 of unsettled liabilities associated with Fortegra’s previous discontinued operations, which is included as a component of liabilities held for sale and discontinued operations within the Company’s Consolidated Balance Sheet.
The following table represents detail of revenues and expenses of discontinued operations in the Consolidated Statements of Operations for the periods presented:
As of December 31, 2015 and December 31, 2014, the Company has $740 and $809, respectively, included on the Consolidated Balance Sheets as liabilities from discontinued operations associated with Fortegra’s dispositions as of December 31, 2013.
2015. Segment results incorporate the revenues and expenses of these subsidiaries since they commenced operations or were acquired.
Real Estate operations include Care LLC (Care), a wholly-owned subsidiary of Tiptree which has a geographically diverse portfolio of seniors housing properties including senior apartments, assisted-living, independent-living, memory care and skilled nursing in the U.S.
Corporate and other operations include Tiptree Direct Holdings LLC (TDH) and Muni Funding Company of America LLC (MFCA). TDH holds the Company’s principal investments, which consist of CLO subordinated notes, common shares of RAIT, an NPL portfolio, risk mitigation transactions, warehouse holdings, holdings in the Star Asia Finance, Limited, Star Asia Opportunity, LLC and Star Asia Opportunity II-LLC (Star Asia Entities) and other corporate investments. MFCA is a specialty finance company that owns and manages a portfolio of non-investment grade and non-rated direct and indirect debt obligations of middle-market tax-exempt borrowers.
The tables below present the components of revenue, expense or loss, and segment assets for each of the operating segments for the following periods:
The Company does not intend to sell the investments that were in an unrealized loss position at December 31, 2015, 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, 2015, 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 year ended December 31, 2015.
Purchases of available for sale securities were $75,275 and $7,026 for the year ended December 31, 2015 and 2014, respectively. Proceeds from maturities calls and prepayments of available for sale securities were $39,062 and $1,192 for the year ended December 31, 2015 and 2014, respectively. Proceeds from the sale of available for sale securities for the year ended December 31, 2015 and 2014, were $20,353 and $783 with associated losses of $58 and gains of $4, respectively.
The following table presents the Company’s loans, measured at fair value and amortized cost:
Corporate Loans primarily include syndicated leveraged loans held by the Company as principal investments, which consist of $233,861 in loans primarily held by the Company’s warehouse credit facility in anticipation of launching a new CLO, Telos CLO 2016-7, Ltd. (Telos 7) and the Telos Credit Opportunities fund at December 31, 2015. The Company contributed $45,000 to the Telos 7 warehouse credit facility and $25,000 to the Telos Credit Opportunities fund with the remainder purchased through warehouse borrowings and a secured credit agreement (see Note 17-Debt, net). As of December 31, 2015, the unpaid principal balance on these loans was $242,693.
The difference between fair value of the Corporate loans and the unpaid principal balance was $(8,832).
During the year ended December 31, 2015, the Company, through a Delaware statutory trust, invested in a pool of non-performing residential real estate mortgage loans (NPLs) and entered into an agreement with an asset management firm to service the portfolio. As of December 31, 2015, the Company’s investments included $38,289 of loans collateralized by real estate in the process of foreclosure of which the unpaid principal balance was $61,676.
Siena structures asset-based loan facilities in the $1,000 to $25,000 range across diversified industries, which include manufacturing distribution, wholesale, and service companies. As of December 31, 2015 and December 31, 2014, the Company carried $51,831 and $35,395 in loans receivable on its Consolidated Balance Sheet. Collateral for asset-backed loan receivables, as of December 31, 2015 and December 31, 2014 consisted 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 as such has determined that no impairment existed as of December 31, 2015. As of December 31, 2015, there were no delinquencies in the Siena portfolio and all loans were classified as performing.
The following table summarized the total mortgage loans held for sale, at fair value:
ASC 820-10 maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used to measure a financial instrument’s fair value. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability, and are affected by the type of product, whether the product is traded on an active exchange or in the secondary market, as well as current market conditions. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Fair value is estimated by applying the hierarchy discussed in Note 2, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement.
U.S Treasury Securities, Obligations of U.S. Government Authorities and Agencies, Municipal Securities, Corporate Securities, and Obligations of Foreign Governments: Fair values were obtained from an independent pricing service and a third party investment manager. The prices provided by the independent pricing service are based on quoted market prices, when available, non-binding broker quotes, or matrix pricing and fall under Level 2 of the fair value hierarchy.
Derivative Assets and Liabilities: Derivatives are comprised of credit default swaps (CDS), index credit default swaps (CDX), interest rate lock commitments (IRLC), and interest rate swaps (IRS). The fair value of these instruments is based upon valuation pricing models, which represent the amount the Company would expect to receive or pay at the balance sheet date to exit the position. In general, the fair value of CDSs and CDXs are based on dealer quotes. Because significant inputs, other than unadjusted quoted prices in active markets are used to determine the dealer quotes, such as price volatility, the Company classifies them as Level 2 in the fair value hierarchy. The fair value of IRS is based upon either valuation pricing models, which represent the amount the Company would expect to pay at the balance sheet date if the contracts were exited, or by obtaining broker or counterparty quotes. Because there are observable inputs used to arrive at these prices, the Company has classified IRS within Level 2 of the fair value hierarchy. Our mortgage origination subsidiaries issue IRLCs to its customers, which are carried at estimated fair value on the Company’s Consolidated Balance Sheet. The estimated fair values of these commitments are generally calculated by reference to the value of the underlying loan associated with the IRLC net of an expected fall out assumption. The fair values of these commitments generally result in a Level 3 classification. Our mortgage origination subsidiaries manage their exposure by entering into best efforts delivery commitments with loan investors referred to as “best efforts lock”. For loans not locked with investors on a best efforts basis, the Company enters into hedge instruments, utilizing to be announced mortgage-backed securities, to protect against movements in interest rates. The fair values of these hedge instruments generally result in a Level 2 classification.
The following table represents additional information about assets that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value for the following periods:
(1) Financial assets classified as Level 3 and fair valued using significant unobservable inputs classified as Level 3 have not been provided as these are not readily available to the Company (including servicing release premium for interest rate lock commitments and forward delivery contracts).
(2) The significant unobservable inputs used in the fair value measurement of our NPLs are discount rates, loan resolution timeline, and the value of underlying properties. Significant changes in any of these inputs in isolation could result in a significant change to the fair value measurement. A decline in the discount rate in isolation would increase the fair value. A decrease in the housing pricing index in isolation would decrease the fair value. Individual loan characteristics, such as location and value of underlying collateral, affect the loan resolution timeline. An increase in the loan resolution timeline in isolation would decrease the fair value. A decrease in the value of underlying properties in isolation would decrease the fair value.
(1) Not included in this table are the debt obligations of consolidated CLOs, measured and leveled on the basis of the fair value of the (more observable) financial assets of the consolidated CLOs in accordance with ASU 2014-13. See Note 2-Summary of Significant Accounting Policies and Note 16-Assets and Liabilities of Consolidated CLOs.
The following table presents the carrying amounts and estimated fair values of financial assets and liabilities that are not recorded at fair value on a recurring or non-recurring basis and their respective levels within the fair value hierarchy:
Notes receivable: The carrying amounts approximate fair value because the interest rates charged approximate current market rates for similar credits. Categorized as Level 2 of the fair value hierarchy.
The schedule of minimum future rental revenue excludes residential lease agreements, generally having terms of one year or less. Rental revenues from residential leases were $36,551 and $15,803 for the year ended December 31, 2015 and 2014, respectively.
The following table presents identifiable intangible assets, accumulated amortization, and goodwill by segment and includes the retrospective adjustments made to the balances at December 31, 2014, as required by ASC Topic 805, for the Fortegra acquisition:
(1) Represents intangible assets with an indefinite useful life. Impairment tests are performed at least annually on these assets.
(2) The increase in goodwill in 2015 is the $1,708 associated with the Reliance acquisition offset by $699 of impairment associated with Luxury. See Note 3-Business Acquisitions.
Amortization expense on intangible assets was $37,294 and $8,566 for the year ended December 31, 2015 and 2014, respectively. The Company conducts annual impairment tests according to ASC Topic 350 Intangibles-Goodwill and Other. As of December 31, 2015, we 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.
The Company utilizes derivative financial instruments as part of its overall investment activities. Investments in derivative contracts are subject to additional risk that can result in a loss of all or part of an investment. The Company’s derivative activities are primarily classified by underlying credit risk, and interest rate risk. In addition, the Company is also subject to additional counterparty risk should its counterparties fail to meet the contract terms. The derivative financial instruments are located within trading assets at fair value within Other assets and trading liabilities within Other liabilities and accrued expenses on the Consolidated Balance Sheets.
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 in the 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 to protect its position on its foreign loans receivable.
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. 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 party to six interest rate swaps in order to economically hedge interest rate risk associated with its real estate portfolio. All of these swaps have the same counterparty.
The Company nets the credit derivative assets and liabilities as these credit derivatives are subject to legally enforceable netting arrangements with the same party. The following table presents derivative instruments that are subject to offset by a master netting agreement:
Fortegra has an IRS with a counterparty, pursuant to which Fortegra 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 has been redesignated as a hedge.
As of December 31, 2015, the notional amount of this cash flow hedge was $35,000, with a fair value of $(1,283). Based on analysis under the long-haul method, the IRS has an unrealized gain net of tax of $111, and a variable rate of interest of 0.51% and a fixed rate of 3.47%.
The assets of each of the CLOs are held solely as collateral to satisfy the obligations of the CLOs. The Company does not own and has no right to the benefits from, nor does it bear the risks associated with, the assets held by the CLOs, beyond its direct investments in, and investment advisory fees generated from, the CLOs. If the Company were to liquidate, the assets of the CLOs would not be available to its general creditors, and as a result, the Company does not consider these assets available for the benefit of its investors. Additionally, the investors in the CLOs have no recourse to the Company’s general assets for the debt issued by the CLOs. Therefore, this debt is not the Company’s obligation. The Company consolidates entities when it is determined to be the primary beneficiary under current VIE accounting guidance. See Note 2-Summary of Significant Accounting Policies, for further information on the Company’s accounting policy on consolidation.
The Company early adopted ASU 2015-02 using the modified retrospective method with an effective adoption date of January 1, 2015. The modified retrospective method did not require the restatement of prior year periods. In connection with the adoption of ASU 2015-02, the Company deconsolidated Telos 1 and Telos 3 effective January 1, 2015 as its fees are no longer deemed variable interests. The impact to the Company’s consolidated Balance Sheet upon the adoption of ASU 2015-02 was the deconsolidation of approximately $559,715 of assets and $557,054 of liabilities.
The table below represents the assets and liabilities of the consolidated CLOs that are included in the Company’s Consolidated Balance Sheet as of the dates indicated:
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 as prescribed by ASU 2014-13 (see Note 2-Summary of Significant Accounting Policies) results in the net amount of the CLOs shown above to be equivalent to the beneficial interests retained by Tiptree as illustrated in the below table:
The following table summarizes the balance of the Company’s debt holdings excluding notes payable of consolidated CLOs at (See Note 16-Assets and Liabilities of Consolidated CLOs, for notes payable of the consolidated CLOs):
The table below presents the amount of interest expense the Company incurred on its debt for the following periods:
The following table present the future maturities of the Company’s long-term debt (excluding original issue discount on credit facility, unamortized (discount)/premium on mortgage borrowings and preferred notes payable) as of:
On September 18, 2013, Operating Company entered into a Credit Agreement with Fortress and borrowed $50,000 thereunder, with an associated original issue discount of $1,000, which is being amortized over the term of the agreement. The Credit Agreement allows Operating Company to borrow additional amounts up to a maximum aggregate of $125,000, subject to satisfaction of certain customary conditions. The obligations of Operating Company under the Credit Agreement are secured by liens on substantially all of the assets of Operating Company. The principal of, and all accrued and unpaid interest on, all loans under the Credit Agreement become immediately due and payable on September 18, 2018. Loans under the Credit Agreement bear interest at a variable rate per annum equal to one-month LIBOR with a LIBOR floor of 1.25%, plus a margin of 6.50% per annum. The weighted average rate paid for the year ended December 31, 2015 was 7.75%. 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.
On January 26, 2015, Tiptree entered into the Amendment to its existing Credit Agreement with Fortress providing for additional term loans in an aggregate principal amount of $25,000 to Tiptree. Tiptree was required to repay and did repay $25,000 of all the aggregate outstanding additional term loans under the Fortress credit agreement upon the closing of the PFG sale on June 30, 2015.
On December 4, 2014, Fortegra entered into an amended and restated $140,000 secured credit agreement (the Credit Agreement) among: (i) Fortegra and its wholly owned subsidiary LOTS Intermediate Co. (LOTS), as borrowers (Fortegra and LOTS, collectively, the Borrowers); (ii) the initial lenders named therein; and (iii) Wells Fargo Bank, National Association, as administrative agent, swingline lender, and issuing lender. The Credit Agreement provides for a $50,000 term loan facility and a $90,000 revolving credit facility. Subject to earlier termination, the Credit Agreement expires on December 4, 2019. The weighted average rate paid for the year ended December 31, 2015 was 3.17%. The Borrowers are required to repay the aggregate outstanding principal amount of the initial $50,000 term loan facility in consecutive quarterly installments of $1,250 that commenced on March 2015.
At December 31, 2015, Fortegra believes it was in compliance with the covenants required by the Line of Credit.
Fortegra has $35,000 of preferred trust securities due June 15, 2037. The preferred trust securities bear interest at a floating rate of 3-month LIBOR plus the annual base rate of 4.10%. Interest is payable quarterly. In 2012, Fortegra entered into an interest rate swap that exchanges the floating rate for a fixed rate, as further described in Note 15-Derivative Financial Instruments and Hedging. The Company may redeem the preferred trust securities, in whole or in part, at a price equal to the full outstanding principal amount of such preferred trust securities outstanding plus accrued and unpaid interest.
In December 2013, Luxury entered into a mortgage note agreement with the Bank of Danbury. The mortgage note has a term of ten years and the monthly payments are based upon a twenty-five year amortization schedule. The mortgage note has a floating rate of Prime plus 1.00%. The mortgage note is secured by the underlying rental property, a guaranty by Luxury, and a personal guaranty by one of the shareholders of Luxury.
As of December 31, 2015, Reliance has a warehouse line of credit with a maximum aggregate borrowing amount of $50,000. The credit agreement, with Citibank, is collateralized by specific mortgage loans held for sale and pays a rate of one - month LIBOR plus margin. For the year ended December 31, 2015, Reliance utilized approximately $43,456 of this line of credit.
Independently of the original line of credit Reliance entered into an agreement for an additional $1,000 with an expiration of August 31, 2016. As of December 31, 2015 there have been no amounts drawn on this facility.
On April 9, 2015, Siena entered into a $3,500 subordinated promissory note with Solaia Credit Strategies LLC, an affiliate of Solaia Capital Management LLC, which owns approximately 38% of Siena. The note has a maturity date of April 9, 2020 or six months following maturity of the Wells Fargo facility described above. The note has an interest rate of 12.50%. Siena may prepay the note following the first anniversary of issuance but is required to pay a prepayment premium expensed as a percentage of the prepayment amount as follows: 3.0% prior to the second anniversary of issuance; 2.0% after the second but before the third anniversary and 1.0% after the third but before the fourth anniversary.
The three separate loans (each, a Greenfield VA Lease Loan and, collectively, the Greenfield VA Lease Loans) with KeyCorp Real Estate Capital Markets, Inc. (KeyCorp) have an aggregate balance of $14,801 as of December 31, 2015. The Greenfield VA Lease Loans bear interest at a fixed rate of 4.76%, amortize over a thirty-year period, provide for monthly interest and principal payments and mature on May 1, 2022. The Greenfield VA Lease Loans are secured by separate cross-collateralized, cross-defaulted first priority deeds of trust on each of the Greenfield VA Lease properties. As of December 31, 2015, management believes Care is in compliance with the representations and covenants for this loan transaction.
The two separate loans from Liberty Bank for the Calamar Properties have an aggregate balance of $17,375 as of December 31, 2015. Both of these loans amortize over a thirty year period at a weighted average fixed rate of 4.21%. These loans are secured by separate first priority mortgages on each of the properties. As of December 31, 2015, management believes Care is in compliance with the representations and covenants for this loan transaction.
The two separate loans from First Niagara Bank for the Terraces Portfolio have an aggregate balance of $15,291 as of December 31, 2015. Both of these loans amortize over a twenty-five year period at a floating rate of LIBOR plus 2.50%. These loans are secured by separate first priority mortgages on each of the properties. As of December 31, 2015, management believes Care is in compliance with the representations and covenants for this loan transaction.
The two separate loans from First Niagara Bank for the Heritage Portfolio have an aggregate balance of $31,462 as of December 31, 2015. Both of these loans amortize over a twenty-five year period at a floating rate of LIBOR plus 2.75%. These loans are secured by separate first priority mortgages on each of the properties. As of December 31, 2015, management believes Care is in compliance with the representations and covenants for this loan transaction.
December 31, 2015. The loan includes 36 months of interest only payments and amortizes over a thirty year period at a floating rate of LIBOR plus 3.20%. The loan is secured by first priority mortgages on each of the properties. As of December 31, 2015, management believes Care is in compliance with the representations and covenants for this loan transaction.
Effective February 9, 2015, in connection with Care and Royal’s acquisition of five seniors housing communities, the parties entered into a $22,500, five year loan (subject to a holdback). The agreement includes 36 months of interest only payments and a $2,000 commitment which will be available to be drawn on between February 9, 2016 and February 9, 2019, subject to certain conditions. As of December 31, 2015, the loan had an aggregate balance of $19,998. As of December 31, 2015, management believes Care is in compliance with the representations and covenants for this loan transaction.
Effective March 30, 2015, affiliates of Care secured a $39,500, 10 year loan (subject to a holdback), in connection with its acquisition of six seniors housing communities. As of December 31, 2015, the loan had an aggregate balance of $38,700. As of December 31, 2015, management believes Care is in compliance with the representations and covenants for this loan transaction.
On May 5, 2015, a subsidiary of Telos Credit Opportunities Fund, L.P. (Telos Credit Opportunities), a leveraged loan fund in which Tiptree is the sole investor and which is managed by Tiptree’s Telos Asset Management LLC subsidiary, entered into an asset based secured credit facility of up to $125,000 with Capital One, N.A. as administrative agent and the lenders party thereto. The credit agreement has a maturity date of May 5, 2020. As of December 31, 2015, $54,900 was outstanding under the credit agreement with a weighted average interest rate of 2.69% for the period ended December 31, 2015.
Telos Credit Opportunities may prepay borrowings under the facility but is required to pay a prepayment premium expressed as a percentage of the amount prepaid as follows: 1.5% if prior to May 5, 2016 and 1% if prior to May 5, 2017.
The following table presents the components of Other liabilities and accrued expenses as reported in the Consolidated Balance Sheets:
The Care Investment Trust Inc. Manager Equity Plan was adopted in June 2007 and will automatically expire on the 10th anniversary of the date it was adopted. As of December 31, 2015, 134,629 common shares remain available for future issuances. No shares have been issued since March 30, 2012 from this plan.
The Care Investment Trust Inc. Equity Plan (2007 Equity Plan), as amended in December 2011, was adopted in June 2007 and
provides for the issuance of equity-based awards, including stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock awards and other awards based upon the Company’s Class A common stock that may be made to directors and executive officers, employees and to the Company’s advisors and consultants who are providing services to the Company as of the date of the grant of the award. The 2007 Equity Plan will automatically expire on the 10th anniversary of the date it was adopted. The Board of Directors may terminate, amend, modify or suspend the 2007 Equity Plan at any time, subject to stockholder approval in the case of certain amendments as required by law, regulation or stock exchange.
During the year ended December 31, 2015, the Company issued 226,379 shares of immediately vested Class A common stock and granted 128,599 shares of restricted stock units with an aggregate fair market value of $1,795 and $993, respectively. The shares were issued or granted to employees and persons providing services to the Company as incentive compensation under the 2013 Equity Plan. As of December 31, 2015, the number of shares of Tiptree’s Class A common stock available for award is 1,582,339 shares.
The table below summarizes changes to the issuances under the Company’s 2007 Equity Plan and 2013 Equity Plan for the periods indicated:
A holder of restricted stock, pursuant to the terms of the restricted stock award agreement governing the awards have all of the rights of a stockholder, including the right to vote and receive distributions. The restricted stock is subject to forfeiture as set forth in the agreement governing the award.
As of December 31, 2015, the total unrecognized compensation cost related to RSUs granted was $687, which is expected to be recognized as compensation expense over a weighted average period of approximately two years. RSU expense was $304 and $233 for the year ended December 31, 2015 and 2014, respectively. As of December 31, 2015, the total unrecognized compensation cost related to restricted stock was $55, which is expected to be recognized as compensation expense in 2016. These expenses are included within payroll expense in the Consolidated Statements of Operations.
In July 2015, Tiptree and Reliance established the Reliance Restricted Units Program under which Reliance is authorized to issue restricted stock units representing equity of Reliance to employees of Reliance. Two-thirds of the restricted stock units issued are subject to vesting based on the performance of Reliance and one-third vest annually in four equal installments, subject to continued employment. Following the fourth anniversary of issuance, vested restricted stock of Reliance may be exchanged at fair market value, at the option of the holder, for Tiptree Class A common stock. The Company has determined that the straight-line method will be used to recognize compensation expense for the time vesting Reliance restricted stock so compensation expense for the time vesting Reliance restricted stock will be recognized using the straight-line method over the requisite service period of four years beginning in July 2015. The Company has determined that the graded-vesting method will be used to recognize compensation expense for the performance vesting Reliance restricted stock so compensation expense for the performance vesting Reliance restricted stock will be recognized if it is probable that the performance condition will be achieved and shall not be accrued if it is not probable that the performance condition will be achieved. The Company must reassess the probability of satisfaction of the performance condition for the performance vesting Reliance restricted stock for each reporting period.
The fees paid to Tricadia for services provided consisted of the following:
(1) Represents cash bonuses and grant date fair value of stock, RSUs and options 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 35.0%. The Company also operates in several state jurisdictions that have an average combined statutory rate equal to approximately 3.6%. 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 35.0% 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:
For the year ended December 31, 2015, the Company’s effective tax rate on income from continuing operations was equal to (11.1)%, which does not bear a customary relationship to statutory income tax rates. The effective tax rate for the year ended December 31, 2015 is lower than the U.S. statutory income tax rate of 35.0%, primarily due to taxes incurred at certain corporate subsidiaries that do not consolidate with the Company’s taxable income, tax losses generated at certain of our taxable subsidiaries which require a valuation allowance and do not generate an income tax benefit, and state income taxes incurred on a separate legal entity basis.
The table below presents the components of the Company’s deferred tax assets and liabilities as of the respective balance sheet dates:
In addition to the U.S. Federal NOLs, Tiptree and its subsidiaries have NOLs in various state jurisdictions totaling $36,941.
Tiptree’s Fortegra subsidiary is a defendant in Mullins v. Southern Financial Life Insurance Co., which was filed on February 2, 2006, in the Pike Circuit Court, in the Commonwealth of Kentucky. A class was certified on June 25, 2010. At issue is the duration or term of coverage under certain policies. The action alleges violations of the Consumer Protection Act and certain insurance statutes, as well as common law fraud. The action seeks compensatory and punitive damages, attorney fees and interest. Plaintiffs filed a Motion for Sanctions on April 5, 2012 in connection with Fortegra's efforts to locate and gather certificates and other documents from Fortegra's agents. While the court did not award sanctions, it did order Fortegra to subpoena certain records from its agents. Although Fortegra appealed the order on numerous grounds, the Kentucky Supreme Court ultimately denied the appeal in April 2014. Consequently, Fortegra has retained a special master to facilitate the collection of certificates and other documents from Fortegra's agents. On January 29, 2015, the trial court issued an Order denying Fortegra’s motion to decertify the class, which Fortegra has appealed. On July 8, 2015, the Kentucky Court of Appeals dismissed Fortegra’s appeal, on the grounds that the court lacked subject-matter jurisdiction. No trial or hearings are currently scheduled.
Tiptree 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, Tiptree does not believe that these proceedings, either individually or in the aggregate, are likely to have a material adverse effect on Tiptree’s financial position.
Effective January 1, 2016, Tiptree, TFP and Operating Company created a consolidated group among themselves and various Operating Company subsidiaries for U.S. federal income tax purposes, with Tiptree being the parent company. In connection with the creation of the consolidated group, TFP and the Operating Company elected to be treated as corporations for U.S. federal income tax purposes, and Tiptree contributed its 28% interest in Operating Company to TFP in exchange for 4,307,023 additional common units of TFP. As a result of these steps, effective January 1, 2016, Tiptree directly owns 81.29% of TFP and TFP directly owns 100% of Operating Company.
In the first quarter of 2016, the Company purchased an additional $8,000 in NPLs, bringing the Company’s total investment in NPLs to $47,700 million as of the date of this report.
On March 10, 2016, the Company’s board of directors declared a quarterly cash dividend of $0.025 per share to Class A stockholders with a record date of March 25, 2016, and a payment date of April 1, 2016.
Subsequent to December 31, 2015, the Company issued to the executive committee 125,618 shares of Class A common stock and options to acquire 251,237 shares of Class A common stock, subject to vesting requirements, as incentive compensation.