Our principal executive offices are located at 780 Third Avenue, 21st Floor, New York, New York 10017. The table below outlines the Company’s leased properties as of December 31, 2014, all of which are used as administrative offices. All facilities are considered adequate and suitable for the Company’s current level of operations. We do not own any properties for administrative purposes.
The Company’s owned real estate as of December 31, 2014 is listed below. All of the owned real estate consists of properties managed by Care, except the Stamford, CT location, which is owned by Luxury.
Tiptree Financial is a diversified holding company that draws upon the extensive experience of its management in the areas of insurance, specialty finance, asset management, real estate and credit investing to acquire and grow primarily controlling interests of operating businesses. We believe our business ownership mix of (i) specialty insurance, insurance services and warranty protection companies, (ii) operating companies which principally originate or own tangible assets, and (iii) asset management companies which earn fees from third-party investment vehicles, provides business synergies which generate a higher overall return on shareholder capital.
When making new acquisitions, we strive to identify businesses that: (i) have strong and experienced management, (ii) have the potential to generate attractive and stable returns on capital with limited downside, (iii) complement existing businesses or strategies through clearly identifiable synergies, and (iv) have sustainable and scalable business models. Tiptree’s permanent capital base allows us to view our business through a long-term lens, providing competitive advantages relative to alternative capital sources with shorter-term objectives. We will retain a well-performing business for an indefinite period, but will consider selling a business when we believe material shareholder value creation will be achieved.
When we acquire a business, we aim to partner with the management and employees, providing assistance when needed, but relying on their unique expertise to run the business day-to-day. We enhance the value of our businesses by utilizing our experience in capital markets, mergers and acquisitions, capital raising, credit markets, distressed investing, securitization, asset management, corporate governance and government regulatory issues. We also optimize the efficiencies of our business operations by strategically using the resources and talents of our more than 700 employees at our consolidated subsidiaries. We seek to adopt a prudent approach with regard to our capital structure, the diversification of financial risk and the avoidance of reputational risk. We evaluate our performance primarily by the comparison of our shareholder’s long-term total return on capital (change in book value plus dividends paid), to alternative investment options and major market indices.
Net after tax income of the Company was $4.6 million for 2014 compared with $40.7 million in 2013. Revenues increased to $80.3 million in 2014 from $23.7 million in 2013. Expenses increased to $99.1 million in 2014 from $36.3 million in 2013. Expenses in 2014 include $6.1 million of charges incurred related to our Fortegra acquisition which are not expected to recur. Discussion of the changes in revenues, expenses and net income is presented below and in our segment analysis.
The Company’s realized and unrealized gains on investments was $9.0 million in 2014, compared to $6.9 million in 2013. The majority of the gains in 2014 were realized by the Company’s Care subsidiary as the result of the repayment in full of a loan that had been held at a discounted value.
Service and administrative fees were $8.7 million in 2014 and represent fees earned by Fortegra, since its acquisition, from a number of different activities, but principally from the provision of warranty protection on furniture, equipment and cell phones. Service fees are also earned through Fortegra’s car club program, offering road side assistance to motorists and car damage protection plans. Fortegra also earns administrative fees paid by reinsurance companies for insurance policies ceded by Fortegra to the reinsurer. The fee covers Fortegra’s administrative cost for issuing the policies plus a profit margin.
Ceding commissions were $3.7 million in 2014 and represent commissions earned by Fortegra, since its acquisition, under coinsurance agreements with third party insurers that are based on contractual formulas that take into account, in part, underwriting performance and investment returns experienced by companies assuming the insurance risks. As experience changes, adjustments to ceding commissions are reflected in the period and are based on the claim and investment experience of the related polices.
Rental revenues are primarily earned from the properties owned by our Care subsidiaries. Rental revenue was $19.7 million in 2014 and $5.8 million in 2013. The higher revenue earned in 2014 was attributable to the increased number of properties owned by Care in 2014. Further discussion of rental income in 2014 and 2013 is presented in our real estate segment analysis.
The Company incurs interest expense on its borrowings. Interest expense was $12.5 million in 2014 and $4.9 million in 2013. The increase in interest expense was attributable to higher borrowings by the Company in 2014 and 2013. Further discussion of interest expenses in 2013 and 2014 is presented in our segment analysis. Further information relating to our borrowings may be found in “- Liquidity and Capital Resources” and in Note 15-Debt, in the accompanying consolidated financial statements.
Payroll expense was $33.8 million in 2014, compared to $16.7 million in 2013. Payroll expenses increased in 2014 due to three primary factors: the acquisition of Luxury in January 2014, which added $8.2 million in payroll and employee commission expense; an increase in the number of Care joint ventures in 2014, which added $5.3 million in payroll expenses; and Fortegra’s payroll expense of $3.5 million for the period since its acquisition. Payroll expense at the corporate level also increased as the Company expanded its management and accounting resources to match the increased scope of its operations.
Commission expense was $4.3 million in 2014 and was incurred by Fortegra, since its acquisition, on most of its revenue classes, including commissions paid to distributors and retailers selling credit insurance policies, motor club memberships, mobile device protection and warranty service contracts. Credit insurance commission rates are, in many instances, set by state regulators and are also impacted by market conditions.
Member benefit claims were $2.7 million in 2014 and were incurred by Fortegra in the period since its acquisition. Member benefit claims represent costs of services and replacement devices incurred on Motor Club and ProtectCELL warranty protection programs.
Net losses and loss adjustment expenses were $3.2 million in 2014 and were incurred by Fortegra in the period since its acquisition. 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 said claims. Incurred claims are impacted by loss frequency, which is a measure of the number of claims per unit of insured exposure and loss severity, which is based on the average size of claims. Factors affecting loss frequency and loss severity include changes in claims reporting patterns, claims settlement patterns, judicial decisions, economic conditions, morbidity patterns and the attitudes of claimants towards settlements.
Depreciation and amortization expense relates to the depreciation and amortization of the Company’s fixed assets, including buildings, leasehold improvements and other fixed assets. The Company also incurs amortization expense on the intangible assets acquired as a result of the purchase of subsidiary companies. Depreciation and amortization expense was $11.9 million in 2014, compared to $2.0 million in 2013. The increase in depreciation and amortization expense in 2014 was attributable primarily to $4.4 million in amortization of intangible assets acquired in conjunction with the expansion in Care joint ventures and due to $4.2 million in amortization of intangible assets acquired with the purchase of Fortegra.
The net income attributable to consolidated CLOs has been allocated to the asset management segment (representing the fees earned from the management of CLOs) and to the corporate and other segment (representing the distributions earned on the CLO subordinated debt and interest-only positions held by the Company and realized and unrealized gains and losses on such
The provision for income taxes increased in 2014 over the prior year primarily due to state income taxes, non-deductible transaction costs incurred on the Fortegra transaction and the effect of changes in valuation allowance on net operating losses reported by Tiptree Financial, Siena, Luxury and MFCA. The effective tax rate on income from continuing operations for the year ended December 31, 2014 was approximately 525.5% compared to 3.44% for the prior year end (which does not bear a customary relationship to statutory income tax rates). Differences from the statutory income tax rates are primarily the result of: (i) non-deductible transaction costs incurred in the Fortegra transactions (ii) the effect of changes in valuation allowance on net operating losses reported by Tiptree Financial, Siena, Luxury, and MFCA, and (iii) the effect of state income taxes required to be reported on a separate legal entity basis resulting in higher aggregate state taxable income than the consolidated pre-tax income from continuing operations.
Discontinued operations, net totaled $7.9 million in 2014, compared to $25.0 million in 2013. The components of discontinued operations in 2014 and 2013 are tabulated below:
In 2013, the Company had a $15.5 million net gain from the sale of the Bickford Portfolio of properties which had been owned by Care. There was no comparable gain on sale earned in 2014.
Net income from discontinued operations decreased to $7.9 million in 2014 from $9.6 million in 2013. The decline in net income from discontinued operations in 2014 is principally due to the absence of income from Bickford operations as noted below. Net income from discontinued operations at PFG increased slightly in 2014, principally due to increased separate account fees of $1.1 million, resulting from increased assets held in separate accounts and higher account management fee rates. Fees from the administration of Hartford policies increased in 2014 by $1.1 million due to higher assets under administration. Interest expense on PFAS’s notes declined by $1.0 million due to the amortization of the principal amount outstanding. These gains were largely offset by an increase in depreciation and amortization expense of $1.4 million, principally due to the increase in depreciation expense incurred in 2014 in connection with the move of PFAS’s physical location from New Jersey to Philadelphia and amortization expense relating to PFG’s intangible assets. Other expenses in 2014 also increased as a result of the move. There were no comparable move-related expenses in 2013. PFG incurred tax expense of $6.1 million in 2013 and $5.5 million in 2014.
The real estate segment previously included investments in Star Asia entities. These investments are now reported in the corporate and other segment.
Each reportable segment’s profit/(loss) is reported before income taxes, discontinued operations and non-controlling interests. Intersegment revenue and expense relate to interest paid and received on loans and interest rate swaps between segments.
Results of the Company’s PFG subsidiary, which had previously been presented in the insurance and insurance services segment have been reclassified as discontinued operations for 2014 and 2013.
Fortegra revenues earned from the date of acquisition totaled $26.2 million, comprised primarily of service and administrative fees of $8.7 million, ceding commissions of $3.7 million and net earned premiums of $12.8 million.
Service and administrative fees for the period totaled $8.7 million. These fees include service and administrative fees of $7.7 million earned on Fortegra’s warranty programs for furniture and appliances, the ProtectCELL program for cell phone protection and car club memberships providing roadside assistance and car damage protection. Fortegra also earned fees of $1.0 million related to the administration of insurance policies ceded to reinsurance companies.
Ceding commissions of $3.7 million is revenue earned under reinsurance agreements with third party insurers who co-insure risks with Fortegra. The agreements with the third party insurers take into account the underwriting performance and investment returns experienced by the assuming companies. Ceding commission income is computed based upon the earned premium and investment income from the assets held in trust for Fortegra’s benefit, less earned commissions, incurred claims and the reinsurer’s fee for coverage.
Fortegra’s interest expense was $637 thousand for the period, which consisted of $582 thousand related to the borrowings under bank lines and the trust preferred security issued by Fortegra and $55 thousand of other interest expense. For further information relating to Fortegra’s debt and interest expenses, please refer to our Liquidity and Capital Resources discussion and analysis and to Note 15-Debt, of the accompanying consolidated financial statements.
Depreciation and amortization expense of $4.3 million related primarily to the amortization of the intangible assets acquired as a result of Tiptree’s purchase of Fortegra. The most significant of these expenses is the amortization of the insurance policies and contracts acquired, which had a value of $36.5 million as of the acquisition date and which has a steep amortization curve. Amortization of this intangible asset cost approximately $4.0 million in the period.
Total revenues of our specialty finance segment were $15.2 million in 2014, compared to $969 thousand for 2013. Total segment expenses were $17.2 million in 2014 and $2.7 million in 2013. Net losses for the segment before taxes and non-controlling interests were $2.3 million in 2014 and $1.7 million in 2013.
The Company manages Siena and Luxury as a single operating segment. However, for additional analysis, the revenues and expenses of Siena and Luxury have been tabulated below:
Siena earned net pre-tax income of $119 thousand in 2014 and incurred a net pre-tax loss of $1.7 million in 2013. The improvement in results was chiefly attributable to significant increases in interest income and loan fee income in 2014. Siena’s expenses also increased in 2014 but not to the same extent as the increase in revenues. Revenues earned by Siena totaled $4.5 million in 2014 and $969 thousand in 2013. Siena’s revenues are primarily from interest on its loans to small and medium sized U.S. companies and fees charged in connection with those loans. Siena’s expenses were $4.4 million in 2014 and $2.7 million in 2013. Siena’s expenses are comprised primarily of interest expense on the Company’s borrowings, payroll and employee commissions, professional fees, depreciation and amortization and other expenses.
Siena’s interest expense was $497 thousand in 2014, compared to $24 thousand in 2013. Interest expense was incurred on drawings under Siena’s $65 million line of credit facility, of which an average of $18.0 million was drawn down in 2014 and $1.8 million in 2013. The increase in interest expense in 2014 was due both to higher average borrowings and a full year of operations.
Professional fees at Luxury were chiefly comprised of design consulting fees of $230 thousand associated with recruiting initiatives and the build-out of new branches, together with audit and legal fees of $75 thousand. Other expenses of $2.9 million included mortgage origination related fees and mortgage recording taxes of $793 thousand, branch occupancy expense of $1.1 million and $472 thousand in office related expenses. Luxury’s intersegment expense of $341 thousand represented interest on a subordinated loan from Tiptree that was converted into preferred equity in October 2014.
Total expenses for asset management were $5.9 million for 2014, compared to $6.7 million for 2013. The expenses were comprised primarily of the payroll expense for the asset managers, together with professional fees and other office expenses. The decrease in expenses of $759 thousand in 2014 was primarily attributable to a reduction in staff bonuses for 2014.
Interest income earned by Care was $1.5 million in 2014, compared to $2.3 million in 2013. The interest income was primarily from the Westside Loan which ceased upon repayment of the Westside Loan during the third quarter in 2014. Care has also earned interest income on a secured loan to the lessees of one of its properties. The carrying value of the loan was $700 thousand as of December 31, 2014.
Total expenses for the real estate segment were $26.1 million in 2014, compared to $12.1 million in 2013. Segment expenses are comprised of interest expenses on Care’s borrowings, payroll expenses, professional fees, depreciation and amortization of properties and leases acquired and other expenses.
Payroll expense, which includes the payroll expenses of managers which are allocated to the operators of the properties owned by Care’s joint venture subsidiaries as well as the expense of Care’s management team, was $8.1 million in 2014, compared to $2.7 million in 2013. The increase in payroll expense is attributable to the expansion in the number of Care joint venture acquisitions during 2013 and 2014.
Professional fee expense was $873 thousand in 2014, compared to $2.0 million in 2013. Professional fees in 2014 were comprised of legal expenses of $686 thousand, chiefly incurred as a result of acquisitions and dispositions of properties in the year, and audit and tax preparation expenses totaling $130 thousand. Professional fees were higher in 2013 principally due to significant expenses incurred in connection with the Contribution Transaction on July 1, 2013.
Depreciation and amortization expenses were $7.2 million in 2014, compared to $1.9 million in 2013. Depreciation and amortization expense chiefly relates to the depreciation of Care’s buildings and improvements and the amortization of the fair value attributed to leases in place upon the acquisition of joint ventures. The increase in 2014 was attributable to Care’s acquisition of properties during 2013 and 2014 and a $3.8 million increase in the amortization of intangible lease assets resulting from new joint ventures.
Corporate realized and unrealized gains and losses and interest income on investments were $302 thousand in 2014 and $668 thousand in 2013. The gain in 2014 comprised of $485 thousand of interest earned on a collateralized debt obligation (“CDO”) asset held by the Company and distributions on CLO subordinated notes managed by a third party, and bank and loan interest of $42 thousand offset by unrealized losses of $224 thousand on the CDO asset. The gain in 2013 comprised of $613 thousand of interest earned on the CDO assets and distributions on CLO subordinated notes managed by a third party and $170 thousand of interest earned on loans to two senior executives of Luxury made by the Company offset by a realized loss of $84 thousand on an equity investment and unrealized losses totaling $75 thousand on the CDO and the subordinated notes of the CLOs under third party management.
In 2013 and in 2014, the Company established loan warehouse credit facilities which were designed to hold loans until new CLOs could be formed. The warehouse loans were used to seed Telos 3 and Telos 4 in 2013 and Telos 5 and Telos 6 in 2014, which are all CLOs managed by the Company. Net pre-tax income from the warehouse loans was $4.1 million in 2014, compared to $5.9 million in 2013. Interest income earned from the warehouse loans was $7.3 million partially offset by unrealized losses of $1.6 million in 2014, compared to interest income of $5.3 million and unrealized gains of $1.6 million in 2013. Interest expense incurred in the funding of the warehouse loans was $1.6 million in 2014, compared to $943 thousand in 2013.
Corporate professional fees include external legal and audit costs as well as fees paid to affiliate companies for the provision of professional services. Corporate professional fees totaled $6.4 million in 2014 and chiefly comprised audit expenses of $1.3 million, legal expenses of $1.3 million, taxation advice and tax filing preparation fees of $775 thousand, consulting and other professional fees of $1.4 million and director fees and expenses of $503 thousand. Also included in corporate professional fees in 2014 are amounts paid to Tricadia and Mariner of $1.2 million for the provision of senior management and finance staff services, legal compliance and information technology services. For further information relating to the payment of fees to Mariner and Tricadia, see Note 21-Related Party Transactions, in the accompanying consolidated financial statements.
Corporate professional fees totaled $4.6 million in 2013 and primarily consisted of audit expenses of $1.2 million, legal expenses of $743 thousand, taxation advice and tax filing preparation fees of $437 thousand, consulting fees of $485 thousand and director fees and expenses of $322 thousand. Also included in corporate professional fees in 2013 are amounts paid to Mariner and Tricadia of $1.4 million for the provision of senior management and finance staff services, legal compliance and information technology services.
Significant non-recurring costs for continuing operations included $6.1 million associated with the Fortegra transaction for the year ended December 31, 2014.
Significant non-recurring 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.
The ability of Tiptree’s subsidiaries to generate sufficient net income and cash flows to make cash distributions will be subject to numerous business and other factors, including restrictions contained in our subsidiaries’ financing agreements, regulatory restrictions, availability of sufficient funds at such subsidiaries, general economic and business conditions, tax considerations, strategic plans, financial results and other factors such as target capital ratios and ratio levels anticipated by rating agencies to maintain or improve current ratings.
The Company has a senior secured credit agreement with Fortress. As of December 31, 2014, $47.5 million of the facility was outstanding. The proceeds were used to partially fund the acquisition of Fortegra. On January 27, 2015, the Company and Fortress amended the credit facility and the Company borrowed an additional $25 million under the credit agreement with Fortress, the proceeds of which will be used for general corporate purposes to grow our business. Loans under the credit agreement bear interest at a variable rate per annum equal to one-month LIBOR (with a minimum LIBOR rate of 1.25%), plus a margin of 6.0% per annum. The weighted average interest rate for 2014 for borrowings under the Fortress facility was 7.75%.
Siena has a $65.0 million senior secured revolving line of credit with Wells Fargo Bank with a maturity date of January 25, 2017. The interest rate on this line of credit is LIBOR plus 250 basis points. Drawings under this line of credit are used to finance Siena’s loans to its customers. As of December 31, 2014, there was $25.7 million outstanding under this line of credit.
Luxury has entered into three credit agreements totaling $82.5 million. Drawings under these agreements are used to finance Luxury’s portfolio of mortgage loans pending the sale to investors. As of December 31, 2014, $27.4 million was outstanding under these lines of credit.
Care has obtained secured mortgage loans provided by a number of different banks. The total outstanding on these mortgage loans was $108.2 million as of December 31, 2014. The loans were used to purchase specific properties and are secured by mortgages on those properties.
Further discussion of the Company’s debt financing arrangements is contained in Note 15-Debt, of the accompanying consolidated financial statements.
The amounts associated with operating, investing and financing activities for each of the periods ending December 31, 2014 and 2013 from discontinued operations are presented as a component of the Company’s consolidated statements of cash flows.
Cash provided by operating activities was $91.0 million for the year ended December 31, 2014, compared to cash used of $3.0 million for the year ended December 31, 2013. Cash provided by operating activities from VIEs for the period ended December 31, 2014 was $105.9 million, compared to cash used of $28.6 million for the year ended December 31, 2013, a change of $134.5 million. Cash provided by discontinued operations was $16.0 million for the year ended December 31, 2014, compared to cash provided of $18.5 million for the year ended December 31, 2013. Excluding the activity attributable to the VIEs and discontinued operations, cash used by operating activities was $30.9 million for the year ended December 31, 2014, compared to cash provided of $7.1 million for the period ended December 31, 2013, a decline of $38.0 million. The change was primarily driven by increases in assets and declines in liabilities of the Company as of December 31, 2014, as compared with balances as of December 31, 2013, together with increased depreciation and amortization expenses in 2014 and increases in Fortegra’s unearned premiums of $9.8 million in the period since its acquisition. The increases in assets held by the Company at December 31, 2014, included loans originated for sale of $6.9 million held by Luxury and an increase in other assets of $27.0 million, which principally consisted of reinsurance receivables and deferred acquisition costs at Fortegra. The decline in in the liabilities included a decrease in amounts due to brokers, dealers and trustees of $7.9 million which was attributable to a reduction in loan warehouse activity at year end. Amortization and depreciation expense was $11.9 million in the year ended December 31, 2014, compared to $2.0 million in the year ended December 31, 2013, an increase of $10.9 million, which was primarily due to increased amortization of intangible assets acquired in conjunction with the expansion of Care joint ventures and amortization of intangible assets acquired with the purchase of Fortegra.
Cash used in investing activities for the period ended December 31, 2014 was $494.2 million, compared to cash used of $689.2 million for the year ended December 31, 2013, an increase of $195.0 million. Cash used in VIE investing activities was $635.5 million for the period ended December 31, 2014, compared with cash used of $537.9 million for the period ended December 31, 2013. Excluding the VIE investing activity, cash provided by investing activities was $141.3 million at December 31, 2014 compared to cash used of $151.3 million for the year ended December 31, 2013, an increase of $292.6 million. Cash provided
The table below summarizes Tiptree’s consolidated contractual obligations by period for payments that are due as of December 31, 2014:
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 14-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.
Non-recourse CLO notes payable principal is payable at stated maturity, 2021 for Telos 1, 2022 for Telos 2, 2024 for Telos 3 and Telos 4, 2025 for Telos 5 and 2027 for Telos 6.
On July 25, 2013, TFI’s subsidiary Siena closed on a line of credit with Wells Fargo Bank. This revolving line is for $65.0 million with an interest rate of LIBOR plus 250 basis points and a maturity date of January 25, 2017. As of December 31, 2014, there was $25.7 million outstanding on this line (see Note 15-Debt, in the accompanying consolidated financial statements).
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 2014 was 3.69%.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. Further information can be found in the notes to the consolidated financial statements related to the following: variable interest entities can be found in Note 3-Out of Period Adjustments, Changes in Accounting Principles and Reclassifications; 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; 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.
Reinsurance receivables include amounts related to paid benefits and estimated amounts related to unpaid policy and contract claims, future policyholder benefits and policyholder contract deposits. The cost of reinsurance is accounted for over the terms of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. Amounts recoverable from reinsurers are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefits reserves and are reported in our consolidated balance sheets. In the ordinary course of business, we are involved in both the assumption and cession of reinsurance with non-affiliated companies, including reinsurance companies owned by our clients. We utilize reinsurance for loss protection and capital management.
in establishing its unpaid claims reserves. These algorithms are used to calculate unpaid claims as a function of paid losses, earned premium, target loss ratios, in-force amounts, unearned premium reserves, industry recognized morbidity tables or a combination of these factors.
Premiums written are earned over the life of the respective policy using the Rule of 78's, pro rata, or other actuarial methods as appropriate for the type of business. Unearned premiums represent the portion of premiums that will be earned in the future. A premium deficiency reserve is recorded if anticipated losses, loss adjustment expenses, deferred acquisition costs - insurance related and policy maintenance costs exceed the recorded unearned premium reserve and anticipated investment income. As of December 31, 2014, no such reserve was recorded.
Earned premiums, net is from direct and assumed earned premium consisting of revenue generated from the direct sale of payment protection insurance policies by our distributors and premiums written for payment protection insurance policies by another carrier and assumed by us. Whether direct or assumed, the premium is earned over the life of the respective policy using methods appropriate to the pattern of losses for the type of business. Methods used include the Rule of 78's, pro rata, and other actuarial methods. Management selects the appropriate method based on available information, and periodically reviews the selections as additional information becomes available. Direct and assumed premiums are offset by premiums ceded to our reinsurers, including PORCs, which are earned in the same manner. The amount ceded is proportional to the amount of risk assumed by the reinsurer.
We limit the underwriting risk we take in our payment protection insurance policies. When we do assume risk in our payment protection insurance policies, we utilize both reinsurance (e.g., quota share and excess of loss) and retrospective commission agreements to manage and mitigate our risk.
and other intangibles are subsequently accounted for in accordance with ASC 350 Intangibles-Goodwill and Other and ASC 360 Impairment or Disposal of Long-Lived Assets. The initial measurement of goodwill and intangibles requires judgment concerning estimates of the fair value of the acquired assets and liabilities. Goodwill ($95.3 million at December 31, 2014) and indefinite-lived intangible assets ($13.0 million at December 31, 2014) are not amortized but subject to tests for impairment annually or if events or circumstances indicate it is more likely than not they may be impaired. Other intangible assets are amortized over their estimated useful lives and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount.
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 ($106.9 million at December 31, 2014) 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.
Consolidated Statements of Operations for the years ended December 31, 2014 and 2013
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014 and 2013
We have audited the accompanying consolidated balance sheets of Tiptree Financial Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for years then ended. 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.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tiptree Financial Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
Tiptree’s Class A Common Stock is traded on the NASDAQ Capital Market under the symbol “TIPT”.
In December 2014, the Company completed the acquisition of Fortegra Financial Corporation (Fortegra), paying $211,740 for 100% ownership. Fortegra is consolidated within the Company’s insurance and insurance services segment since the closing date. Assets acquired were $763,794, including $114,500 of intangible assets and $93,442 of goodwill.
The Contribution Transactions were accounted for as a combination of entities under common control. As a result, the comparative financial information has been retrospectively adjusted to furnish comparative combined financial information from August 2010 (the date of common control). The application of this “as-if pooling of interests” required the previously issued consolidated financial statements of Tiptree to be recast to reflect such activity. As a result, any capital transaction activity of TFP related to these acquisitions, such as any increases or decreases in noncontrolling interest, was retroactively adjusted as an adjustment to Tiptree’s additional paid-in capital. Also, the results of operations of each of the acquisitions that have occurred after August 2010 are included in the consolidated financial statements from the date of acquisition.
The accompanying consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles (GAAP). The consolidated financial statements are presented in U.S. dollars, the main operating currency of the Company. 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 the Contribution Transactions.
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. See "Purchase Price Adjustments" below for more information on measurement period adjustments.
The Company records all security transactions on a trade-date basis. Realized gains/(losses) are generally determined using the specific-identification method. ASC Topic 320, Investments - Debt and Equity Securities, requires the Company to classify its investment assets as trading, available for sale or held to maturity.
Debt and equity securities and corporate bonds classified as trading are intended to be sold at any time and are recorded at fair value, with unrealized gains/(losses) included in the consolidated statements of operations.
Realized gains/(losses) on the sale of debt securities are calculated by the specific-identification method. The Company regularly conducts and documents periodic reviews of all securities with unrealized losses in order to evaluate whether the impairment is other-than-temporary. Under the guidance for debt securities, other-than-temporary impairment (OTTI) is recognized in earnings in the consolidated statements of operations for debt securities that the Company has an intent to sell or that it believes it is more likely than not that it will be required to sell prior to recovery of the amortized cost basis.
Management’s estimate of OTTI includes, among other things: (i) the duration of time and the relative magnitude to which fair value of the security has been below cost; (ii) the financial condition and near-term prospects of the issuer of the investment; (iii) extraordinary events, including negative news releases and rating agency downgrades, with respect to the issuer of the investment; (iv) the Company’s ability and intent to hold an equity security for a period of time sufficient to allow for any anticipated recovery; (v) whether it is more likely than not that the Company will sell a security before recovery of its amortized cost basis; (vi) whether a debt security exhibits cash flow deterioration; and (vii) whether the security’s decline is attributable to specific conditions, such as conditions in an industry or in a geographic location.
The Company records the fair value of the respective derivative instrument in trading assets at fair value or trading liabilities, at fair value. To the extent a derivative is an effective hedge of the cash flow risk of the hedged debt obligation, any change in the derivative's fair value is recorded in AOCI, net of income tax. To the extent the derivative is an ineffective hedge, that portion of the change in fair value is recorded in other operating expenses or interest expense as appropriate. The Company is not a party to leveraged derivatives and does not enter into derivative financial instruments for speculative purposes.
The CLOs managed by the Company contain a diversified portfolio of middle market leveraged loans carried at estimated fair value. In general, the fair value of leveraged loans are obtained from an independent pricing service which provides secondary coverage of market participants. The values represent a composite of mark-to-market bid/offer prices and are classified as Level 2. In certain instances the Company will make its own determination of fair value of leveraged loans
For asset backed loans held by Siena, impairment is recorded when the Company determines that it is probable that principal will not be collected in full.
The 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.
Interest income is generally recognized using the effective interest method or on a basis approximating a level rate of return over the term of the loan. Nonaccrual loans are those on which the accrual of interest has been suspended. Loans are placed on nonaccrual status and considered nonperforming when full payment of principal and interest is in doubt, or when principal or interest is 90 days or more past due and collateral, if any, is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against interest income. In addition, the amortization of net deferred loan fees is suspended. Interest income on nonaccrual loans may be recognized only to the extent it is received in cash. However, where there is doubt regarding the ultimate collectability of loan principal, cash receipts on such nonaccrual loans are applied to reduce the carrying value of such loans. Nonaccrual loans may be returned to accrual status when repayment is reasonably assured and there has been demonstrated performance under the terms of the loan or, if applicable, the restructured terms of such loan. The Company did not have any loans on nonaccrual status as of December 31, 2014 or 2013.
The Company accrues interest income on its notes receivable based on the contractual terms of the respective note. The Company monitors all notes receivable for delinquency and provides for estimated losses for specific receivables that are not likely to be collected. In addition to allowances for bad debt for specific notes receivable, a general provision for bad debt is estimated for the Company’s notes receivable based on historical trends. Account balances are generally charged against the allowance when the Company believes it is probable that the note receivable will not be recovered, and has exhausted its contractual and legal remedies. The Company continually reviews its allowance for doubtful accounts.
Accounts and premiums receivable from the Company’s insurance services business are presented net of the allowance for doubtful accounts and consist primarily of advance commissions and agents' balances in course of collection and billed but not collected policy premiums. For policy premiums that have been billed but not collected, the Company records a receivable on its balance sheet for the full amount of the premium billed, with a corresponding liability, net of its commission, to insurance 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. The allowance for doubtful accounts totaled $296 at December 31, 2014.
The Company assesses whether there are indicators that the value of its partially-owned entities may be impaired. An investment’s value is impaired if management determines that a decline in the value of the investment below its carrying value is other than temporary. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the estimated value of the investment. There were no material impairments on our investments in partially-owned entities for the years ended December 31, 2014 and December 31, 2013.
Upon the acquisition of real estate, management will assess the fair value of acquired assets (including land, buildings and improvements, and identified intangible assets such as above and below market leases and acquired in-place leases and customer relationships) and acquired liabilities and then allocate purchase price based on these assessments. Management assesses fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. In estimating carrying costs, the Company includes estimates of lost rents at estimated market rates during the hypothetical expected lease-up periods, which are dependent on local market conditions and expected trends.
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. An impairment loss is measured based on the excess of the carrying amount over the fair value. The fair value is determined by using a discounted cash flow model and appropriate discount and capitalization rates. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates, and capital requirements that could differ materially from actual results. If anticipated holdings periods change or estimated cash flows decline based on market conditions or otherwise, an impairment loss may be recognized. Long-lived assets to be disposed of are recorded at the lower of carrying value or fair value less estimated costs to sell. There were no material impairments on the Company’s real estate investments for the years ended December 31, 2014 and 2013.
Tiptree has two segments of its business which contain goodwill and for which annual goodwill impairment testing is done at a reporting unit level in accordance with ASC 350. These segments are insurance and insurance services for Tiptree’s acquisition of Fortegra and specialty finance for its acquisition of Siena and Luxury. The goodwill impairment testing is performed in two steps. The first step compares the estimated fair value of the reporting unit with its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. However, if the carrying amount of the reporting unit were to exceed its estimated fair value, a second step would be performed that would compare the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. An impairment loss would be recorded to the extent that the carrying amount exceeds the implied fair value of the reporting unit’s goodwill. A substantial goodwill impairment charge would not have a significant impact on the Company’s financial condition, but could have an adverse impact on our results of operations.
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 ($106,894 at December 31, 2014) 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.
The Company tests intangible assets with finite lives for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with ASC 360, and the Company is required to evaluate whether the carrying amount of the amortizable intangible asset is recoverable. If the carrying amount is not recoverable, the Company tests the carrying amount for impairment. Any impairment loss recognized reduces the asset to its new cost
The Company evaluates whether deferred acquisition costs-insurance related are recoverable at year-end, and considers investment income in the recoverability analysis. As a result of the Company's evaluations, no write-offs for unrecoverable deferred acquisition costs were recognized during the year ended December 31, 2014.
The Company evaluates whether deferred acquisition costs - non-insurance 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 year ended December 31, 2014.
Net earned premium is from direct and assumed earned premium consisting of revenue generated from the direct sale of payment protection insurance policies by the Company's distributors and premiums written for payment protection insurance policies by another carrier and assumed by the Company. Whether direct or assumed, the premium is earned over the life of the respective policy using methods appropriate to the pattern of losses for the type of business. Methods used include the Rule of 78's, pro rata, and other actuarial methods. Management selects the appropriate method based on available information, and periodically reviews the selections as additional information becomes available. Direct and assumed premiums are offset by premiums ceded to the Company's reinsurers, including producer owned reinsurance companies ("PORCs"), earned in the same manner. The amount ceded is proportional to the amount of risk assumed by the reinsurer.
Rental revenue from residential tenants are recognized on a contractual basis, as lease periods for residential tenants are short-term in nature. The Company recognizes rental revenue from triple net leases in accordance with ASC Topic 840, Leases (ASC 840). ASC 840 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
Level 3 - Significant inputs that are unobservable inputs for the asset or liability, including the Company’s own data and assumptions that are used in pricing the asset or liability.
The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market, and the current market conditions. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized within Level 3 of the fair value hierarchy. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and the consideration of factors specific to the asset or liability. From time to time, the Company’s assets and liabilities will be transferred between one level to another level. It is the Company’s policy to recognize transfers between different levels at the end of each reporting period.
Municipal securities: Fair values were obtained from an independent pricing service and a third party investment manager. The prices provided by the independent pricing service are based on quoted market prices, when available, non-binding broker quotes, or matrix pricing and fall under Level 2 of the fair value hierarchy.
Certificates of deposit: The estimated fair value of certificates of deposit approximates their carrying value and fall under Level 1 of the fair value hierarchy.
Corporate securities: Fair values were obtained from an independent pricing service and a third party investment manager. The prices provided by the independent pricing service are based on quoted market prices, when available, non-binding broker quotes, or matrix pricing and fall under Level 2 of the fair value hierarchy.
Obligations of 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), interest rate swaps (IRS) and U.S. Treasury short positions. The fair value of these instruments is based upon valuation pricing models, which represent what 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 used to determine the dealer quotes, such as price volatility, the Company has classified them as Level 2 of the fair value hierarchy. The fair value of IRS is based upon valuation pricing models, which represent what the Company would expect to pay at the balance sheet date if the contracts were exited or is determined 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. Luxury issues IRLC 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. Luxury manages its 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.
Notes receivable: The carrying amounts approximate fair value because the interest rates charged approximate current market rates for similar credits.
Compensation cost is recognized for stock options issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Compensation cost is recognized over the required service period, generally defined as the vesting period. There were no issuances of stock option awards during either 2014 or 2013. The Company also issues restricted stock units as compensation to employees with the difference at grant date between the fair market value and the cost basis of the shares recorded as a reduction to retained earnings or an increase to additional paid-in capital, as applicable. The expense is amortized over the vesting period of the awards, generally three years.
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.
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, the new guidance 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, and the Company is evaluating the effect upon its financial statements.
(3) Out of Period Adjustments, Changes in Accounting Principles and Reclassifications
In August 2014, ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity was issued. Management believes this change in accounting principle is justified since the measurement approach prescribed by this new guidance will better align the consolidated CLO asset values with the consolidated CLO liability values. The Company has elected to measure both the financial assets and the financial liabilities of the CLOs using the more observable fair value measurement of the financial assets. As such, the notes payable of the CLOS are measured as (1) the sum of the fair value of the financial assets and the carrying value of any nonfinancial assets held temporarily, less (2) the sum of the fair value of any beneficial interests retained by the Company and the Company’s carrying value of any beneficial interests that represent compensation for services. The application of this new guidance results in adjustments to certain balances in the previously issued consolidated balance sheets, consolidated statements of operations, and consolidated statements of cash flows for the year ended December 31, 2013 as well as the interim periods ending March 31, 2014, June 30, 2014, and September 30, 2014. The effects of these adjustments are presented below by line item for the year ended December 31, 2013. In addition, the cumulative effect of the change in retained earnings and other components of equity is presented in the consolidated statements of stockholders’ equity.
Certain prior period amounts have been reclassified to conform to the current year presentation. These amounts are identified under the reclassification heading in the tables below.
(3) Net credit derivative income (loss) associated with master netting agreement (see Note 14-Derivative Financial Instruments).
Fortegra’s results will be included in the Company’s insurance and insurance services segment. The Company did not issue shares of its common stock in connection with the acquisition of Fortegra.
The financial results of Fortegra have been included in the Company's results as of the acquisition date of December 4, 2014. The following table presents the actual revenue and net income for the Fortegra acquisition included in the Company's Consolidated Statements of Operations for the year ended December 31, 2014:
supplemental pro forma results were prepared for comparative purposes only and do not purport to be indicative of the results of operations which may have actually resulted had the acquisition of Fortegra occurred at January 1, 2013, nor is it indicative of any future operating results of the Company.
•Payroll decreased by $611 and $823 for the years ending December 31, 2014 and 2013, respectively, to reflect the elimination of historically recognized Fortegra stock based compensation expense.
•Commission expense decreased by $14,605 and $52,387 for the years ending December 31, 2014 and 2013, respectively, as a result of the elimination of deferred acquisition costs assumed on the January 1, 2013 acquisition date. This elimination results in no commission expense to be amortized into the income statement for the policies and memberships in effect as of the acquisition date.
•Other expenses decreased by $3,592 and $6,694 for the years ending December 31, 2014 and 2013 respectively, adjustment reflects the elimination of changes in deferred premium taxes and deferred administrative costs, a direct result of the elimination of deferred costs assumed on January 1, 2013 and the elimination of director fees and stock based compensation for Fortegra’s directors due to the elimination of these director positions as the result of the acquisition.
Total consideration for the acquisition of Fortegra was funded through parent's cash on hand of $91,740 and borrowings of $120,000. The purchase price of Fortegra was largely determined on the basis of management’s expectations of future earnings and cash flows, resulting in the recognition of goodwill. The preliminary purchase price allocation below has been developed based on preliminary estimates of fair value using the historical financial statements of Fortegra as of the acquisition date. In addition, the allocation of the purchase price to intangible assets is based on preliminary fair value estimates and subject to the completion of management’s final analysis.
Management’s preliminary allocation of the purchase price to the net assets acquired resulted in the recording of intangible assets. Because valuations of acquired assets and liabilities are still in process, information may become available within the measurement period which may or may not change these valuations and, accordingly, the purchase price allocation is subject to adjustment. The residual amount of the purchase price after preliminary allocation to net assets acquired and identifiable intangibles has been allocated to goodwill. This goodwill is included in the insurance and insurance services segment.
The following table shows the preliminary values recorded by the Company, as of the acquisition date, for indefinite-lived intangible assets included in the Insurance and Insurance Services segment, not subject to amortization, associated with the Fortegra acquisition:
The Company completed the acquisition of 67.5% of Luxury in January 2014; therefore, Luxury’s financials are consolidated within the Company’s financial statements beginning with the first quarter of 2014 and reported in Tiptree’s specialty finance segment. The primary reason for the Company’s acquisition of a controlling interest in Luxury is to enter the mortgage origination business. Management has completed an assessment of the allocation of the fair value of the assets acquired and liabilities assumed from the Luxury acquisition in accordance with ASC 805, Business Combinations.
The acquisition of Luxury is being treated as a stock purchase for tax purposes and goodwill recorded by the Company in connection with the acquisition will not be deductible for tax purposes.
The following table represents detail of the assets and liabilities of PFG categorized as held for sale on the Company’s consolidated balance sheets:
The following table represents cash flows from discontinued operations for the periods indicated:
The principal changes made to the operating segments in 2014 are summarized below:
Insurance and Insurance Services operations are conducted through a wholly owned subsidiary, Fortegra, which the Company acquired on December 4, 2014. Fortegra is a specialized insurance company that offers a wide array of consumer related protection products, including credit-related insurance, mobile device protection, and warranty and service contracts. Fortegra also provides third party administration services to insurance companies, retailers, automobile dealers, insurance brokers and agents and financial services companies.
Specialty Finance is comprised of Siena, which commenced operations in April 2013, and Luxury, which was acquired in January 2014. Segment results incorporate the revenues and expenses of these subsidiaries since they commenced operations or were acquired.
Siena’s business consists of structuring asset-based loan facilities across diversified industries which include manufacturing, distribution, wholesale, and service companies. Luxury is a residential mortgage lender that originates loans, primarily FHA, prime jumbo and super jumbo mortgages for sale to institutional investors.
The asset management segment generates fee income from the CLOs under management and from its management of NPPF I, a portfolio of tax-exempt securities owned by third-party investors.
Corporate and other operations include Tiptree Direct and MFCA. Tiptree Direct holds the Company’s principal investments, which consist of CLO subordinated notes, risk mitigation transactions, warehouse holdings, holdings in the 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.
Intersegment revenues/expenses refers to those items of revenue/expense which are eliminated upon consolidation. Intersegment revenue and expense between the specialty finance segment and corporate and other segment largely relate to interest paid and received on subordinated debt and interest-only positions. Management made estimates to allocate a
Investments in available for sale securities as of December 31, 2014 are held by Fortegra. Available for sale securities held by PFG as of December 31, 2014 and 2013 have been transferred into assets held for sale.
The following table summarizes the gross unrealized losses on available for sale securities in an unrealized loss position as of:
The amortized cost and fair values of investments of these debt securities, by contractual maturity date, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Excluded from this table are equity securities as they have no contractual maturity as well as certificates of deposit, all of which have maturities of less than one year.
Total loans owned include net deferred loan origination fees of $2,308 and $686 at December 31, 2014 and 2013, respectively. Asset backed loans are net of an allowance for loan losses of $189 and $9 at December 31, 2014 and 2013, respectively.
On July 25, 2014, the Company’s Care subsidiary received principal proceeds of $29,846 resulting in a gain of approximately $7,891 on repayment in full of a loan that was secured by skilled nursing facilities as well as collateral relating to assisted living facilities and a multifamily property (the Westside Loan).
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, 2014, the Company carried $35,395 in loans receivable on its consolidated balance sheet which is net of a participation interest of $14,511. Collateral for asset-backed loan receivables, as of 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, 2014. As of December 31, 2014, there were no delinquencies in the Siena portfolio and all loans were classified as performing.
As of December 31, 2014, Fortegra held $18,053 in notes receivable. The majority of these notes totaling $11,900 consist of receivables from Fortegra’s premium financing program. A total of $2,381 was for notes receivable under its Pay us Later Program, which allows customers to finance the cost of electronic mobile devices and or protection programs on these devices. The remaining $3,772 represents unsecured notes receivable issued to various business partners in order to solidify relationships and grow its business. The Company has established a valuation allowance against its notes receivable of $34 as of December 31, 2014. As of December 31, 2014, there were $709 in balances classified as 90 day plus past due.
The following table contains information regarding the Company’s investment in real estate as of the following periods:
The other real estate owned represents a single family residential property that is being rented through the Company's subsidiary, Luxury. The property is located in Connecticut.
The following table presents the future minimum annual rental revenue under the noncancelable terms of all operating leases as of:
The schedule of minimum future rental revenue excludes residential lease agreements, generally having terms of one year or less. Rental revenue from residential leases was $15,803 and $3,086 for the years ended December 31, 2014 and 2013, respectively.
(3) For further information regarding goodwill associated with the Fortegra acquisition see Note 4-Business Acquisitions.
The following table presents the amortization expense on intangible assets for the next five years by segment:
The Company conducts annual impairment tests according to ASC 350 Intangibles-Goodwill and Other. As of December 31, 2014 and 2013, there was no impairment recorded on either its goodwill or intangibles.
Telos Asset Management LLC (Telos), a subsidiary of the Company acquired in 2012, is a CLO manager of six CLOs; namely Telos CLO 2014-6, Ltd. (Telos 6), Telos CLO 2014-5, Ltd. (Telos 5), Telos CLO 2013-4, Ltd. (Telos 4), Telos CLO 2013-3, Ltd. (Telos 3), Telos CLO 2007-2, Ltd. (Telos 2) and Telos CLO 2006-1, Ltd. (Telos 1). Prior to the acquisition of TAMCO, the Company did not consolidate the then existing CLOs (Telos 1 and Telos 2) as it only held a residual interest which was recorded at fair value. The Company met the requirement to consolidate when it acquired the management rights of the CLOs. Tiptree owns various amounts of Telos 1, Telos 2, Telos 4, Telos 5 and Telos 6 with an aggregate fair market value of $94,342.
The beneficial interests retained by Tiptree includes (i) ownership in the subordinated notes and interest-only positions of the CLOs and (ii) accrued management fees. Although these beneficial interests are eliminated upon consolidation, the application of this measurement alternative 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 tables below provide further details regarding the notes payable amounts of $1,785,207 and $1,314,871 as of December 31, 2014 and 2013, respectively:
(2) Tranche B-2 Notes in Telos 6 have a fixed rate of 4.78% over the life of the CLO.
Credit Default Swaps (CDS) are generally defined as over-the-counter contracts between a buyer and seller of protection against the risk of default on a set of obligations issued by a specified reference entity. The Company is party to one CDS contract with a notional amount of $2,652 at December 31, 2014. The Company was party to one CDS contract which had a notional value of $3,985 as of December 31, 2013.
On September 18, 2013, Operating Company entered into a Credit Agreement with Fortress Credit Corp. (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 minimum LIBOR rate of 1.25%), plus a margin of 6.50% per annum. The weighted average rate paid for 2014 was 7.75%. The principal amounts of the loan is to be repaid in quarterly installments, the amount of which may be adjusted based on the Net Leverage Ratio (as defined in the Credit Agreement) at the end of each fiscal quarter.
The Company is obligated to pay interest on a monthly basis and has incurred interest expense of $3,830 and $1,119 for the years ended December 31, 2014 and 2013, respectively. The amortization of the original issue discount totaled $743 and $943 for the years ended December 31, 2014 and 2013.
The Company capitalized approximately $1,272 of costs associated with the transaction and is amortizing the costs ratably over the life of the facility. The Company recorded approximately $254 and $74 of expense for the years ended December 31, 2014 and 2013, respectively, related to these capitalized costs.
Also included in debt are any warehouse lines outstanding associated with the Company’s CLOs. As of December 31, 2013 there was $133,715 outstanding for Telos 5. There were no warehouse lines outstanding as of December 31, 2014.
On April 24, 2012, Care refinanced a bridge loan for the acquisition of the Greenfield VA Lease properties by entering into three separate non-recourse loans (each, a Greenfield VA Lease Loan and collectively, the Greenfield VA Lease Loans) with KeyCorp Real Estate Capital Markets, Inc. (KeyCorp) for an aggregate amount of approximately $15,680. As of December 31, 2014, the aggregate balance was $15,063. 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.
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.
Effective November 2013, in connection with the acquisition of The Heritage Portfolio, the Company entered into two separate loans from First Niagara Bank with an aggregate balance of $32,173 as of December 31, 2014. 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.
Effective October 2014, in connection with the acquisition of The Greenfield Portfolio - JV, the Company entered into a loan from Synovus Bank with an aggregate balance of $21,595 as of December 31, 2014. The loan includes thirty six 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.
Effective December 2014, in connection with the additional acquisition of an additional seniors housing community property to The Heritage Portfolio, the Company assumed a HUD loan from Red Mortgage Capital with an aggregate balance of $6,069 as of December 31, 2014. The loan amortizes over a thirty year period at a fixed rate of 4.72%. The loan is secured by a first priority mortgage on the property.
Each of these loan transactions described above contains typical representations and covenants for loans of its type. As of December 31, 2014, management believes Care is in compliance with such covenants.
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 of one of the shareholders of Luxury.
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 terminates on December 4, 2019. The weighted average rate paid for 2014 was 3.69%.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 commencing March 2015.
Fortegra has a $15,000 revolving line of credit agreement (the “Line of Credit”) with Synovus Bank, entered into on October 9, 2013, with a maturity date of April 30, 2017. The Line of Credit bears interest at a rate of 300 basis points plus 90-day LIBOR, and is available specifically for the South Bay premium financing product. The weighted average rate paid for 2014 was 3.23%.
Fortegra has $35,000 of fixed/floating rate 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 14-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.
As of December 31, 2014 and 2013, the debt of PFG was transferred into liabilities held for sale. See Note 5-Dispositions, Assets Held for Sale and Discontinued Operations for additional information.
Minimum rental obligations for Tiptree, Care, MFCA, Siena, Luxury and Fortegra office leases. For the twelve month periods ended December 31, 2014 and 2013, rent expense for the Company’s office leases were $1,508 and $283, respectively.
Tiptree and its subsidiaries are defendants in a purported consolidated class action in connection with Tiptree’s acquisition of Fortegra, entitled Stein v. Fortegra Financial Corporation, et al., Case No. 16-2014-CA-005825-XXXX-MA in the Circuit Court of the Fourth Judicial Circuit in and for Duval County, State of Florida. The complaint alleges that the merger consideration is inadequate, that the members of Fortegra’s board of directors breached their fiduciary obligations to Fortegra’s stockholders by approving the merger agreement and related agreements, engaging in an unfair sales process and failing to make adequate disclosures to Fortegra’s stockholders, and that the other named defendants aided and abetted the breach of those duties.
On February 6, 2015, the court granted preliminary approval of a disclosure-only settlement pursuant to which the terms of the merger agreement remain unchanged, but Fortegra issued additional supplemental disclosures about the merger to stockholders. We expect the settlement to be finally proved at a hearing on April 20, 2015. Tiptree has provided notice to the class as required. Accordingly, in management's opinion, based on information available at this time, the ultimate resolution of this litigation will not be materially adverse to the financial position, results of operations or cash flows of Tiptree.
Tiptree and its subsidiaries are parties to legal proceedings in the ordinary course of their 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 or results of operations.
The following tables show the fair values and carrying values of the Company’s financial assets and liabilities measured on a recurring basis and the associated fair value hierarchy amounts as of: (included are balances associated with the consolidated CLOs):
(3) Includes $1,267,612 and $30,543 related to CLOs classified in Level 2 and Level 3, respectively.
Tiptree’s authorized capital stock consists of 100,000,000 shares of preferred stock, $0.001 par value, 200,000,000 shares of Class A common stock, $0.001 par value, and 50,000,000 shares of Class B common stock, $0.001 par value. As of
December 31, 2014 and December 31, 2013, no shares of preferred stock were issued and outstanding. As of December 31, 2014 and December 31, 2013, there were 31,830,174 and 10,556,390 shares of Class A common stock issued and outstanding, respectively. As of December 31, 2014 and December 31, 2013, there were 9,770,367 and 30,968,877 shares of Class B common stock issued and outstanding, respectively.
On July 1, 2013, in conjunction with the Contribution Transactions, Operating Company issued warrants to TFP, to purchase an aggregate of 2,098,500 shares of Class A common stock at an exercise price of $8.48 per share, which are immediately exercisable and expire on June 12, 2017, and another warrant to purchase 1,510,920 shares of Class A common stock at an exercise price of $5.36 per share, which is immediately exercisable and expires on June 30, 2022. TFP paid $4,328 and $6,846, respectively, for these. Since these warrants were issued by Operating Company, they are not included as a component of stockholders’ equity of the Company. TFP also owns a warrant to purchase 652,500 shares of Class A common stock at $11.33 per share which is immediately exercisable and expires on September 30, 2018.
For the year ended December 31, 2014, the Company did not declare or pay any cash dividends.
The following table presents the reclassification adjustments out of AOCI included in net income and the impacted line items on the income statement for the following period:
In June 2007, the Company adopted the Care Investment Trust Inc. Equity Plan (2007 Equity Plan), as amended in December 2011, which 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.
provide them with incentives and rewards for superior performance and to better align their interests with the interests of the Company’s stockholders. As of December 31, 2014, 28,869 shares of immediately vested Class A common stock with an aggregate fair market value of $223 were issued to employees and persons providing services to the Company as incentive compensation under the 2013 Equity Plan. As of December 31, 2014, the number of shares of Tiptree’s Class A common stock available for award under the 2013 Equity Plan is 1,793,274 shares of Class A common stock. Unless otherwise extended by the Board, the 2013 Equity Plan terminates automatically on August 8, 2023, the tenth anniversary of its adoption by the Board. As of December 31, 2014, there was no restricted stock unit activity associated with the 2013 Equity Plan.
The following table summarizes changes to the issuances under the Company’s 2013 Equity Plan for activity in 2014:
On October 14, 2010, the PFG board of directors adopted an equity incentive plan (the PFG Plan) in which a total of 546,136 shares of common stock of PFG were reserved and available for issuance under the PFG Plan. The number of shares of PFG stock was increased to 583,300 during 2012. As of December 31, 2014, 564,092 shares have been granted to PFG employees.
Under the terms of the PFG Plan, the common stock shares shall vest and become nonforfeitable with respect to one-third of the shares initially granted on each of the first, second, and third anniversaries of the grant date. Grant dates were April 16, 2012, December 19, 2012 and March 8, 2013.
The Company has determined that the measurement date for shares granted under the PFG Plan awarded to employees occurs when the PFG common stock vests. The fair value of the unvested common stock granted is initially estimated based on the fair value of the individual assets and liabilities of PFG on the date of grant, and subsequently re-measured on each reporting date throughout the vesting period with changes in fair value during the requisite service period recognized as compensation cost through that period. The per unit fair value of unvested PFG common stock was $0.00 and $2.03 as of December 31, 2014 and December 31, 2013, respectively.
As of December 31, 2014 the total unrecognized compensation cost related to PFG common stock was $24, which is expected to be recognized as compensation expense over a weighted average period of less than one year. Total unrecognized compensation cost was $89 as of December 31, 2013.
Expense incurred for PFG stock issued under the plan for the years ended December 31, 2014 and 2013, respectively, was $66 and $65.
The Company is subject to certain inherent credit risks arising from its transactions involving counterparties to CDS, CDX and IRS positions.
As of December 31, 2014, the CDS and CDX positions have a notional amount of $2,652 and net notional amount $92 and a fair value of $99 and $10,734. The counterparty for the CDS and CDX positions are Bank of America, N.A. and Morgan Stanley.
The Company's income taxes (receivable) payable as of December 31, 2014 and 2013 were $(1,691) and $1,811, respectively.
The total income tax expense of $4,141 for the period ended December 31, 2014 was reflected as a component of net income (loss) from continuing operations. This tax expense represented a consolidated total of all of Tiptree’s subsidiaries, but excludes $5,525 related to PFG which is included in discontinued operations.
As a result of the issuance of Tiptree Financial Inc. Class A shares and corresponding cancellation of Class B shares in exchange for the TFP units, the company recorded $8,581 of deferred tax liabilities as a component of additional paid-in capital for taxable basis differences in the net assets acquired (see Note 18 - Stockholders’ Equity for additional information on the exchange).
A reconciliation of the expected federal income tax expense on income from continuing operations using the 35% federal statutory income tax rate to the actual income tax expense and resulting effective income tax rate is as follows for the periods indicated below:
For the twelve months ended December 31, 2014, the Company’s effective tax rate on income from continuing operations was equal to 525.5%, which does not bear a customary relationship to statutory income tax rates. Differences from the statutory income tax rates are primarily the result of: (i) state income taxes; (ii) non-deductible transaction costs incurred on the Fortegra acquisition; and (iii) the effect of changes in valuation allowance on net operating losses reported by TFI, Siena, Luxury and MFCA.
In addition to the U.S. Federal NOLs, Tiptree and its subsidiaries have NOLs in various state jurisdictions totaling $47,113.
The Company calculates basic net income per common share based on the Company’s common stock outstanding as well as its unvested restricted share units. The unvested restricted share units are included because they are eligible to receive dividends. Diluted net income for the period takes into account the effect of dilutive instruments, such as any options on common shares, but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of common shares outstanding. Diluted net income also includes the minimal dilutive impact of the 3,609,420 Operating Company warrants held by TFP as part of the Contribution Transactions as summarized in Note 1-Organization. Earnings per share data excludes Tiptree’s Class B common stock, as the Class B common stock evidences a voting right without any economic interest.
The following table presents a reconciliation of basic and diluted net income per common share for the following periods:
(1) For the year ended December 31, 2014, the total net income attributable to non-controlling interest was $6,294, comprised of $1,939 due to continuing operations and $4,355 attributable to discontinued operations. For the year ended December 31, 2013, the total net income attributable to non-controlling interest was $30,336, comprised of $11,445 due to continuing operations and $18,891 attributable to discontinued operations.
On January 26, 2015, Tiptree entered into a First Amendment to its existing Fortress credit agreement (the Amendment). The Amendment provides for additional term loans in an aggregate principal amount of $25,000 to Tiptree and will have the same maturity date, margin above LIBOR, principal repayment terms, and conditions and covenants as the existing term loans under the existing Fortress credit agreement, subject to certain exceptions in the Amendment. Tiptree is required to prepay $25,000 of the loan upon the closing of the PFG sale. In addition, Tiptree is required to pay a prepayment premium of 2% of the outstanding loan amount if Tiptree voluntarily prepays the loan prior to June 30, 2016.