As a smaller reporting company, we are not required to provide the information contained in this Item.
(1) See Note 3-Out of Period Adjustments, Changes in Accounting Principles and Reclassifications, for detail descriptions of these adjustments.
Balance Sheet Information - Year Ended December 31, 2014 compared to December 31, 2013
During the year ended December 31, 2014, management changed its reportable operating segments. The Company now has five reportable operating segments, organized in a manner that reflects how management views the strategic business units.
Other expenses of $4.0 million included deferred administrative costs of $1.7 million, an accrual of $500 thousand related to the potential settlement cost of outstanding legal claims, bank and credit card processing fees of $220 thousand, technology expenses of $180 thousand and filing and licensing fees of $129 thousand. Also included in other expenses is Fortegra’s rent expense for its offices of $194 thousand for the period.
As of December 31, 2014 and 2013, the Company held investments at fair value of $13.2 million and $31.0 million, respectively, in portfolios of tax-exempt securities managed by the Company. The Company earned realized and unrealized gains of $1.0 million in 2014 and incurred realized and unrealized losses of $863 thousand in 2013 from these portfolios. Interest income earned from these securities was $1.7 million in 2014, compared to $2.7 million in 2013. The decline in interest income in 2014 was due to reduced size of the securities portfolio.
(1) “Interest expense in 2014” refers to the periods the subsidiary entity's results have been incorporated into the consolidated financial statements. Interest expense includes the amortization of capitalized debt costs, where applicable.
Minimum rental obligation for Tiptree, Care, MFCA, Siena, Luxury and Fortegra office lease. The total rent expense for the Company for fiscal 2014 and 2013 was $1.5 million and $1.5 million, respectively.
In addition, our revenue includes administrative fees charged by us under retrospective commission arrangements with producers, where the commissions paid are adjusted based on actual losses incurred compared to premium earned after a specified net allowance retained by us. Under these arrangements, our insurance companies receive the insurance premiums and administer the policies that are distributed by our clients. The producer of the credit insurance policies receives a retrospective commission if the premium generated by that producer in the accounting period exceeds the costs associated with those polices, which includes our administrative fees, incurred claims, reserves and premium taxes. If the net result is negative, we either offset that negative amount against future retrospective commission payments, reduce the producer's up-front commission on a prospective basis to increase the likelihood that it will return to a positive position or request payment of the negative amount from the producer. Revenues in our business may fluctuate seasonally based on consumer spending trends, where consumer spending has historically been higher in September and December, corresponding to back-to-school and the holiday season. Accordingly, our payment protection revenues may reflect higher third and fourth quarters than in the first half of the year.
The principal factors affecting earned premiums, net are: (i) the proportion of the risk assumed by our reinsurers as defined in the applicable reinsurance treaty; (ii) increases and decreases in written premium; (iii) the pattern of losses by type of business, (iv) increases and decreases in policy cancellation rates; (v) the average duration of the policies written; and (vi) changes in regulation that would modify the earning patterns for the policies underwritten and administered.
For a discussion of recently issued accounting standards see Note 2-Summary of Significant Accounting Policies, in the accompanying consolidated financial statements.
The Company has notes receivable from commercial businesses for its premium financing program and from consumers for its pay us later financing program at Fortegra and its real estate partners at Care. From time to time, the Company issues notes receivable to business partners to solidify relationships and grow its business.
Generally, receivables overdue more than 120 days are written off when the Company determines it has exhausted reasonable collection efforts and remedies.
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, and performs impairment tests on these assets at least annually. Costs incurred to renew or maintain these licenses are recorded as operating costs in the period in which they arise.
basis. There have been no events or changes in circumstances that required an impairment test for amortizing intangible assets. There has been no impairment recognized on the intangible assets.
Management is presenting these tables to provide a clear understanding of out of period adjustments, the adoption of accounting principles and reclassifications to the Company’s historical results for 2013.
We have revised our prior year financial statements for previously uncorrected misstatements that affected periods prior to 2013 through the third quarter of 2014. The corrections are immaterial to our financial statements for the period ended December 31, 2013. Accordingly, we have revised our previously issued financial statements within these consolidated financials as presented in the schedule below. The first revision, related to our real estate segment, affected the balance sheet by increasing intangible assets by $7,240, decreasing real estate by $7,666, increasing deferred tax assets for $45 and decreasing equity by $381. This revision also affected the income statement by increasing depreciation and amortization expense by $426, decreasing provision for income taxes, and decreasing net income attributable to noncontrolling interest. The second correction, related to discontinued operations, affected the balance sheet by increasing assets held for sale by $1,465, increasing retained earnings by $341, and increasing non-controlling interest by $1,124. This revision also increased each of income from discontinued operations and net income attributable to noncontrolling interest.
(1) Prior period information reclassified to conform to the current year presentation.
•There were no adjustments made to net realized gains for the year ended December 31, 2014. Net realized gains decreased by $2,646 for the year ended December 31, 2013 for the revision of investment cost basis to market value as of the assumed acquisition date, affecting the calculation of realized gain or loss on subsequent sales of investments held.
The following table presents the preliminary determination of the fair value amounts for the identifiable assets acquired, liabilities assumed, and goodwill recorded as of the acquisition date of Fortegra:
For corporate and other, the main drivers of revenue include investment interest, net realized and unrealized gains on investments, distributions earned on the subordinated CLO debt and interest-only positions held by the Company and realized and unrealized gains and losses on such debt and positions.
The following table presents the effect of reinsurance on losses and loss adjustment expenses ("LAE") incurred by Fortegra for the following period:
Affiliates of Care entered into a joint venture to own and operate three seniors housing communities with affiliates of Greenfield. Care owns an 80% interest in the joint venture, while affiliates of Greenfield own the remaining 20% interest and provide management services to the communities under a management contract. For the year ended December 31, 2014, rental revenue and net income/(loss) were approximately $1,792 and $(629), respectively.
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 them 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. As of December 31, 2014 and 2013, the Company’s maximum exposure to loss related to the CLOs is limited to its investment in the CLOs of $97,935 and $65,359, respectively, as well as the management fees receivable of $2,782 and $3,616 as of December 31, 2014 and 2013, respectively. Both the carrying values of the CLOs and management fees receivable are eliminated upon consolidation.
The Company is exposed to interest rate risk when there is an unfavorable change in the value of investments as a result of adverse movements in the market interest rates. The Company enters into interest rate swaps to protect against such adverse movements in interest rates. The Company is required to post collateral for the benefit of the counterparty. This is included as a component of other assets in the consolidated balance sheet.
The Company nets these credit derivative assets and liabilities as these credit derivatives are subject to legally enforceable netting arrangements with the same party. The Company did not have any derivative instruments subject to enforceable netting arrangements at December 31, 2013. There are no derivative instruments subject to a netting agreement for which we are not currently netting. The following table present derivative instruments that are subject to offset by a master netting agreement as of:
On August 8, 2013, the Company granted 19,310 shares to employees of the Company. These shares have a grant date fair value of $134 and will vest over a period of three years beginning on January 3, 2014.
The Company has evaluated events that have occurred from December 31, 2014 through March 31, 2015 (the date this Form 10-K was filed), and except as already included in the notes to the consolidated financial statements, it believes that no events have occurred that would require recognition or additional disclosures in these audited consolidated financial statements.