ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") represents an overview of our results of operations and financial condition and should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in ITEM 8 of this
Form 10-K
. Except for the historical information contained herein, the discussions in MD&A contain forward-looking statements that involve risks and uncertainties. Our future results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "ITEM 1A. Risk Factors" included in this
Form 10-K
.
EXECUTIVE SUMMARY
The following provides an overview of events and financial results for
the year ended December 31, 2013
:
Overview of Events
On December 31, 2012, we acquired ProtectCELL and 4Warranty. Their impact on our financial results began in 2013.
In January 2013, we announced a plan to consolidate our fulfillment, claims administration and information technology functions (the "Plan"). Prior to the Plan, such functions resided in individual business units. The decision was part of our efforts to streamline operations, focus resources and provide first in class service to our customers. During the first quarter of 2013, approximately 40 employee and contract positions were eliminated.
On February 1, 2013, we acquired 100% of the outstanding stock of Response Indemnity Company of California ("RICC"), from subsidiaries of the Kemper Corporation ("Kemper") for $4.8 million. RICC is a property/casualty insurance company domiciled and licensed in California, which we intend to use for geographic expansion. RICC had, at the time of purchase, no policies in force, and all remaining claim liabilities for previously issued policies are fully reinsured by Kemper's subsidiary, Trinity Universal Insurance Company.
In June 2013, we sold our wholly owned subsidiary, Magna Insurance Company, for a sales price of $3.0 million and realized a $0.4 million pre-tax gain on the sale, which is included in our 2013 results.
In August 2013, our Board of Directors (the "Board") authorized an additional $5.0 million increase to the share repurchase plan. This additional authorization expands the existing share repurchase program from $10.0 million as authorized by the Board in November 2011 to $15.0 million. During 2013, we acquired
200,000
shares under our share repurchase plan at an aggregate value of
$1.4 million
. We believe our share repurchase plan is an effective method of creating stockholder value and a prudent use of available cash.
In October 2013, our subsidiary, South Bay entered into a $15.0 million line of credit agreement (the "Line of Credit") with Synovus Bank. The Line of Credit is used for our premium financing product, and allows South Bay to finance up to 90% of the eligible receivable.
O
n December 2, 2013, we entered into a Stock Purchase Agreement ("Purchase Agreement") with AmWINS Holdings, LLC, a North Carolina limited liability company ("AmWINS"), pursuant to which LOTS Intermediate Co., a Delaware corporation and direct wholly-owned subsidiary of the Corporation agreed to sell all the issued and outstanding stock of its subsidiaries, Bliss and Glennon, Inc., a California corporation ("Bliss and Glennon"), and eReinsure.com, Inc., a Delaware corporation ("eReinsure").
On December 31, 2013, we completed the previously announced sale of all of the issued and outstanding stock of our subsidiaries, Bliss and Glennon and eReinsure, to AmWINS (the "Disposition"), pursuant to the terms of the Purchase Agreement, and recognized a
$8.8 million
gain on the sale of discontinued operations, net of tax, for
the year ended December 31, 2013
. As consideration for the Disposition, we received net cash proceeds of
$81.8 million
, which we utilized on December 31, 2013 to pay off the full amount outstanding under our existing credit facility with Wells Fargo Bank, N.A. See the Notes, "Summary of Significant Accounting Policies - Discontinued Operations" and "Divestitures" in the Notes to Consolidated Financial Statements, included in ITEM 8 of this
Form 10-K
for additional information.
Prior to the fourth quarter of 2013, we operated in three business segments: (i) Payment Protection, (ii) Business Process Outsourcing and (iii) Brokerage. In connection with the Disposition, in the fourth quarter of 2013, we realigned our reporting structure to manage our business as a single profit center called Protection Products and Services. Accordingly, we now have one reportable segment. See the Note, "Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in ITEM 8 of this
Form 10-K
for additional information.
Overview of Financial Results
Net income attributable to Fortegra Financial Corporation for
the year ended December 31, 2013
increased
$7.6 million
, or
49.8%
, to
$22.7 million
from
$15.2 million
for the year ended
December 31, 2012
. Earnings per diluted share attributable to Fortegra Financial Corporation increased
50%
to
$1.11
for
the year ended December 31, 2013
from
$0.74
for the same period in
2012
. Our 2013 results include the impact of an
$8.8 million
gain, net of tax, or $0.43 per diluted share, from the Disposition, while
2012
included the $1.0 million benefit from the change in accounting estimate, or
$0.05
per diluted share.
Our net income from continuing operations before non-controlling interests for
the year ended December 31, 2013
decreased
$1.2 million
, or
8.9%
, to
$11.8 million
from
$13.0 million
for the year ended
December 31, 2012
. Our 2013 net income was lower due to $0.8 million of expense from the Plan, while our 2012 results included a $1.0 million benefit from a change in accounting estimate. The 2013 net income attributable to the ProtectCELL and 4Warranty acquisitions of $4.8 million on a combined basis was largely offset by competitive pressures in other product lines and regulatory changes influencing our clients' marketing and outsourcing activities.
For
the year ended December 31, 2013
, our revenues increased
$91.5 million
, or
35.7%
, to
$347.9 million
from
$256.3 million
for the same period in
2012
. Our 2012 revenues included a $5.3 million increase in revenues attributable to the change in accounting estimate. The increase in revenues for 2013 is primarily attributable to the ProtectCELL and 4Warranty acquisitions on December 31, 2012, which accounted for $93.7 million and $3.1 million of the 2013 increase, respectively. In addition, total revenues included increases of
$9.2 million
in net earned premiums and
$2.0 million
in net realized investment gains, which was partially offset by lower service and administrative fees from reduced transaction volume under our administration service contracts.
Total expenses increased
$93.7 million
, or
39.6%
, to
$330.4 million
for
the year ended December 31, 2013
from
$236.7 million
for the same period in
2012
. The majority of the increase was due to the ProtectCELL and 4Warranty acquisitions, which added $89.9 million and $1.5 million to expenses, respectively, as well an $8.5 million increase in commission expense, which corresponds with the rise in revenues. In addition, 2013 expenses also included $1.2 million in costs associated with the Plan.
CRITICAL ACCOUNTING POLICIES
We prepare our Consolidated Financial Statements in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") which requires management to make significant estimates and assumptions that affect the reported amounts of our assets, liabilities, revenues and expenses. See "Use of Estimates" and "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements, included in ITEM 8 of this
Form 10-K
for additional information.
We periodically evaluate our estimates, which are based on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management's most difficult, subjective or complex judgments, as a result
of the need to make estimates about the effect of matters that are inherently uncertain. If actual performance should differ from historical experience or if the underlying assumptions were to change, our financial condition and results of operations may be materially impacted. In addition, some accounting policies require significant judgment to apply complex principles of accounting to certain transactions, such as acquisitions, in determining the most appropriate accounting treatment. We believe that the significant accounting estimates and policies described below are material to our financial reporting and are subject to a degree of subjectivity and/or complexity. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors.
Change in Accounting Estimate - Unearned Premium Reserves
During the period ended September 30, 2012, we reviewed our unearned premium reserves in relation to the loss patterns and the related recognition of income for certain types of credit property and vendor single interest payment protection products, and based on our analysis determined that a change to the Rule of 78's method results in a more accurate estimate of net earned premium reserves for these products. The change was accounted for as a change in accounting estimate and was applied prospectively. See the Note, "Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in ITEM 8 of this
Form 10-K
for the effect of this change in accounting estimate on our 2012 results of operations.
Investments
We regularly monitor our investment portfolio to ensure investments that may be other-than-temporarily impaired ("OTTI") are identified in a timely fashion, properly valued, and if necessary, written down to their fair value through a charge against earnings in the proper period. The determination that a security has incurred an other-than-temporary decline in fair value requires the judgment of management. The analysis takes into account relevant factors, both quantitative and qualitative in nature. Among the factors considered are the following: the length of time and the extent to which fair value has been less than cost; issuer-specific considerations, including an issuer's short-term prospects and financial condition, recent news that may have an adverse impact on its results, and an event of missed or late payment or default; the occurrence of a significant economic event that may affect the industry in which an issuer participates; and for loan-backed and structured securities, the undiscounted estimated future cash flows as compared to the current book value. When such impairments are determined to be other-than-temporary, the decrease in fair value is reported in net income as a realized investment loss and a new cost basis is established.
There are inherent risks and uncertainties involved in making these judgments. Changes in circumstances and critical assumptions such as a continued weak economy, a more pronounced economic downturn or unforeseen events, which affect one or more companies, industry sectors or countries could result in additional impairments in future periods for other-than-temporary declines in fair value. See the Note, "Investments" in the Notes to Consolidated Financial Statements included in ITEM 8 of this
Form 10-K
for additional information and ITEM 1A. RISK FACTORS - "Risks Related to Our Products and Services - Our investment portfolio is subject to several risks that may diminish the fair value of our invested assets and cash and may materially and adversely affect our business and profitability" and "Liquidity and Capital Resources - Liquidity" contained elsewhere in this
Form 10-K
.
Reinsurance
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. See ITEM 1A. RISK FACTORS - "Risks Related to Our Products and Services - Reinsurance may not be available or adequate to protect us against losses, and we are subject to the credit risk of reinsurers," included in this
Form 10-K
.
Property and Equipment
Property and equipment are carried at cost, net of accumulated depreciation and amortization. Gains and losses on sales and disposals of property and equipment are based on the net book value of the related asset at the disposal date using the specific identification method with the corresponding gain or loss recorded to operations when incurred. Maintenance and repairs, which do not materially extend asset useful life and minor replacements, are charged to earnings when incurred. Depreciation expense is computed using the straight-line method over the estimated useful lives of the respective assets with three years for computers and five years for furniture, fixtures and equipment. Amortization of capitalized software is computed using the straight-line method over the estimated useful lives of five years. Leasehold improvements are depreciated over the remaining life of the lease. We also lease certain equipment and software under a capital lease. Assets under capital leases are depreciated over the remaining life of the lease or their estimated productive lives.
We capitalize internally developed software costs on a project-by-project basis. Software development costs are carried at unamortized cost and are amortized using the straight-line method over the estimated useful life of the software, typically
5
years. Amortization begins when the software is ready for its intended use.
Deferred Acquisition Costs - Insurance Related
We defer certain costs of acquiring new and renewal business. These costs are limited to direct costs that resulted from successful contract transactions and would not have been incurred by our insurance entities had the transactions not occurred. These capitalized costs are amortized as the related premium is earned.
We evaluate whether deferred acquisition costs-insurance related are recoverable at year-end, and periodically if deemed necessary, and consider investment income in the recoverability analysis. As a result of our evaluations, no write-offs for unrecoverable deferred acquisition costs were recognized during the years ended
December 31, 2013, 2012 and 2011
.
Deferred Acquisition Costs - Non-insurance Related
We defer certain costs of acquiring new and renewal business related to non-insurance subsidiary transactions. These costs are limited to prepaid direct costs, typically commissions and contract transaction fees, that resulted from successful contract transactions and would not have been incurred by us had the transactions not occurred. These capitalized costs are amortized as the related service and administrative fees are earned.
We evaluate whether deferred acquisition costs - non-insurance related are recoverable at year-end, and periodically if deemed necessary. As a result of our evaluations, no write-offs for unrecoverable deferred acquisition costs were recognized during the years ended
December 31, 2013, 2012 and 2011
.
Goodwill
Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired in a business combination, and is carried as an asset on the Consolidated Balance Sheets. Goodwill is not amortized, but is reviewed for impairment annually in the fourth quarter, or more frequently if certain indicators arise.
Our goodwill impairment analysis typically involves an assessment of qualitative factors to determine whether it is more likely than not that fair value of our reporting unit is less than the recorded book value. If it is more likely than not, we must perform a quantitative test to determine fair value. If that fair value is less than the book value of the reporting unit, an impairment charge is recorded equal to the excess of the carrying amount of goodwill over its implied fair value. At its discretion, management may opt to bypass the qualitative analysis and perform the quantitative test.
The goodwill impairment review is highly judgmental and may involve the use of significant estimates and assumptions impacting the amount of any impairment charge recorded. The estimates and assumptions may have a significant impact on the amount of any impairment charge recorded.
Because the Company changed to one reporting segment in 2013, management bypassed the qualitative analysis, and determined fair value using market based methods including the use of market capitalization plus a control premium. Management assessed goodwill as of
December 31, 2013, 2012 and 2011
and determined that no impairment existed as of those dates.
Other Intangible Assets
We have acquired significant other intangible assets through business acquisitions. Our other intangible assets consist of indefinite-lived trademarks and licenses, and of finite-lived intangibles, including customer related and contract based assets representing primarily client lists and non-compete arrangements and acquired software. Finite-lived intangible assets are amortized over periods ranging from
0.3
years to
15
years. Certain trademarks are not amortized since these assets have been determined to have indefinite useful lives. The costs to periodically renew other intangible assets are expensed as incurred.
Indefinite-lived intangible assets are tested for impairment at least annually, or whenever events or circumstances indicate that their carrying amount may not be recoverable using an analysis of expected future cash flows. Finite-lived intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans, or changes in anticipated future cash flows. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted cash flows expected to be generated by the assets. If the sum of the expected future undiscounted cash flows is less than the carrying amount, the Company would recognize an impairment loss. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value of the long-lived assets and intangibles.
Management assessed other intangible assets as of
December 31, 2013, 2012 and 2011
and determined that no impairment existed as of those dates.
Unpaid Claims
Unpaid claims are reserve estimates that are established in accordance with U.S. GAAP using generally accepted actuarial methods. Credit life, credit disability and accidental death and dismemberment ("AD&D") unpaid claims reserves include claims in the course of settlement and incurred but not reported ("IBNR"). For all other product lines, unpaid claims reserves are entirely IBNR. We use a number of algorithms in establishing our unpaid claims reserves. These algorithms are used to calculate unpaid claims as a function of paid losses, earned premium, target loss ratios, in force amounts, unearned premium reserves; industry recognized morbidity tables or a combination of these factors. The factors used to develop the IBNR vary by product line. However, in general terms, the factor used to develop IBNR for credit life insurance is a function of the amount of life insurance in force. The factor can vary from $0.60 to $1.00 per $1,000 of in force coverage. The factor used to develop IBNR for credit disability is a function of the pro-rata unearned premium reserve and is typically 5% of the unearned premium reserve. Finally, IBNR for AD&D policies is a function of in force coverage and is currently $0.15 per $1,000 of in force coverage.
In accordance with applicable statutory insurance company regulations, our unpaid claims reserves are evaluated by appointed actuaries. The appointed actuaries perform this function in compliance with the Standards of Practice and Codes of Conduct of the American Academy of Actuaries. The appointed actuaries perform their actuarial analysis each year and prepare opinions, statements and reports documenting their determinations. The appointed actuaries conduct their actuarial analysis on a basis gross of reinsurance. The same estimates used as a basis in calculating the gross unpaid claims reserves are then used as the basis for calculating the net unpaid claims reserves, which take into account the impact of reinsurance.
Anticipated future loss development patterns form a key assumption underlying these analyses. Our claims are generally reported and settled quickly resulting in a consistent historical loss development pattern. From the anticipated loss development patterns, a variety of actuarial loss projection techniques are employed, such as chain ladder method, the Bornhuetter-Ferguson method and expected loss ratio method.
Our unpaid claims reserves represent our best estimates, generally involving actuarial projections at a given time. Actual claim costs are dependent upon a number of complex factors such as changes in doctrines of legal liabilities and damage awards. These factors are not directly quantifiable, particularly on a prospective basis. We periodically review and update our methods of making such unpaid claims reserve estimates and establishing the related liabilities based on our actual experience. We have not made any changes to our methodologies for determining unpaid claims reserves in the periods presented.
The following table provides unpaid claims reserve information by product line, net of reserves ceded under reinsurance arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
As of December 31, 2013
|
|
As of December 31, 2012
|
|
As of December 31, 2011
|
|
Product Type
|
In Course of Settlement
(1)
|
IBNR
(2)
|
Total Claim Reserve
|
|
In Course of Settlement
(1)
|
IBNR
(2)
|
Total Claim Reserve
|
|
In Course of Settlement
(1)
|
IBNR
(2)
|
Total Claim Reserve
|
|
Property
|
$
|
156
|
|
$
|
2,857
|
|
$
|
3,013
|
|
|
$
|
—
|
|
$
|
3,534
|
|
$
|
3,534
|
|
|
$
|
213
|
|
$
|
3,189
|
|
$
|
3,402
|
|
|
Surety
|
—
|
|
89
|
|
89
|
|
|
—
|
|
204
|
|
204
|
|
|
—
|
|
173
|
|
173
|
|
|
General liability
(3)
|
—
|
|
4,028
|
|
4,028
|
|
|
—
|
|
3,168
|
|
3,168
|
|
|
—
|
|
2,167
|
|
2,167
|
|
|
Credit life
|
500
|
|
2,188
|
|
2,688
|
|
|
629
|
|
1,573
|
|
2,202
|
|
|
539
|
|
2,267
|
|
2,806
|
|
|
Credit disability
|
199
|
|
2,381
|
|
2,580
|
|
|
145
|
|
3,211
|
|
3,356
|
|
|
204
|
|
3,540
|
|
3,744
|
|
|
AD&D
|
161
|
|
457
|
|
618
|
|
|
109
|
|
489
|
|
598
|
|
|
176
|
|
614
|
|
790
|
|
|
Other
|
—
|
|
193
|
|
193
|
|
|
1
|
|
56
|
|
57
|
|
|
1
|
|
68
|
|
69
|
|
|
Total
|
$
|
1,016
|
|
$
|
12,193
|
|
$
|
13,209
|
|
|
$
|
884
|
|
$
|
12,235
|
|
$
|
13,119
|
|
|
$
|
1,133
|
|
$
|
12,018
|
|
$
|
13,151
|
|
(1)
"In Course of Settlement" represents amounts reserved to pay claims known but are not yet paid.
(2)
IBNR reserves represent amounts reserved to pay claims where the insured event has occurred and has not yet been reported. IBNR reserves for credit disability also include the net present value of future claims payment of $1,788, $1,243 and $1,354 as of
December 31, 2013, 2012 and 2011
, respectively.
(3)
General liability primarily represents amounts reserved to pay claims on contractual liability policies behind debt cancellation products.
Most of our credit insurance business is written on a retrospective commission basis, which permits management to adjust commissions based on claims experience. Thus, any adjustment to prior years' incurred claims in this line of business is partially offset by a change in retrospective commissions.
While management has used its best judgment in establishing the estimate of required unpaid claims, different assumptions and variables could lead to significantly different unpaid claims estimates. Two key measures of loss activity are 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, legislation, economic conditions, morbidity patterns and the attitudes of claimants towards settlements. The adequacy of our unpaid claims reserves will be impacted by future trends that impact these factors.
While our cost of claims has not varied significantly from our reserves in prior periods, if the actual level of loss frequency and severity are higher or lower than expected, our paid claims will be different than management's estimate. We believe that, based on our actuarial
analysis, an aggregate change that is greater than ± 10% (or 5% for each of loss frequency and severity) is not probable. The effect of higher and lower levels of loss frequency and severity levels on our ultimate cost for claims occurring in
2013
would be as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Sensitivity change in both loss frequency and severity for all payment protection products:
|
Claims Cost
|
|
Change in Claims Cost
|
|
5% higher
|
$
|
14,563
|
|
|
$
|
1,354
|
|
|
3% higher
|
14,013
|
|
|
804
|
|
|
1% higher
|
13,475
|
|
|
266
|
|
|
Base scenario
|
13,209
|
|
|
—
|
|
|
1% lower
|
12,943
|
|
|
(266
|
)
|
|
3% lower
|
12,405
|
|
|
(804
|
)
|
|
5% lower
|
11,855
|
|
|
(1,354
|
)
|
Adjustments to our unpaid claims reserves, both positive and negative, are reflected in our statement of income for the period in which such estimates are updated. Because the establishment of our unpaid claims reserves is an inherently uncertain process involving estimates of future losses, there can be no certainty that ultimate losses will not exceed existing claims reserves. Future loss development could require our reserves to be increased, which could have a material adverse effect on our earnings in the periods in which such increases are made.
Unearned Premiums
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, 2013, 2012 and 2011
, respectively, no such reserve was recorded.
Deferred Revenues
Deferred revenues represent the portion of income that will be earned in the future attributable to motor club memberships, mobile device protection plans, and other non-insurance service contracts that are earned over the respective contract periods using Rule of 78's, modified Rule of 78's, pro rata, or other methods as appropriate for the contract. A deficiency reserve would be recorded if anticipated contract benefits, deferred acquisition costs and contract service costs exceed the recorded deferred revenues and anticipated investment income. As of
December 31, 2013
and
2012
, no deficiency reserve was recorded.
Income Taxes
The calculation of tax liabilities is complex, and requires the use of estimates and judgments by management since it involves application of complex tax laws. We record deferred income taxes in accordance with the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recorded based on the difference between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences, and are based on the enacted tax laws and statutory tax rates applicable to the periods in which we expect the temporary differences to reverse.
A deferred tax asset should be reduced by a valuation allowance if, based on the weight of all available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. In determining whether our deferred tax asset is realizable, we considered all available evidence, including both positive and negative evidence. The realization of deferred tax assets depends upon the existence of sufficient taxable income of the same character during the carry-back or carry-forward period. We considered all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and carry forwards, taxable income in carry-back years and tax-planning strategies.
Management has evaluated its deferred tax assets to determine realization in the foreseeable future and accordingly, no valuation allowance has been established as of December 31, 2013. The detailed components of our deferred tax assets and liabilities are shown in the Note, "Income Taxes" in the Notes to Consolidated Financial Statements included in ITEM 8 of this
Form 10-K
.
Contingencies
Management evaluates each contingent matter separately. A loss is reported if reasonably estimable and probable. We establish reserves for these contingencies at the best estimate, or, if no one estimated number within the range of possible losses is more probable than any other, we report an estimated reserve at the midpoint of the estimated range. Contingencies affecting us include litigation matters, which are inherently difficult to evaluate and are subject to significant changes.
Service and Administrative Fees
We earn service and administrative fees from a variety of activities. Such fees are typically positively correlated with transaction volume and are recognized as revenue as they become both realized and earned.
Service Fees.
Service fee revenue is recognized as the services are performed. These services include fulfillment, software development, and claims handling for our customers. Collateral tracking fee income is recognized when the service is performed and billed. Management reviews the financial results under each significant contract on a monthly basis. Any losses that may occur due to a specific contract would be recognized in the period in which the loss occurs. During the years ended
December 31, 2013, 2012 and 2011
we have not incurred a loss with respect to a specific significant service fee contract.
Administrative Fees.
Administrative service revenue includes the administration of credit insurance, debt cancellation programs, motor club programs, and warranty programs. Related administrative fee revenue is recognized consistent with the earnings recognition pattern of the underlying insurance policies, debt cancellation contracts and motor club memberships being administered, using Rule of 78's, modified Rule of 78's, pro rata, or other methods as appropriate for the contract. Management selects the appropriate method based on available information, and periodically reviews the selections as additional information becomes available.
Our payment protection products are sold as complementary products to consumer retail and credit transactions and are thus subject to the volatility of volume of consumer purchase and credit activities. We receive service and administrative fees for administering payment protection products that are sold by our clients, such as credit insurance, debt protection, motor club and warranty solutions. We earn administrative fees for administering debt cancellation plans, facilitating the distribution and administration of warranty or extended service contracts, providing motor club membership benefits and providing related services for our clients. For credit insurance products, our clients typically retain the risk associated with credit insurance products that they sell to their customers through economic arrangements with us. Our payment protection revenue includes revenue earned from reinsurance arrangements with producer owned reinsurance companies ("PORCs") owned by our clients. Our clients own PORCs that assume the credit insurance premiums and associated risk that they originate in exchange for fees paid to us for ceding the premiums. In 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.
Ceding Commissions
We earn ceding commissions on our credit insurance products. Ceding commissions earned under coinsurance agreements are based on contractual formulas that take into account, in part, underwriting performance and investment returns experienced by the assuming companies. As experience changes, adjustments to the ceding commissions are reflected in the period incurred. Experience adjustments are based on the claim experience of the related policy. The adjustment is calculated by adding the earned premium and investment income from the assets held in trust for our benefit less earned commissions, incurred claims and the reinsurer's fee for the coverage.
We elect to cede to reinsurers under coinsurance arrangements a significant portion of the credit insurance that we distribute on behalf of our clients. We continue to provide all policy administration for credit insurance that we cede to reinsurers. Ceding commissions primarily represent the fees we charge the reinsurers for that administration service. In addition, a portion of the ceding commissions is determined based on the underwriting profits of the ceded credit insurance. The credit insurance that we distribute has historically generated attractive underwriting profits. Ceding commissions also include investment income earned on reserves maintained in trust accounts on the balance sheets of the reinsurers.
Ceding commissions are generally positively correlated with our credit insurance transaction and premium volumes. The portion of our ceding commissions that is related to the underwriting profits of the ceded credit insurance also fluctuates based on the claims made on such policies. The portion of our ceding commissions that is related to investment income can be impacted by the amount of reserves that are maintained in trust accounts and changes in interest rates. Ceding commissions are earned over the life of the policy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our experience adjustments, exclusive of investment income, are as follows:
(in thousands)
|
Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Experience Adjustments
|
$
|
6,872
|
|
|
$
|
8,635
|
|
|
$
|
7,245
|
|
Net Earned Premium
Net earned premium 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.
The principal factors affecting net earned premiums 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.
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.
Commissions
Commissions are paid to distributors selling credit insurance policies, motor club memberships, and warranty service contracts, and are generally deferred and expensed in proportion to the earning of related revenue. Credit insurance commission rates, in many instances, are set by state regulators and are also impacted by market conditions. In certain instances, our commissions are subject to retrospective adjustment based on the profitability of the related policies. These retrospective commission adjustments are payments made or adjustments to future commission expense based on prior claims experience. Under these retrospective commission arrangements, the producer of the credit insurance policies, which is typically our client, receives a retrospective commission if the premium generated by that producer in the accounting period exceeds the costs associated with those policies, which includes our administrative fees, 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.
Net Investment Income
We earn net investment income from interest payments and dividends received from our investment portfolio, and interest earned on our cash accounts and notes receivable, less portfolio management expenses. Our investment portfolio is primarily invested in fixed maturity securities, which tend to produce consistent levels of investment income. The fair value of the fixed maturity securities in our portfolio and the investment income from these securities fluctuate depending on general economic and market conditions. The fair value generally increases or decreases in an inverse relationship with fluctuations in interest rates. Investment income can be significantly impacted by changes in interest rates. Interest rate volatility can increase or reduce unrealized gains or unrealized losses in our portfolios. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Fluctuations in interest rates affect our returns on, and the fair value of, fixed maturity and short-term investments.
We also have investments that carry prepayment risk, such as mortgage-backed and asset-backed securities. Actual net investment income and/or cash flows from investments that carry prepayment risk may differ from estimates at the time of investment as a result of interest rate fluctuations. In periods of declining interest rates, mortgage prepayments generally increase and mortgage-backed securities, commercial mortgage obligations and bonds are more likely to be prepaid or redeemed as borrowers seek to borrow at lower interest rates. Therefore, we may be required to reinvest those funds in lower interest-bearing investments. Conversely, in times of rising interest rates, prepayments slow as borrowers tend to be less likely to refinance borrowings at higher interest rates, which tends to increase the duration of our investment holdings. With the increase in investment duration, we will have less cash flows from prepayments to invest at higher prevailing market rates.
Stock-Based Compensation
We currently have time-based stock options outstanding under our 2005 Equity Incentive Plan and time-based and performance-based stock options and restricted stock awards outstanding under The 2010 Omnibus Incentive Plan. Time-based stock options and restricted stock awards are grants that vest based on the passage of time whereas performance-based stock options and restricted stock awards are grants that vest based on us attaining certain financial metrics. Stock-based compensation expense is measured using fair value and is recorded over the requisite service or performance period of the awards. We measure stock-based compensation expense using the calculated value method. Under this method, we estimate the fair value of each stock option on the grant date using the Black-Scholes valuation model. We use historical data to estimate expected employee behavior related to stock award exercises and forfeitures. Since there is not sufficient historical market experience for shares of our stock, we have chosen to estimate volatility, by using the average volatility of a selected peer group of publicly traded companies operating in the same industry. Expected dividends are based
on the assumption that no dividends are expected to be distributed in the near future. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the options. The fair value of restricted stock awards are based on the market price of our common stock at the grant date. We typically recognize stock-based compensation expense for time-based awards on a straight-line basis over the requisite service and on a graded vesting attribution model for performance-based awards. Our current policy is to issue new shares upon the exercise of stock options. Please see the Note, "Stock-Based Compensation" in the Notes to Consolidated Financial Statements included in ITEM 8 of this
Form 10-K
for additional information.
Recently Issued Accounting Standards
For a discussion of recently issued accounting standards see the Note "Recent Accounting Standards" of the Notes to Consolidated Financial Statements included in ITEM 8 of this
Form 10-K
.
COMPONENTS OF REVENUES AND EXPENSES
The following provides an overview of the components of revenues and expenses that are not discussed in our Critical Accounting Policies section.
REVENUES
Net Realized Investment Gains (Losses)
We realize gains when invested assets are sold for an amount greater than the amortized cost in the case of fixed maturity securities and cost basis for equity securities. We recognize realized losses for invested assets sold for an amount less than their carrying cost or when the decline in the fair value is below the cost of fixed maturity securities or equity securities is determined to be an other-than-temporary impairment ("OTTI").
Other Income
Other income consists primarily of miscellaneous fees generated by our operations.
EXPENSES
Net Losses and Loss Adjustment Expenses
Net losses and loss adjustment expenses include actual paid claims and the change in unpaid claim reserves and consist of direct and assumed losses less ceded losses. Incurred claims are impacted by loss frequency, which is the measure of the number of claims per unit of insured exposure, and loss severity, which is based on the average size of claims. Factors affecting loss frequency and loss severity include changes in claims reporting patterns, claims settlement patterns, judicial decisions, legislation, economic conditions, morbidity patterns and the attitudes of claimants towards settlements.
Actual claims paid are claims payments made to the policyholder or beneficiary during the accounting period. The change in unpaid claim reserve is an increase or reduction to the unpaid claim reserve in the accounting period to maintain the unpaid claim reserve at the levels evaluated by our actuaries.
Unpaid claims are reserve estimates that are established in accordance with U.S. GAAP using generally accepted actuarial methods. Credit life and AD&D unpaid claims reserves include claims in the course of settlement and IBNR. Credit disability unpaid claims reserves also include continuing claim reserves for open disability claims. For all other product lines, unpaid claims reserves are bulk reserves and are entirely IBNR. We use a number of algorithms in establishing our 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.
In arriving at our unpaid claims reserves, we conduct an actuarial analysis on a basis gross of reinsurance. The same estimates used as a basis in calculating the gross unpaid claims reserves are then used as the basis for calculating the net unpaid claims reserves, which take into account the impact of reinsurance. Anticipated future loss development patterns form a key assumption underlying these analyses. Our claims are generally reported and settled quickly, resulting in consistent historical loss development patterns. From the anticipated loss development patterns, a variety of actuarial loss projection techniques are employed, such as the chain ladder method, the Bornhuetter-Ferguson method and expected loss ratio method.
Our unpaid claims reserves represent our best estimates, generally involving actuarial projections at a given time. Actual claim costs are dependent upon a number of complex factors such as changes in doctrines of legal liabilities and damage awards. These factors are not directly quantifiable, particularly on a prospective basis. We periodically review and update our methods of making such unpaid claims reserve estimates and establishing the related liabilities based on our actual experience. We have not made any changes to our methodologies for determining unpaid claims reserves in the periods presented.
Member Benefit Claims
Member Benefit Claims represent claims paid on behalf of contract holders directly to third parties providers for roadside assistance and for the repair or replacement of covered products. Claims can also be paid directly to contract holders as a reimbursement payment provided supporting documentation of loss is submitted to us. Claims are recognized as expense when incurred.
Personnel Costs
Personnel costs represent the amounts attributable to wages, salaries, bonuses and benefits for our full and part-time employees, as well as expense related to our stock-based compensation. In addition to our general personnel costs, some of our employees are paid a percentage of revenues they generate, which may vary from period to period based on volume. Bonuses for the remaining employees are discretionary and are based on an evaluation of their individual performance, as well as our overall performance.
Other Operating Expenses
Other operating expenses consist primarily of rent, insurance, transaction expenses, professional fees, technology costs, travel and entertainment and advertising, and may include variable costs based on the volume of business we process. Other operating expenses are a significant portion of our expenses.
Depreciation and Amortization
Depreciation and amortization expense is the allocation of the capitalized cost of property, equipment and software over the periods benefited by the use of the asset.
Amortization of Intangibles
Amortization of finite-lived intangibles is an expense recorded to allocate the cost of finite-lived intangible assets, such as purchased customer accounts and non-compete agreements acquired as part of our business acquisitions, over their estimated useful lives.
Interest Expense
Interest expense includes interest incurred on our credit facilities, notes payable and preferred trust securities, net of the impact of the interest rate swap, and is directly correlated to the balances outstanding and the prevailing interest rates on these debt instruments.
Income Taxes
Income taxes are comprised of federal and state taxes based on income in multiple jurisdictions and changes in uncertain tax positions, if any.
RESULTS OF OPERATIONS
The following tables set forth our Consolidated Statements of Income for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except shares, per share amounts and percentages)
|
For the Years Ended December 31,
|
|
|
2013
|
2012
|
$ Change from 2012
|
% Change from 2012
|
|
2011
|
|
Revenues:
|
|
|
|
|
|
|
|
Service and administrative fees
|
$
|
172,427
|
|
$
|
90,550
|
|
$
|
81,877
|
|
90.4
|
%
|
|
$
|
94,464
|
|
|
Ceding commissions
|
32,824
|
|
34,825
|
|
(2,001
|
)
|
(5.7
|
)
|
|
29,495
|
|
|
Net investment income
|
3,050
|
|
3,067
|
|
(17
|
)
|
(0.6
|
)
|
|
3,368
|
|
|
Net realized investment gains
|
2,043
|
|
3
|
|
2,040
|
|
nm
|
|
|
4,193
|
|
|
Net earned premium
|
136,787
|
|
127,625
|
|
9,162
|
|
7.2
|
|
|
115,503
|
|
|
Other income
|
736
|
|
269
|
|
467
|
|
173.6
|
|
|
170
|
|
|
Total revenues
|
347,867
|
|
256,339
|
|
91,528
|
|
35.7
|
|
|
247,193
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
41,567
|
|
40,219
|
|
1,348
|
|
3.4
|
|
|
37,949
|
|
|
Member benefit claims
|
46,019
|
|
4,642
|
|
41,377
|
|
891.4
|
|
|
4,409
|
|
|
Commissions
|
154,606
|
|
128,741
|
|
25,865
|
|
20.1
|
|
|
126,918
|
|
|
Personnel costs
|
39,487
|
|
28,475
|
|
11,012
|
|
38.7
|
|
|
26,021
|
|
|
Other operating expenses
|
35,117
|
|
24,233
|
|
10,884
|
|
44.9
|
|
|
23,739
|
|
|
Depreciation and amortization
|
4,858
|
|
3,275
|
|
1,583
|
|
48.3
|
|
|
2,662
|
|
|
Amortization of intangibles
|
5,527
|
|
2,742
|
|
2,785
|
|
101.6
|
|
|
2,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except shares, per share amounts and percentages)
|
For the Years Ended December 31,
|
|
|
2013
|
2012
|
$ Change from 2012
|
% Change from 2012
|
|
2011
|
|
Interest expense
|
3,621
|
|
4,334
|
|
(713
|
)
|
(16.5
|
)
|
|
4,690
|
|
|
(Gain) Loss on sale of subsidiary
|
(402
|
)
|
—
|
|
(402
|
)
|
100.0
|
|
|
477
|
|
|
Total expenses
|
330,400
|
|
236,661
|
|
93,739
|
|
39.6
|
|
|
229,684
|
|
|
Income from continuing operations before income taxes
|
17,467
|
|
19,678
|
|
(2,211
|
)
|
(11.2
|
)
|
|
17,509
|
|
|
Income taxes - continuing operations
|
5,660
|
|
6,716
|
|
(1,056
|
)
|
(15.7
|
)
|
|
5,947
|
|
|
Income from continuing operations before non-controlling interests
|
11,807
|
|
12,962
|
|
(1,155
|
)
|
(8.9
|
)
|
|
11,562
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
Income from discontinued operations - net of tax
|
3,546
|
|
2,275
|
|
1,271
|
|
55.9
|
|
|
1,777
|
|
|
Gain on sale of discontinued operations - net of tax
|
8,844
|
|
—
|
|
8,844
|
|
100.0
|
|
|
—
|
|
|
Discontinued operations - net of tax
|
12,390
|
|
2,275
|
|
10,115
|
|
444.6
|
|
|
1,777
|
|
|
Net income before non-controlling interests
|
24,197
|
|
15,237
|
|
8,960
|
|
58.8
|
|
|
13,339
|
|
|
Less: net income (loss) attributable to non-controlling interests
|
1,482
|
|
72
|
|
1,410
|
|
1,958.3
|
%
|
|
(170
|
)
|
|
Net income attributable to Fortegra Financial Corporation
|
$
|
22,715
|
|
$
|
15,165
|
|
$
|
7,550
|
|
49.8
|
%
|
|
$
|
13,509
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - Basic:
|
|
|
|
|
|
|
|
Net income from continuing operations - net of tax
|
$
|
0.53
|
|
$
|
0.65
|
|
|
|
|
$
|
0.57
|
|
|
Discontinued operations - net of tax
|
0.64
|
|
0.12
|
|
|
|
|
0.09
|
|
|
Net income attributable to Fortegra Financial Corporation
|
$
|
1.17
|
|
$
|
0.77
|
|
|
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - Diluted:
|
|
|
|
|
|
|
|
Net income from continuing operations - net of tax
|
$
|
0.50
|
|
$
|
0.63
|
|
|
|
|
$
|
0.55
|
|
|
Discontinued operations - net of tax
|
0.61
|
|
0.11
|
|
|
|
|
0.09
|
|
|
Net income attributable to Fortegra Financial Corporation
|
$
|
1.11
|
|
$
|
0.74
|
|
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
19,477,802
|
|
19,655,492
|
|
|
|
|
20,352,027
|
|
|
Diluted
|
20,482,652
|
|
20,600,362
|
|
|
|
|
21,265,801
|
|
nm = not meaningful
REVENUES
Service and Administrative Fees
Service and administrative fees for
the year ended December 31, 2013
increased
$81.9 million
, or
90.4%
, to
$172.4 million
from
$90.6 million
for the year ended
December 31, 2012
. The increase resulted primarily from $82.8 million and $3.1 million in
2013
revenues attributable to ProtectCELL and 4Warranty, respectively, which was partially offset by a $3.0 million decrease in our insurance company client revenues and motor club membership revenues of $1.6 million.
Service and administrative fees for the year ended
December 31, 2012
decreased
$3.9 million
, or
4.1%
, to
$90.6 million
from
$94.5 million
for the year ended December 31, 2011. The decrease resulted primarily from a $5.6 million decrease in our motor club membership revenues and $0.7 million related to the sale of Creative Investigations Recovery Group, LLC ("CIRG") in July 2011. This decrease was partially offset by a $2.7 million increase in administrative fees from our acquisition of PBG in October 2011.
Ceding Commissions
Ceding commissions for
the year ended December 31, 2013
decreased
$2.0 million
, or
5.7%
, to
$32.8 million
from
$34.8 million
for the year ended
December 31, 2012
. This decrease primarily resulted from the change in accounting estimate, which increased 2012 results by $2.8 million. For the year ended December 31, 2013, ceding commissions included $25.0 million in service and administrative fees, $6.9 million in underwriting profits and $0.9 million in net investment income.
Ceding commissions for the year ended
December 31, 2012
increased
$5.3 million
, or
18.1%
, to
$34.8 million
from
$29.5 million
for the year ended December 31, 2011. This increase primarily resulted from improved underwriting results due to growth in earned premiums and favorable loss experience along with additional administrative fees earned from increased insurance production in 2012, and the change in accounting estimate, which accounted for $2.8 million of the increase. For the year ended
December 31, 2012
, ceding commissions included $25.6 million in service and administrative fees, $8.6 million in underwriting profits and $0.6 million in net investment income.
Net Investment Income
Net investment income totaled
$3.1 million
for the years ended
December 31, 2013
and
2012
, respectively. The amount of invested assets increased in 2013 compared to 2012, which was offset by a decrease in yields for the 2013 period. The yield on the investment portfolio at
December 31, 2013
was 1.83% compared to 2.67% at
December 31, 2012
.
Net investment income for the year ended
December 31, 2012
decreased
$0.3 million
, or
8.9%
, to
$3.1 million
compared to
$3.4 million
for the year ended December 31, 2011. The decrease from 2011 was principally due to lower income earned on fixed income securities and to a lesser extent a lower amount of income earned on cash. The yield on the investment portfolio at December 31, 2012 was 2.67% compared to 2.88% at December 31, 2011.
Net Realized Investment Gains
Net realized gains on the sale of investments totaled
$2.0 million
for
the year ended December 31, 2013
compared to net realized gains of
$3.0 thousand
for the year ended
December 31, 2012
. The increase for 2013 was due to higher levels of investment sales occurring in 2013. The net gain for 2012 included a
$16.0 thousand
net realized loss attributable to an OTTI charge for the write-down of a single equity security.
Net realized gains on the sale of investments totaled
$3.0 thousand
for the year ended
December 31, 2012
compared to net realized gains of
$4.2 million
for the year ended December 31, 2011. The decrease for 2012 was due to higher levels of investment sales occurring in 2011 that were not repeated in 2012. The net gain for 2011 included a $0.2 million net realized loss attributable to an OTTI charge for the write-down of ten equity securities.
Net Earned Premium
Net earned premium for
the year ended December 31, 2013
increased
$9.2 million
, or
7.2%
, to
$136.8 million
from
$127.6 million
for the year ended
December 31, 2012
, with the change in accounting estimate increasing net earned premium by $2.5 million for the
2012
period. For the
2013
period, direct and assumed earned premium increased
$29.9 million
resulting from increased production from existing and new clients distributing our credit insurance, warranty, and auto products, and from geographic expansion. Because of this increase, ceded earned premiums increased
$20.8 million
, or
8.9%
, for
the year ended December 31, 2013
. On average, we maintained a
64.9%
overall cession rate of direct and assumed earned premium for
the year ended December 31, 2013
compared with
64.5%
in
2012
.
Net earned premium for the year ended
December 31, 2012
increased
$12.1 million
, or
10.5%
, to
$127.6 million
from
$115.5 million
for the year ended December 31, 2011, with the change in accounting estimate increasing net earned premium by $2.5 million for the 2012 period. For the 2012 period, direct and assumed earned premium increased $38.4 million resulting from increased production from existing clients and new clients distributing our credit insurance and warranty service contracts and geographic expansion. Because of this increase, ceded earned premiums increased $26.3 million, or 12.8%, for the year ended
December 31, 2012
. On average, we maintained a 64.5% overall cession rate of direct and assumed earned premium for the year ended
December 31, 2012
compared with 64.1% in 2011.
Other Income
Other income for
the year ended December 31, 2013
increased
$0.5 million
, or
173.6%
, to
$0.7 million
from
$0.3 million
for the year ended
December 31, 2012
. Other income for the 2013 period includes $0.2 million of interest income from our premium financing program for South Bay, which began late in 2013.
Other income for the year ended
December 31, 2012
increased
$0.1 million
, or
58.2%
, to
$0.3 million
from
$0.2 million
for 2011.
EXPENSES
Net Losses and Loss Adjustment Expenses
Net losses and loss adjustment expenses for
the year ended December 31, 2013
increased
$1.3 million
, or
3.4%
to
$41.6 million
, from
$40.2 million
for the year ended
December 31, 2012
. Our net losses and loss adjustment expense ratio of
30.4%
in
2013
was similar to prior periods. The increase in net losses and loss adjustment expenses was primarily driven by increased earned premiums. For the
2013
period, our direct and assumed losses increased by
$4.4 million
, or
5.1%
, as compared with the same period in
2012
. For the
2013
period, our ceded losses were higher by
$3.0 million
, or
6.6%
, compared with the same period in
2012
, partially offsetting the increase in direct and assumed losses. On average, we maintained a
54.2%
and
53.5%
overall cession rate of direct and assumed losses and loss adjustment expenses for
the year ended December 31, 2013
and
2012
, respectively.
Net losses and loss adjustment expenses for the year ended
December 31, 2012
increased
$2.3 million
, or
6.0%
to
$40.2 million
, from
$37.9 million
for the year ended December 31, 2011. Our net losses and loss adjustment expense ratio of
31.5%
in 2012 was similar to prior periods. The increase in net losses and loss adjustment expenses was primarily driven by increased earned premiums and warranty claims. For the 2012 period, our direct and assumed losses increased by $4.6 million, or 5.6%, as compared with the same period in 2011. For the 2012 period, our ceded losses were higher by $2.3 million, or 5.2%, compared with the same period in 2011, partially offsetting the increase in direct and assumed losses. On average, we maintained a 53.5% and 53.6% overall cession rate of direct and assumed losses and loss adjustment expenses for the years ended December 31, 2012 and 2011, respectively.
Member Benefit Claims
Member benefit claims for
the year ended December 31, 2013
increased
$41.4 million
, or
891.4%
, to
$46.0 million
, from
$4.6 million
for the year ended
December 31, 2012
. The increase resulted principally from ProtectCELL’s cost of member benefits claims attributable to the cost of replacement devices and associated claims handling and fulfillment costs.
Member benefit claims for the year ended
December 31, 2012
increased
$0.2 million
, or
5.3%
, to
$4.6 million
, from
$4.4 million
for the year ended December 31, 2011. The increase for 2012, compared to 2011, resulted from higher than expected claims paid for one Auto Knight program that was terminated in 2012.
Commissions
Commissions for
the year ended December 31, 2013
increased
$25.9 million
, or
20.1%
, to
$154.6 million
, from
$128.7 million
for the year ended
December 31, 2012
. The increase in 2013 resulted primarily from $16.9 million and $0.4 million in commissions attributable to ProtectCELL and 4Warranty, respectively, and comparable period over period growth of $13.0 million from the revenue increases in credit insurance and warranty service contracts, while 2012 was higher due to the additional $3.9 million of commission expense resulting from the change in accounting estimate.
Commissions for the year ended
December 31, 2012
increased
$1.8 million
, or
1.4%
, to
$128.7 million
, from
$126.9 million
for the year ended December 31, 2011. The increase for 2012, compared to 2011, resulted from growth in net earned premiums and from the change in accounting estimate, which increased commissions for 2012 by $3.9 million.
Personnel Costs
Personnel costs for
the year ended December 31, 2013
increased
$11.0 million
, or
38.7%
, to
$39.5 million
from
$28.5 million
for the year ended
December 31, 2012
. The increase resulted principally from $9.8 million and $0.1 million from ProtectCELL and 4Warranty, respectively, and $1.2 million in non-recurring costs associated with the Plan, which were partially offset by the impact of the decrease in headcount associated with the Plan. Total employees of our continuing operations at
December 31, 2013
were 494, compared to 397 at
December 31, 2012
(which excludes the employees of ProtectCELL and 4Warranty). Stock-based compensation expense included in personnel costs totaled
$0.7 million
for the years ended
December 31, 2013
and
2012
, respectively.
Personnel costs for the year ended
December 31, 2012
increased
$2.5 million
, or
9.4%
, to
$28.5 million
from
$26.0 million
for the year ended December 31, 2011. The increase resulted primarily from $1.9 million for the 2011 PBG acquisition and the increased headcount across the business. In addition, the sale of CIRG in 2011 reduced personnel costs in 2012 by $0.3 million. Total employees of our continuing operations at
December 31, 2012
increased to 397 (which excludes the employees of ProtectCELL and 4Warranty) compared to 355 at December 31, 2011. Stock-based compensation expense included in personnel costs totaled
$0.7 million
and
$0.6 million
for the year ended
December 31, 2012
and 2011, respectively.
Other Operating Expenses
Other operating expenses for
the year ended December 31, 2013
increased
$10.9 million
, or
44.9%
, to
$35.1 million
from
$24.2 million
for the year ended
December 31, 2012
. These expenses increased primarily due to ProtectCELL and 4Warranty, which added $8.3 million and $0.6 million, respectively, while our specialty products and direct-to-consumer initiatives added $1.2 million.
Other operating expenses for the year ended
December 31, 2012
increased
$0.5 million
, or
2.1%
, to
$24.2 million
from
$23.7 million
for the year ended December 31, 2011. Other operating expenses declined by $2.6 million led by transaction costs and other one-time
expenses decreasing $0.4 million and $1.4 million, respectively. These improvements were offset in part by the impact of a full year of other operating expenses from PBG, which we acquired during the final quarter in 2011. For 2012, PBG's other operating expenses were $2.1 million compared with other operating expenses of $0.3 million for 2011.
Depreciation and Amortization
Depreciation and amortization expense for
the year ended December 31, 2013
increased
$1.6 million
or
48.3%
to
$4.9 million
from
$3.3 million
for the year ended
December 31, 2012
. The increase for both periods compared to the same prior year periods was due to higher levels of depreciable and amortizable assets in service during 2013 compared to 2012, with $1.1 million of the increase attributable to internally developed software.
Depreciation and amortization expense for the year ended
December 31, 2012
increased
$0.6 million
or
23.0%
to
$3.3 million
from
$2.7 million
for the year ended December 31, 2011, with the increase attributable to higher levels of depreciable and amortizable assets in service during 2012 compared to 2011.
Amortization of Intangibles
Amortization expense on intangibles for
the year ended December 31, 2013
increased
$2.8 million
or
101.6%
to
$5.5 million
from
$2.7 million
for the year ended
December 31, 2012
. The increase was primarily due to the 2012 acquisitions of ProtectCELL and 4Warranty, which increased amortization expense on intangibles by $2.4 million and $0.3 million, respectively.
Amortization expense on intangibles decreased
$0.1 million
or
2.7%
, to
$2.7 million
for the year ended
December 31, 2012
from
$2.8 million
for the year ended December 31, 2011. The decrease for 2012 was primarily attributable to certain intangibles becoming fully amortized.
Interest Expense
Interest expense for
the year ended December 31, 2013
decreased
$0.7 million
, or
16.5%
, to
$3.6 million
from
$4.3 million
for the year ended
December 31, 2012
and was positively impacted by a lower interest rate on outstanding borrowings in
2013
compared to
2012
. The decrease in rate was slightly offset by higher outstanding borrowings during 2013, resulting from additional borrowings associated with the acquisitions of ProtectCELL and 4Warranty, when compared to the 2012 outstanding borrowings. In addition,
2012
interest expense was higher due to a $0.7 million charge to interest expense for previously capitalized transaction costs associated with the termination of the SunTrust Bank, N.A. revolving credit facility in August 2012.
Interest expense for the year ended
December 31, 2012
decreased
$0.4 million
, or
7.6%
, to
$4.3 million
from
$4.7 million
for the year ended December 31, 2011 and was positively impacted by a lower interest rate on outstanding borrowings and our new credit facility with Wells Fargo Bank, N.A., which took effect on August 2, 2012. Interest expense in 2011 included the write-off of $0.3 million for capitalized issuance costs associated with the redemption of preferred stock. These decreases were partially offset by a $0.7 million charge to interest expense for previously capitalized transaction costs associated with the termination of the SunTrust Bank, N.A. revolving credit facility in August 2012.
Gain (Loss) on sale of subsidiary
In June 2013, we sold our 100% interest in Magna Insurance Company and realized a gain of $0.4 million.
On July 1, 2011, we sold our wholly-owned subsidiary, CIRG, for a sales price of $1.2 million, for cash and a $1.1 million secured note receivable. For the year ended December 31, 2011, we recorded a $0.5 million loss on the sale of CIRG.
Income Taxes
Income taxes for
the year ended December 31, 2013
decreased
$1.1 million
, or
15.7%
, to
$5.7 million
from
$6.7 million
for the year ended
December 31, 2012
, with the decrease primarily attributable to a lower level of pretax income. Our effective tax rate was
32.4%
for
the year ended December 31, 2013
compared to
34.1%
for the same period in
2012
because of the rate impact of the ProtectCELL non-controlling interest.
Income taxes for the year ended
December 31, 2012
increased
$0.8 million
, or
12.9%
, to
$6.7 million
from
$5.9 million
for the year
ended December 31, 2011, with the increase primarily attributable to a higher level of pretax income, and a beneficial tax true-up in 2011. Our effective tax rate was
34.1%
for the year ended
December 31, 2012
compared to
34.0%
for the same period in 2011.
See the Note, "Income Taxes" in the Notes to Consolidated Financial Statements, included in ITEM 8 of this
Form 10-K
for additional information and a reconciliation of the items impacting our income taxes and our effective tax rate.
During 2012, we were under examination by the Internal Revenue Service ("IRS") for the 2010 and 2009 tax years. In February 2013, the IRS completed its field audit and in March 2013, we received notice from the IRS that the audit report has been fully approved. We have agreed to those findings and paid $57.0 thousand, which was expensed during the first quarter of 2013.
Divestitures - Discontinued Operations
On December 31, 2013, we completed the previously announced sale of all of the issued and outstanding stock of our subsidiaries, Bliss and Glennon and eReinsure, to AmWINS (the "Disposition"), pursuant to the terms of the Purchase Agreement, and recognized an
$8.8 million
gain on the sale of discontinued operations, net of tax, for
the year ended December 31, 2013
. As consideration for the Disposition, we received net cash proceeds of
$81.8 million
for the Disposition, representing gross proceeds of
$83.5 million
less
$1.0 million
in transaction fees paid at the time of closing and
$0.7 million
of cash held by the disposed entities. We utilized the cash proceeds received on December 31, 2013 to pay off our existing credit facility with Wells Fargo Bank, N.A. As a result of the Disposition, we no longer operate in the businesses of wholesale insurance brokerage and selling or licensing of a computerized system or platform for the negotiation and/or placement of facultative reinsurance. Further, we have agreed not to compete with the Bliss and Glennon and eReinsure businesses for five years, and have agreed not to solicit former employees of the divested businesses. The following table provides the amounts related to discontinued operations in the Consolidated Statements of Income for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Income from discontinued operations:
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Brokerage commissions and fees
|
$
|
36,823
|
|
|
$
|
35,306
|
|
|
$
|
34,396
|
|
|
Net investment income
|
22
|
|
|
1
|
|
|
—
|
|
|
Other income
|
40
|
|
|
—
|
|
|
—
|
|
|
Total revenues
|
36,885
|
|
|
35,307
|
|
|
34,396
|
|
|
Expenses:
|
|
|
|
|
|
|
Personnel costs
|
20,251
|
|
|
20,173
|
|
|
18,526
|
|
|
Other operating expenses
|
5,778
|
|
|
6,121
|
|
|
7,401
|
|
|
Depreciation and amortization
|
615
|
|
|
658
|
|
|
415
|
|
|
Amortization of intangibles
|
1,929
|
|
|
2,211
|
|
|
2,133
|
|
|
Interest expense
|
2,318
|
|
|
2,290
|
|
|
2,951
|
|
|
Total expenses
|
30,891
|
|
|
31,453
|
|
|
31,426
|
|
|
Income from discontinued operations before income taxes
|
5,994
|
|
|
3,854
|
|
|
2,970
|
|
|
Income taxes - discontinued operations
|
2,448
|
|
|
1,579
|
|
|
1,193
|
|
|
Income from discontinued operations - net of tax
|
3,546
|
|
|
2,275
|
|
|
1,777
|
|
|
Gain on sale of discontinued operations:
|
|
|
|
|
|
|
Gain on sale of discontinued operations before income taxes
|
14,739
|
|
|
—
|
|
|
—
|
|
|
Income taxes - gain on sale of discontinued operations
|
5,895
|
|
|
—
|
|
|
—
|
|
|
Gain on sale of discontinued operations - net of tax
|
8,844
|
|
|
—
|
|
|
—
|
|
|
Discontinued operations - net of tax
|
$
|
12,390
|
|
|
$
|
2,275
|
|
|
$
|
1,777
|
|
See the Notes, "Summary of Significant Accounting Policies - Discontinued Operations" and "Divestitures" in the Notes to Consolidated Financial Statements, included in ITEM 8 of this
Form 10-K
for additional information.
Presentation of Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
In this
Form 10-K
, we present EBITDA from continuing operations and Adjusted EBITDA from continuing operations. These financial measures as presented in this
Form 10-K
are considered Non-GAAP financial measures and are not recognized terms under U.S. GAAP and should not be used as an indicator of, and are not an alternative to, net income as a measure of operating performance. EBITDA as used in this
Form 10-K
is net income before interest expense, income taxes, net income attributable to non-controlling interests, depreciation and amortization. Adjusted EBITDA from continuing operations, as used in this
Form 10-K
means "Consolidated Adjusted EBITDA" which is defined under our credit facility with Wells Fargo Bank, N.A., which in general terms means consolidated net income before non-controlling interests, consolidated interest expense, consolidated amortization expense, consolidated depreciation expense and consolidated income tax expense, relating to continuing operations. The other items excluded in this calculation may include if applicable, but are not limited to, specified acquisition costs, impairment of goodwill and other non-cash charges, stock-based compensation expense, and unusual or non-recurring charges and items that affect comparability of results. The calculation below does not give effect to certain additional adjustments permitted under our credit facility, which if included, would increase the amount of Adjusted EBITDA from continuing operations reflected in this table. We believe presenting EBITDA from continuing operations and Adjusted EBITDA from continuing operations provides investors with a supplemental financial measure of our operating performance.
In addition to the financial covenant requirements under our credit facility, management uses EBITDA from continuing operations and Adjusted EBITDA from continuing operations as financial measures of operating performance for planning purposes, which may include, but are not limited to, the preparation of budgets and projections, the determination of bonus compensation for executive officers, the analysis of the allocation of resources and the evaluation of the effectiveness of business strategies. Although we use EBITDA from continuing operations and Adjusted EBITDA from continuing operations as financial measures to assess the operating
performance of our business, both measures have significant limitations as analytical tools because they exclude certain material expenses. For example, they do not include interest expense and the payment of income taxes, which are both a necessary element of our costs and operations. Since we use property and equipment to generate service revenues, depreciation expense is a necessary element of our costs. In addition, the omission of amortization expense associated with our intangible assets further limits the usefulness of this financial measure. Management believes the inclusion of the adjustments to EBITDA from continuing operations and Adjusted EBITDA from continuing operations are appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future. Because EBITDA from continuing operations and Adjusted EBITDA from continuing operations do not account for these expenses, its utility as a financial measure of our operating performance has material limitations. Due to these limitations, management does not view EBITDA from continuing operations and Adjusted EBITDA from continuing operations in isolation or as a primary financial performance measure.
We believe EBITDA and Adjusted EBITDA are frequently used by securities analysts, investors and other interested parties in the evaluation of similar companies in similar industries and to measure a company's ability to service its debt and other cash needs. Because the definitions of EBITDA and Adjusted EBITDA (or similar financial measures) may vary among companies and industries, they may not be comparable to other similarly titled financial measures used by other companies.
The following table presents a reconciliation of income from continuing operations before non-controlling interests to EBITDA from continuing operations and Adjusted EBITDA from continuing operations for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in thousands)
|
2013
|
|
2012
|
|
2011
|
|
Income from continuing operations before non-controlling interests
|
$
|
11,807
|
|
|
$
|
12,962
|
|
|
$
|
11,562
|
|
|
Depreciation
|
4,858
|
|
|
3,275
|
|
|
2,662
|
|
|
Amortization of intangibles
|
5,527
|
|
|
2,742
|
|
|
2,819
|
|
|
Interest expense
|
3,621
|
|
|
4,334
|
|
|
4,690
|
|
|
Income taxes
|
5,660
|
|
|
6,716
|
|
|
5,947
|
|
|
EBITDA from continuing operations
|
31,473
|
|
|
30,029
|
|
|
27,680
|
|
|
Transaction costs
(1)
|
203
|
|
|
601
|
|
|
989
|
|
|
Corporate governance study
|
—
|
|
|
—
|
|
|
248
|
|
|
Restructuring expenses
|
1,299
|
|
|
—
|
|
|
—
|
|
|
Relocation expenses
|
—
|
|
|
—
|
|
|
207
|
|
|
Statutory audits
|
—
|
|
|
—
|
|
|
98
|
|
|
(Gain) loss on sale of subsidiary
|
(402
|
)
|
|
—
|
|
|
477
|
|
|
Legal expenses
|
520
|
|
|
—
|
|
|
360
|
|
|
Stock-based compensation expense
|
1,228
|
|
|
954
|
|
|
747
|
|
|
Change in accounting estimate
|
—
|
|
|
(1,509
|
)
|
|
—
|
|
|
Adjusted EBITDA from continuing operations
|
$
|
34,321
|
|
|
$
|
30,075
|
|
|
$
|
30,806
|
|
|
(1)
Represents transaction costs associated with acquisitions.
|
|
|
|
|
|
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, capital expenditures, debt service, acquisitions and other commitments and contractual obligations. We historically have derived our liquidity from our invested assets, cash flows from operations, ordinary and extraordinary dividend capacity from our subsidiary insurance companies, our credit facility and investments. When considering our liquidity, it is important to note that we hold cash in a fiduciary capacity as a result of premiums received from insured parties that have not yet been paid to insurance carriers. The fiduciary cash is recorded as an asset on our Consolidated Balance Sheets with a corresponding liability, net of our commissions, to insurance carriers.
Our primary cash requirements include the payment of operating expenses, interest and principal payments on debt, capital expenditures and acquisitions. We may also incur unexpected costs and operating expenses related to any unforeseen disruptions to our facilities and equipment, the loss of key personnel or changes in the credit markets and interest rates, which could increase our immediate cash requirements or otherwise impact our liquidity.
Our primary sources of liquidity include our total investments, cash and cash equivalent balances, availability under our revolving credit facility and dividends and other distributions from our subsidiaries. At
December 31, 2013
, we had total available-for-sale and short-term investments of
$138.8 million
, which includes restricted investments of
$16.5 million
. In addition, we had cash and cash equivalents of
$21.7 million
and
$86.7 million
of available capacity on our credit facility. At
December 31, 2012
, we had total investments of
$118.1 million
, which included restricted investments of
$17.9 million
. In addition, we had cash and cash equivalents of
$15.2 million
and
$34.3 million
of available capacity on our revolving credit facility. Our total indebtedness was
$38.3 million
at
December 31, 2013
compared to
$124.4 million
at
December 31, 2012
. The decrease in our outstanding indebtedness was due to the utilization of the proceeds from the Disposition to pay off the full balance on the Wells Fargo Bank, N.A. credit facility.
On August 2, 2012, we terminated our existing $85.0 million revolving credit facility with SunTrust Bank, N.A. and entered into a new credit facility with Wells Fargo Bank, N.A., which is described in the sections below, "$75.0 Million Credit Facility" and "$85.0 Million Revolving Credit Facility."
We believe that our cash flows from operations and our availability under our revolving credit facility, combined with our low capital expenditure requirements will provide us with sufficient capital to continue to grow our business over the next several years. We intend to use a portion of our available cash flows to pay interest on our outstanding debt, thus limiting the amount available for working capital, capital expenditures and other general corporate purposes. As we continue to expand our business and make acquisitions, we may in the future require additional working capital to meet our future business needs. This additional working capital may be in the form of additional debt or equity. Although we believe we have sufficient liquidity under our revolving credit facility, as discussed above, under adverse market conditions or in the event of a default under our revolving credit facility, there can be no assurance that such funds would be available or sufficient, and, in such a case, we may not be able to successfully obtain additional financing on f
avorable terms, or at all, or replace our existing credit facility upon maturity in August 2017.
C
ash Exceeding Federal Deposit Insurance Corporation ("FDIC") Limits
We maintain cash and cash equivalents with major third party financial institutions, including interest-bearing money market accounts. In the United States, these accounts were fully insured by the FDIC regardless of account balance through the Transaction Account Guarantee ("TAG") program created by Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). The expiration of the TAG program on December 31, 2012, caused the FDIC's standard insurance limit of $250,000 per depositor per institution to be reimposed on January 1, 2013. Thus, our accounts containing cash and cash equivalents after January 1, 2013 may exceed the FDIC's standard $250,000 insurance limit from time to time.
Our cash balance, including restricted cash, exceeding the FDIC standard insurance limit totaled
$18.9 million
at
December 31, 2013
. At
December 31, 2012
, our cash balances in money markets accounts, which were our only cash balances subject to limitation under TAG, exceeding the FDIC standard insurance limit totaled
$8.2 million
. To date, we have not experienced any loss of, or lack of access to, our cash and cash equivalents or our restricted cash. Although we periodically monitor and adjust the balances of these accounts as needed, the balances of these accounts nonetheless remain subject to unexpected, adverse conditions in the financial markets and could be adversely impacted if a financial institution with which we maintain an account fails. We will continue to monitor the depository institutions at which our accounts are maintained, but cannot guarantee that access to our cash and cash equivalents will not be impacted by, or that we will not lose deposited funds exceeding the FDIC standard insurance limit due to, adverse conditions in the financial markets or if a financial institution with which we maintain an account fails.
Share Repurchase Plan
We have an active share repurchase plan, which allows us to purchase up to $15.0 million in total of our common stock to be purchased from time to time through open market or private transactions. For
the year ended December 31, 2013
, we repurchased
200,000
common shares with an average price of
$6.79
per share and a total cost of
$1.4 million
compared to
508,080
common shares at an average price of
$7.72
per share at a total cost of
$3.9 million
for same period in 2012. See ITEM 5 and the Note, "Share Repurchase Plan," of the Notes to Consolidated Financial Statements, included in this
Form 10-K
, for more information on the share repurchase plan.
Regulatory Requirements
Dividends Limitations
We are a holding company and have limited direct operations. Our holding company assets consist primarily of the capital stock of our subsidiaries. Accordingly, our future cash flows depend upon the availability of dividends and other payments from our subsidiaries, including statutorily permissible payments from our insurance company subsidiaries, as well as payments under our tax allocation agreement and management agreements with our subsidiaries. The following table sets forth the dividends paid to us by our insurance company subsidiaries during the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in thousands)
|
2013
|
|
2012
|
|
2011
|
|
Ordinary dividends
|
$
|
2,383
|
|
|
$
|
2,783
|
|
|
$
|
6,956
|
|
|
Extraordinary dividends
|
—
|
|
|
—
|
|
|
830
|
|
|
Total dividends
|
$
|
2,383
|
|
|
$
|
2,783
|
|
|
$
|
7,786
|
|
Please see ITEM 1, "Regulation of Our Products - Dividends Limitations," and the Note, "Statutory Reporting and Insurance Company Subsidiaries Dividend Restrictions" in the Notes to Consolidated Financial Statements included in ITEM 8 of this
Form 10-K
, for additional information.
$75.0 Million Credit Facility
On August 2, 2012, we entered into a five-year secured credit agreement (the "Credit Agreement"), which had an initial capacity of $125.0 million, with a syndicate of lenders, including Wells Fargo Bank, N.A., who also serves as administrative agent ("Wells Fargo" or the "Administrative Agent"). The Credit Agreement was comprised of a $50.0 million term loan facility (the "Term Loan Facility"), and a $75.0 million revolving credit facility (the "Revolving Facility" and collectively with the Term Loan Facility, the "Facilities") with a sub-limit of $10.0 million for swingline loans and $10.0 million for letters of credit. As required by the terms of the Credit Agreement, we used the proceeds from the Disposition to pay off the balances of both the Term Loan Facility and the Revolving Facility. Accordingly, the Term Loan Facility is no longer available for future borrowings, while the Revolving Facility remains available. Subject to earlier termination, the Credit Agreement terminates on August 2, 2017. The Credit Agreement includes a provision pursuant to which, from time to time, we may request that the lenders in their discretion increase the maximum amount of commitments under the Facilities by an amount not to exceed $50.0 million. For the benefit of the Administrative Agent and the lenders, the Credit Agreement contains certain customary representations and warranties, as well as financial covenants, which we are required to maintain as of the end of each fiscal quarter.
As of
December 31, 2013
, we were in compliance with the financial covenants contained in the Credit Agreement. Please see the Note, "Notes Payable" in the Notes to Consolidated Financial Statements included in ITEM 8 of this
Form 10-K
, for additional information on the Credit Agreement's interest rate, terms and financial covenants.
$15.0 million Revolving Line of Credit - Synovus Bank
At
December 31, 2013
, South Bay had a $15.0 million line of credit agreement (the "Line of Credit") with Synovus Bank, entered into on October 2013, with a maturity date of April 2017. The Line of Credit bears interest at a rate of 300 basis points plus the 90 day LIBOR. The Line of Credit is used by South Bay for its premium financing product. The Line of Credit allows South Bay to finance up to 90% of the eligible receivables less an applicable reserve of $500,000. At
December 31, 2013
, the balance of premium financing receivables included in notes receivable, net on the Consolidated Balance Sheet, totaled
$5.4 million
, and the balance of the Line of Credit included in notes payable on the Consolidated Balance Sheet was
$3.3 million
.
$85.0 Million Revolving Credit Facility
In June 2010, we entered into a $35.0 million revolving credit facility with SunTrust Bank, N.A., which was set to mature in June 2013 (the "Facility"). Subsequent to June 2010, the Facility was increased to $85.0 million.
On August 2, 2012, we terminated the $85.0 million revolving credit facility with SunTrust Bank, N.A. and entered into a new credit facility with Wells Fargo Bank, N.A., which is discussed above. In connection with the termination of the SunTrust Bank, N.A. revolving credit facility, we recorded a charge of $0.7 million to interest expense during the year ended December 31, 2012 for previously capitalized transaction costs associated with this revolving credit facility.
Preferred Trust Securities
In connection with the Summit Partners Transactions, our subsidiary, LOTS Intermediate Co. issued $35.0 million of fixed/floating rate preferred trust securities due in 2037. The preferred trust securities accrued interest at a rate of 9.61% per annum until the June 2012 interest payment date, thereafter, interest accrues at a rate of 3-month LIBOR plus 4.10% for each interest rate period. We were not permitted to redeem the preferred trust securities until after the June 2012 interest payment date, and we may now redeem the preferred trust securities, in whole or in part, at a price equal to 100% of the principal amount of such preferred trust securities outstanding plus accrued and unpaid interest. Interest is payable quarterly.
The indenture governing the preferred trust securities contains various affirmative and negative covenants, including limitations on the sale of capital stock of our significant subsidiaries, mergers and consolidations and the ability to grant a lien on the capital stock of our significant subsidiaries unless such security interests are secured indebtedness of not more than $20 million, in the aggregate, at any one time. The limitation on the ability to issue, sell or dispose of the capital stock of significant subsidiaries are not applicable if such transactions are made at fair value and we retain at least 80% of the ownership of such subsidiary.
The indenture governing the preferred trust securities also contains customary events of default, including failure to pay any principal or interest when due, failure to comply with covenants or agreements contained in the indenture or preferred trust securities, cross defaults with other indebtedness of payment of principal or acceleration of principal payments and bankruptcy events.
At
December 31, 2013
, we have a single interest rate swap (the "Swap") designated as a cash flow hedge with Wells Fargo Bank, N.A., pursuant to which we swapped the floating rate portion of our $35.0 million in outstanding preferred trust securities to a fixed rate of 3.47% per annum payable quarterly resulting in a total rate of 7.57% after adding the applicable margin of 4.10%. The Swap has a five year term, which commenced in June 2012 when the interest rate on the underlying preferred trust securities began to float, and will expire in June 2017. Please see the Note, "Derivative Financial Instruments - Interest Rate Swap" in the Notes to Consolidated Financial Statements included in included in ITEM 8 of this
Form 10-K
, for additional information.
Invested Assets
Our invested assets consist mainly of high quality investments in fixed maturity securities, short-term investments, and a smaller allocation of common and preferred equity securities. We believe that prudent levels of investments in equity securities within our investment portfolio are likely to enhance long-term after-tax total returns without significantly increasing the risk profile of the portfolio. We regularly review our entire portfolio in the context of macroeconomic and capital market conditions. The overall credit quality of the investment portfolio was rated AA- by Standard and Poor's Rating Service at
December 31, 2013
and A+ at
December 31, 2012
, respectively.
Regulatory Requirements
Our investments must comply with applicable laws and regulations, which prescribe the kind, quality and concentration of investments we are permitted to make. In general, these laws and regulations permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common equity securities, mortgage loans, real estate and other investments.
Investment Strategy
Our investment policy and strategy is reviewed and approved by the board of directors of each of our insurance company subsidiaries on a regular basis in order to review and consider investment activities, tactics and new investment opportunities. Our investment strategy seeks long-term returns through disciplined security selection, portfolio diversity and an integrated approach to risk management. We select and monitor investments to balance the goals of safety, stability, liquidity, growth and after-tax total return with the need to comply with regulatory investment requirements. Our investment portfolio is managed by a third-party provider of asset management services, which specializes in the insurance sector. Asset/liability management is accomplished by setting an asset target duration range that is influenced by the following factors: (i) the estimated reserve payout pattern, (ii) the inclusion of our tactical capital market views into the investment decision making process and (iii) our overall risk tolerance. We aim to achieve a relatively safe and stable income stream by maintaining a broad-based portfolio of investment grade fixed maturity securities. These holdings are supplemented by investments in additional asset types with the objective of further enhancing the portfolio's diversification and expected returns. These additional asset types include common and redeemable preferred stock. We manage our investment risks through consideration of duration of liabilities, diversification, credit limits, careful analytic review of each investment decision, and comprehensive risk assessments of the overall portfolio.
As of
December 31, 2013
, we held
161
individual fixed maturity and
11
individual equity securities in unrealized loss positions. We do not intend to sell the investments that are in an unrealized loss position at
December 31, 2013
and it is more likely than not that we will be able to hold these securities until full recovery of their amortized cost basis for fixed maturity securities or cost for equity securities, although we can give no assurances. As of
December 31, 2013
, based on our quarterly review, none of the fixed maturity or equity securities were deemed to be other-than-temporarily impaired based on the analysis of the securities and our intent to hold the securities until recovery.
As of
December 31, 2012
, we held
29
individual fixed maturity and
three
individual equity securities in unrealized loss positions. We do not intend to sell the investments that are in an unrealized loss position at
December 31, 2012
and it is more likely than not that we will be able to hold these securities until full recovery of their amortized cost basis for fixed maturity securities or cost for equity securities, although we can give no assurances. At
December 31, 2012
, based on our quarterly review, we deemed that a single equity security was other than temporarily impaired and recorded an impairment charge of $16.0 thousand for the year ended
December 31, 2012
.
Cash Flows
We monitor cash flows at the consolidated, holding company and subsidiary levels. Cash flow forecasts at the consolidated and subsidiary levels are provided on a monthly basis using trend and variance analysis to project future cash needs, with adjustments made as needed. The table below shows our cash flows for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Years Ended December 31,
|
|
Cash provided by (used in):
|
2013
|
|
2012
|
|
2011
|
|
Operating activities
|
$
|
40,458
|
|
|
$
|
31,988
|
|
|
$
|
11,166
|
|
|
Investing activities
|
54,110
|
|
|
(59,291
|
)
|
|
(45,795
|
)
|
|
Financing activities
|
(88,096
|
)
|
|
11,173
|
|
|
22,579
|
|
|
Net change in cash and cash equivalents
|
$
|
6,472
|
|
|
$
|
(16,130
|
)
|
|
$
|
(12,050
|
)
|
Our Consolidated Statements of Cash Flows includes the cash flows from Bliss and Glennon and eReinsure. Our Consolidated Balance Sheets as of
December 31, 2013
reflect Bliss and Glennon and eReinsure as discontinued operations.
Operating Activities
Net cash provided by operating activities was
$40.5 million
and
$32.0 million
for the years ended December 31, 2013 and December 31, 2012, respectively. The increase in 2013, compared to 2012 was primarily attributable to a higher net income and an increase in accrued expenses, accounts payable and other liabilities, unearned premiums and deferred revenue, which was partially offset by increases in accounts and premiums receivable, net, other receivables, reinsurance receivables and the gain on discontinued operations.
Net cash provided by operating activities was
$32.0 million
and
$11.2 million
for the years ended December 31, 2012 and 2011, respectively. The increase in 2012, compared to 2011, was primarily attributable to our net income and an increase in accrued expenses, accounts payable and other liabilities and unearned premiums, which was partially offset by increases in reinsurance receivables, accounts and premiums receivable, net, and other receivables.
Investing Activities
Net cash provided by investing activities was
$54.1 million
for
the year ended December 31, 2013
compared to net cash used in investing activities of
$59.3 million
for the year ended December 31, 2012. The increase in net cash provided by investing activities in 2013, compared to net cash used in investing activities in 2012, was primarily attributable to the proceeds we received from the Disposition. In addition, 2013 had higher proceeds from maturities and sales of fixed maturity investments due to more investment sales in 2013 compared to 2012. Also contributing to cash provided by investing activities was the proceeds received on the related party note receivable. The cash provided by investing activities in 2013, was partially offset by an increase in funds used to purchase fixed maturity and equity securities and cash used to purchase RICC.
Net cash used in investing activities was
$59.3 million
and
$45.8 million
for the years ended December 31, 2012 and 2011, respectively. The increase in net cash used in 2012 compared to 2011 was primarily due to a higher usage of cash for our investment portfolio activity. These uses of cash were partially offset by a lower usage of cash for our 2012 acquisitions compared to the amount of funds used for acquisitions in 2011.
Financing Activities
Net cash used in financing activities was
$88.1 million
for
the year ended December 31, 2013
compared to net cash provided by financing activities of
$11.2 million
for the year ended December 31, 2012. The cash used in 2013 primarily reflected the use of
$101.9 million
to pay off our credit facility, with $81.8 million of those funds received from the Disposition and the use of
$1.4 million
to repurchase
200,000
shares of our common stock under our share repurchase plan. The cash used in financing activities for 2013 was partially offset by borrowings under our lines of credit of
$15.8 million
.
Net cash provided by financing activities was
$11.2 million
and
$22.6 million
for the years ended December 31, 2012 and December 31, 2011, respectively. The decline in cash provided by financing activities in 2012 reflected lower net borrowings under our lines of credit, which was partially offset by the use of $3.9 million to repurchase 508,080 shares of our common stock under our share repurchase plan. Payments and proceeds from our notes payables were also higher for the year ended December 31, 2012, compared to the same period in 2011, due to the payoff of our SunTrust Bank, N.A. revolving credit facility and the entry into the new Wells Fargo Bank, N.A. credit facility.
Contractual Obligations and Other Commitments
We have obligations and commitments to third parties as a result of our operations. These obligations and commitments, as of
December 31, 2013
, are detailed in the table below by maturity date as of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Payments Due by Period
|
|
|
|
Less than
|
|
|
More than
|
|
|
Total
|
1 Year
|
1-3 Years
|
4-5 Years
|
5 Years
|
|
Notes payable
(1)
|
$
|
3,273
|
|
$
|
3,273
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Preferred trust securities
|
35,000
|
|
—
|
|
—
|
|
—
|
|
35,000
|
|
|
Interest payable on total debt
(2)
|
68,247
|
|
5,664
|
|
11,230
|
|
9,919
|
|
41,434
|
|
|
Operating leases
|
15,417
|
|
2,034
|
|
4,193
|
|
3,771
|
|
5,419
|
|
|
Capital leases
(3)
|
134
|
|
134
|
|
—
|
|
—
|
|
—
|
|
|
Policyholder account balances
|
23,486
|
|
1,408
|
|
2,882
|
|
2,928
|
|
16,268
|
|
|
Unpaid claims
(4)
|
34,732
|
|
29,147
|
|
5,363
|
|
214
|
|
8
|
|
|
Total
|
$
|
180,289
|
|
$
|
41,660
|
|
$
|
23,668
|
|
$
|
16,832
|
|
$
|
98,129
|
|
(1)
- For more information on our note(s) payable, please see the sections above titled "$75.0 Million Credit Facility" and "$15.0 Revolving Line of Credit - Synovus" in this MD&A and the Note, "Notes Payable" in the Notes to Consolidated Financial Statements included in ITEM 8 of his
Form 10-K
.
(2)
- Interest payable on total debt is wholly attributable to the amount due on our preferred trust securities at December 31, 2013, since we did not have an outstanding balance on our Wells Fargo Bank, N.A., credit facility. In addition, we considered the amount of
interest expense due on our revolving line of credit facility with Synovus Bank to be immaterial to the financial statements and accordingly, excluded that amount in the above table. Due to the impact of the interest rate swap on the preferred trust securities interest payable, we made certain assumptions regarding future interest rates, which are as follows:
|
|
|
|
a.
|
For interest payable on the preferred trust securities, we used the interest rate swap in effect of 7.57% until June 2017, subsequent to that date we utilized the contractual spread amount of 410 basis points plus the 3-month forward LIBOR curve rate.
|
(3)
- Includes the interest portion of the capital lease payments.
(4)
- Estimated. Net unpaid claims are: total
$13,074
; less than 1 year
$10,972
; 1-3 years
$2,019
; 4-5 years
$80
; and more than 5 years
$3
.
As part of the 2012 acquisition of ProtectCELL, we have a conditional commitment to provide up to $10.2 million of additional capital ("Additional Fortegra Capital Contributions") to ProtectCELL if the board of directors of ProtectCELL (the "PC Board") determines that ProtectCELL requires additional funds to support expansion and growth, or other appropriate business needs.
We are obligated to evaluate any such funding request received from the PC Board in good faith to determine whether in our reasonable business judgment the requested capital should be contributed. We are not required to honor the funding request from the PC Board if we in good faith deem the request to be imprudent or unjustified.
The benefits of such additional funding would inure to us and to the non-controlling ownership interest of ProtectCELL, in proportion to their respective ownership interests. However, in return for each $1,000 of Additional Fortegra Capital Contributions, we would receive one Series A Preferred Unit. Any unreturned Series A Preferred contribution is deducted from ProtectCELL's valuation in determining the option price.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that are reasonably likely to have a material effect on our financial condition, results of operations, liquidity or capital resources.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Fortegra Financial Corporation
We have audited the accompanying consolidated balance sheet of Fortegra Financial Corporation and subsidiaries as of December 31, 2013, and the related statements of income, comprehensive income, stockholders’ equity and cash flows for the year then ended. Our audit also included the financial statement schedule of Fortegra Financial Corporation and subsidiaries listed in Item 15(a). These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. The consolidated financial statements of Fortegra Financial Corporation and subsidiaries as of December 31, 2012, and for the two years then ended were audited by other auditors and whose report, dated March 29, 2013 (except for Note 9, as to which is dated March 14, 2014), expressed an unqualified opinion on those statements.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2013 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fortegra Financial Corporation and subsidiaries as of December 31, 2013, and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Fortegra Financial Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2013, based on criteria established in
Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992, and our report dated March 14, 2014 expressed an unqualified opinion on the effectiveness of Fortgera Financial Corporation and subsidiaries’ internal control over financial reporting.
/s/ McGladrey LLP
Jacksonville, Florida
March 14, 2014
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Fortegra Financial Corporation
We have audited the consolidated balance sheet as of December 31, 2012 and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the years ended December 31, 2012 and 2011 of Fortegra Financial Corporation (“the Company”). Our audit also included the financial statement schedules as of December 31, 2012 and for the year ended December 31, 2012 and 2011 listed in the Index at Item 15. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fortegra Financial Corporation as of December 31, 2012 and the consolidated results of its operations and cash flows for the years ended December 31, 2012 and 2011, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Also, in our opinion, the related financial statement schedules for the year ended December 31, 2012 and 2011, when considered in relation to the basic consolidated financial statements taken as a whole; present fairly in all material respects the information set forth therein.
/s/ Johnson Lambert LLP
Jacksonville, Florida
March 29, 2013 (except for Note 9, as to which is dated March 14, 2014)
FORTEGRA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(All Amounts in Thousands, Except Share and Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2013
|
|
2012
|
|
Assets:
|
|
|
|
|
Investments:
|
|
|
|
|
Fixed maturity securities available-for-sale, at fair value (amortized cost of $133,288 at December 31, 2013 and $107,095 at December 31, 2012)
|
$
|
131,751
|
|
|
$
|
110,641
|
|
|
Equity securities available-for-sale, at fair value (cost of $7,081 at December 31, 2013 and $6,082 at December 31, 2012)
|
6,198
|
|
|
6,220
|
|
|
Short-term investments
|
871
|
|
|
1,222
|
|
|
Total investments
|
138,820
|
|
|
118,083
|
|
|
Cash and cash equivalents
|
21,681
|
|
|
15,209
|
|
|
Restricted cash
|
17,293
|
|
|
31,142
|
|
|
Accrued investment income
|
1,175
|
|
|
1,235
|
|
|
Notes receivable, net
|
11,920
|
|
|
11,290
|
|
|
Accounts and premiums receivable, net
|
18,702
|
|
|
27,302
|
|
|
Other receivables
|
33,409
|
|
|
13,393
|
|
|
Reinsurance receivables
|
215,084
|
|
|
203,988
|
|
|
Deferred acquisition costs
|
78,042
|
|
|
59,320
|
|
|
Property and equipment, net
|
14,332
|
|
|
17,900
|
|
|
Goodwill
|
73,701
|
|
|
127,679
|
|
|
Other intangible assets, net
|
49,173
|
|
|
70,310
|
|
|
Income taxes receivable
|
—
|
|
|
2,919
|
|
|
Other assets
|
6,307
|
|
|
7,667
|
|
|
Assets of discontinued operations
|
791
|
|
|
—
|
|
|
Total assets
|
$
|
680,430
|
|
|
$
|
707,437
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Unpaid claims
|
$
|
34,732
|
|
|
$
|
33,007
|
|
|
Unearned premiums
|
256,380
|
|
|
235,900
|
|
|
Policyholder account balances
|
23,486
|
|
|
26,023
|
|
|
Accrued expenses, accounts payable and other liabilities
|
53,035
|
|
|
58,660
|
|
|
Income taxes payable
|
2,842
|
|
|
—
|
|
|
Deferred revenue
|
76,927
|
|
|
55,043
|
|
|
Notes payable
|
3,273
|
|
|
89,438
|
|
|
Preferred trust securities
|
35,000
|
|
|
35,000
|
|
|
Deferred income taxes, net
|
19,659
|
|
|
28,651
|
|
|
Liabilities of discontinued operations
|
8,603
|
|
|
—
|
|
|
Total liabilities
|
513,937
|
|
|
561,722
|
|
|
Commitments and Contingencies (Note 25)
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity:
|
|
|
|
|
Preferred stock, par value $0.01; 10,000,000 shares authorized; none issued
|
—
|
|
|
—
|
|
|
Common stock, par value $0.01; 150,000,000 shares authorized; 20,912,853 and 20,710,370 shares issued at December 31, 2013 and 2012, respectively, including shares in treasury
|
209
|
|
|
207
|
|
|
Treasury stock, at cost; 1,224,182 shares and 1,024,212 shares at December 31, 2013 and 2012, respectively
|
(8,014
|
)
|
|
(6,651
|
)
|
|
Additional paid-in capital
|
99,398
|
|
|
97,641
|
|
|
Accumulated other comprehensive loss, net of tax
|
(3,665
|
)
|
|
(631
|
)
|
|
Retained earnings
|
72,532
|
|
|
49,817
|
|
|
Stockholders' equity before non-controlling interests
|
160,460
|
|
|
140,383
|
|
|
Non-controlling interests
|
6,033
|
|
|
5,332
|
|
|
Total stockholders' equity
|
166,493
|
|
|
145,715
|
|
|
Total liabilities and stockholders' equity
|
$
|
680,430
|
|
|
$
|
707,437
|
|
See accompanying Notes to Consolidated Financial Statements.
FORTEGRA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(All Amounts in Thousands, Except Share and Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Revenues:
|
|
|
|
|
|
|
Service and administrative fees
|
$
|
172,427
|
|
|
$
|
90,550
|
|
|
$
|
94,464
|
|
|
Ceding commissions
|
32,824
|
|
|
34,825
|
|
|
29,495
|
|
|
Net investment income
|
3,050
|
|
|
3,067
|
|
|
3,368
|
|
|
Net realized investment gains
|
2,043
|
|
|
3
|
|
|
4,193
|
|
|
Net earned premium
|
136,787
|
|
|
127,625
|
|
|
115,503
|
|
|
Other income
|
736
|
|
|
269
|
|
|
170
|
|
|
Total revenues
|
347,867
|
|
|
256,339
|
|
|
247,193
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
41,567
|
|
|
40,219
|
|
|
37,949
|
|
|
Member benefit claims
|
46,019
|
|
|
4,642
|
|
|
4,409
|
|
|
Commissions
|
154,606
|
|
|
128,741
|
|
|
126,918
|
|
|
Personnel costs
|
39,487
|
|
|
28,475
|
|
|
26,021
|
|
|
Other operating expenses
|
35,117
|
|
|
24,233
|
|
|
23,739
|
|
|
Depreciation and amortization
|
4,858
|
|
|
3,275
|
|
|
2,662
|
|
|
Amortization of intangibles
|
5,527
|
|
|
2,742
|
|
|
2,819
|
|
|
Interest expense
|
3,621
|
|
|
4,334
|
|
|
4,690
|
|
|
(Gain) Loss on sale of subsidiary
|
(402
|
)
|
|
—
|
|
|
477
|
|
|
Total expenses
|
330,400
|
|
|
236,661
|
|
|
229,684
|
|
|
Income from continuing operations before income taxes
|
17,467
|
|
|
19,678
|
|
|
17,509
|
|
|
Income taxes - continuing operations
|
5,660
|
|
|
6,716
|
|
|
5,947
|
|
|
Income from continuing operations before non-controlling interests
|
11,807
|
|
|
12,962
|
|
|
11,562
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
Income from discontinued operations - net of tax
|
3,546
|
|
|
2,275
|
|
|
1,777
|
|
|
Gain on sale of discontinued operations - net of tax
|
8,844
|
|
|
—
|
|
|
—
|
|
|
Discontinued operations - net of tax
|
12,390
|
|
|
2,275
|
|
|
1,777
|
|
|
Net income before non-controlling interests
|
24,197
|
|
|
15,237
|
|
|
13,339
|
|
|
Less: net income (loss) attributable to non-controlling interests
|
1,482
|
|
|
72
|
|
|
(170
|
)
|
|
Net income attributable to Fortegra Financial Corporation
|
$
|
22,715
|
|
|
$
|
15,165
|
|
|
$
|
13,509
|
|
|
|
|
|
|
|
|
|
Earnings per share - Basic:
|
|
|
|
|
|
|
Net income from continuing operations - net of tax
|
$
|
0.53
|
|
|
$
|
0.65
|
|
|
$
|
0.57
|
|
|
Discontinued operations - net of tax
|
0.64
|
|
|
0.12
|
|
|
0.09
|
|
|
Net income attributable to Fortegra Financial Corporation
|
$
|
1.17
|
|
|
$
|
0.77
|
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
Earnings per share - Diluted:
|
|
|
|
|
|
|
Net income from continuing operations - net of tax
|
$
|
0.50
|
|
|
$
|
0.63
|
|
|
$
|
0.55
|
|
|
Discontinued operations - net of tax
|
0.61
|
|
|
0.11
|
|
|
0.09
|
|
|
Net income attributable to Fortegra Financial Corporation
|
$
|
1.11
|
|
|
$
|
0.74
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
Basic
|
19,477,802
|
|
|
19,655,492
|
|
|
20,352,027
|
|
|
Diluted
|
20,482,652
|
|
|
20,600,362
|
|
|
21,265,801
|
|
See accompanying Notes to Consolidated Financial Statements.
FORTEGRA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(All Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Net income attributable to Fortegra Financial Corporation
|
$
|
22,715
|
|
|
$
|
15,165
|
|
|
$
|
13,509
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
Unrealized gains (losses) on available-for-sale securities:
|
|
|
|
|
|
|
Unrealized holding (losses) gains arising during the period
|
(4,061
|
)
|
|
2,473
|
|
|
1,568
|
|
|
Related tax benefit (expense)
|
1,421
|
|
|
(865
|
)
|
|
(550
|
)
|
|
Reclassification of (gains) included in net income
|
(2,043
|
)
|
|
(3
|
)
|
|
(4,193
|
)
|
|
Related tax expense
|
715
|
|
|
1
|
|
|
1,468
|
|
|
Unrealized (losses) gains on available-for-sale securities, net of tax
|
(3,968
|
)
|
|
1,606
|
|
|
(1,707
|
)
|
|
|
|
|
|
|
|
|
Interest rate swap:
|
|
|
|
|
|
|
Unrealized gain (loss) on interest rate swap
|
277
|
|
|
(1,007
|
)
|
|
(3,601
|
)
|
|
Related tax (expense) benefit
|
(97
|
)
|
|
352
|
|
|
1,260
|
|
|
Reclassification of losses included in net income
|
1,132
|
|
|
270
|
|
|
—
|
|
|
Related tax benefit
|
(396
|
)
|
|
(94
|
)
|
|
—
|
|
|
Unrealized gain (loss) on interest rate swap, net of tax
|
916
|
|
|
(479
|
)
|
|
(2,341
|
)
|
|
Other comprehensive (loss) income before non-controlling interests, net of tax
|
(3,052
|
)
|
|
1,127
|
|
|
(4,048
|
)
|
|
Less: comprehensive (loss) income attributable to non-controlling interests
|
(18
|
)
|
|
4
|
|
|
(1
|
)
|
|
Other comprehensive (loss) income
|
(3,034
|
)
|
|
1,123
|
|
|
(4,047
|
)
|
|
Comprehensive income attributable to Fortegra Financial Corporation
|
$
|
19,681
|
|
|
$
|
16,288
|
|
|
$
|
9,462
|
|
See accompanying Notes to Consolidated Financial Statements.
FORTEGRA FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(All Amounts in Thousands, Except Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Treasury Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Additional Paid-in Capital
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Retained Earnings
|
|
Non-controlling Interests
|
|
Total Stockholders' Equity
|
|
Balance, December 31, 2010
|
20,256,735
|
|
|
$
|
203
|
|
|
(44,578
|
)
|
|
$
|
(176
|
)
|
|
$
|
95,556
|
|
|
$
|
2,293
|
|
|
$
|
21,143
|
|
|
$
|
682
|
|
|
$
|
119,701
|
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,509
|
|
|
(170
|
)
|
|
13,339
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,047
|
)
|
|
—
|
|
|
(1
|
)
|
|
(4,048
|
)
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
763
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
763
|
|
|
Shares issued for the Employee Stock Purchase Plan
|
10,167
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
58
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
58
|
|
|
Treasury stock purchased
|
—
|
|
|
—
|
|
|
(471,554
|
)
|
|
(2,552
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,552
|
)
|
|
Options exercised, net of forfeitures
|
294,426
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
648
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
651
|
|
|
Initial public offering costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(826
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(826
|
)
|
|
Balance, December 31, 2011
|
20,561,328
|
|
|
$
|
206
|
|
|
(516,132
|
)
|
|
$
|
(2,728
|
)
|
|
$
|
96,199
|
|
|
$
|
(1,754
|
)
|
|
$
|
34,652
|
|
|
$
|
511
|
|
|
$
|
127,086
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,165
|
|
|
72
|
|
|
15,237
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,123
|
|
|
—
|
|
|
4
|
|
|
1,127
|
|
|
Stock-based compensation
|
87,011
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1,043
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,044
|
|
|
Direct stock awards to employees
|
6,020
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
49
|
|
|
—
|
|
|
—
|
|
|
|
|
49
|
|
|
Shares issued for the Employee Stock Purchase Plan
|
53,511
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
330
|
|
|
|
|
|
|
|
|
330
|
|
|
Treasury stock purchased
|
—
|
|
|
—
|
|
|
(508,080
|
)
|
|
(3,923
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,923
|
)
|
|
Options exercised, net of forfeitures
|
2,500
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20
|
|
|
Non-controlling interest attributable to ProtectCELL acquisition
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,745
|
|
|
4,745
|
|
|
Balance, December 31, 2012
|
20,710,370
|
|
|
$
|
207
|
|
|
(1,024,212
|
)
|
|
$
|
(6,651
|
)
|
|
$
|
97,641
|
|
|
$
|
(631
|
)
|
|
$
|
49,817
|
|
|
$
|
5,332
|
|
|
$
|
145,715
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
22,715
|
|
|
1,482
|
|
|
24,197
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,034
|
)
|
|
—
|
|
|
(18
|
)
|
|
(3,052
|
)
|
|
Dividends paid to non-controlling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(43
|
)
|
|
(43
|
)
|
|
Distributions to non-controlling interest partners
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(720
|
)
|
|
(720
|
)
|
|
Stock-based compensation
|
130,784
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1,329
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,330
|
|
|
Direct stock awards to employees
|
4,113
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
31
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
31
|
|
|
Shares issued for the Employee Stock Purchase Plan
|
61,336
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
357
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
358
|
|
|
Treasury stock purchased, net of issuances
|
—
|
|
|
—
|
|
|
(199,970
|
)
|
|
(1,363
|
)
|
|
(9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,372
|
)
|
|
Options exercised, net of forfeitures
|
6,250
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
49
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
49
|
|
|
Balance, December 31, 2013
|
20,912,853
|
|
|
$
|
209
|
|
|
(1,224,182
|
)
|
|
$
|
(8,014
|
)
|
|
$
|
99,398
|
|
|
$
|
(3,665
|
)
|
|
$
|
72,532
|
|
|
$
|
6,033
|
|
|
$
|
166,493
|
|
See accompanying Notes to Consolidated Financial Statements.
FORTEGRA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Operating Activities
|
|
|
|
|
|
|
Net income
|
$
|
22,715
|
|
|
$
|
15,165
|
|
|
$
|
13,509
|
|
|
Adjustments to reconcile net income to net cash flows provided by operating activities:
|
|
|
|
|
|
|
Change in deferred acquisition costs
|
(18,722
|
)
|
|
(3,692
|
)
|
|
3,908
|
|
|
Depreciation and amortization
|
12,930
|
|
|
8,886
|
|
|
8,029
|
|
|
Deferred income tax (benefit) expense - continuing operations
|
(2,318
|
)
|
|
2,444
|
|
|
1,150
|
|
|
Deferred income tax expense - discontinued operations
|
428
|
|
|
1,808
|
|
|
571
|
|
|
Net realized investment gains
|
(2,043
|
)
|
|
(3
|
)
|
|
(4,193
|
)
|
|
Gain on sale of discontinued operations, net of tax
|
(8,844
|
)
|
|
—
|
|
|
—
|
|
|
(Gain) loss on sale of subsidiary
|
(402
|
)
|
|
—
|
|
|
477
|
|
|
Stock-based compensation expense
|
1,330
|
|
|
1,044
|
|
|
763
|
|
|
Direct stock awards to employees
|
31
|
|
|
49
|
|
|
—
|
|
|
Amortization of premiums and accretion of discounts on investments
|
1,496
|
|
|
1,283
|
|
|
609
|
|
|
Non-controlling interests
|
1,482
|
|
|
72
|
|
|
(170
|
)
|
|
Change in allowance for doubtful accounts
|
(46
|
)
|
|
(90
|
)
|
|
(31
|
)
|
|
Changes in operating assets and liabilities, net of the effects of acquisitions and dispositions:
|
|
|
|
|
|
|
Accrued investment income
|
78
|
|
|
(306
|
)
|
|
(16
|
)
|
|
Accounts and premiums receivable, net
|
(8,338
|
)
|
|
(4,933
|
)
|
|
(898
|
)
|
|
Other receivables
|
(19,997
|
)
|
|
(4,139
|
)
|
|
(1,769
|
)
|
|
Reinsurance receivables
|
(10,896
|
)
|
|
(9,248
|
)
|
|
(5,181
|
)
|
|
Income taxes receivable
|
2,874
|
|
|
(3,628
|
)
|
|
818
|
|
|
Other assets
|
1,203
|
|
|
865
|
|
|
(389
|
)
|
|
Unpaid claims
|
1,525
|
|
|
248
|
|
|
(315
|
)
|
|
Unearned premiums
|
20,480
|
|
|
7,971
|
|
|
14,373
|
|
|
Policyholder account balances
|
(2,537
|
)
|
|
(2,017
|
)
|
|
(45
|
)
|
|
Accrued expenses, accounts payable and other liabilities
|
22,758
|
|
|
20,190
|
|
|
(14,909
|
)
|
|
Income taxes payable
|
2,802
|
|
|
(1,344
|
)
|
|
1,344
|
|
|
Deferred revenue
|
22,469
|
|
|
1,363
|
|
|
(6,469
|
)
|
|
Net cash flows provided by operating activities
|
40,458
|
|
|
31,988
|
|
|
11,166
|
|
|
Investing activities
|
|
|
|
|
|
|
Proceeds from maturities, calls and prepayments of available-for-sale investments
|
10,297
|
|
|
11,138
|
|
|
9,691
|
|
|
Proceeds from sales of available-for-sale investments
|
54,663
|
|
|
8,364
|
|
|
62,300
|
|
|
Net change in short-term investments
|
351
|
|
|
100
|
|
|
100
|
|
|
Purchases of available-for-sale investments
|
(90,849
|
)
|
|
(40,445
|
)
|
|
(62,147
|
)
|
|
Purchases of property and equipment
|
(3,268
|
)
|
|
(5,830
|
)
|
|
(6,280
|
)
|
|
Net paid for acquisitions of subsidiaries, net of cash received
|
(3,112
|
)
|
|
(21,820
|
)
|
|
(49,873
|
)
|
|
Sale of subsidiaries, net of cash received (paid)
|
83,975
|
|
|
—
|
|
|
(153
|
)
|
|
Net issuance of notes receivable
|
(6,765
|
)
|
|
(1,346
|
)
|
|
(975
|
)
|
|
Net proceeds from related party note receivable
|
6,135
|
|
|
—
|
|
|
—
|
|
|
Change in restricted cash, net of restricted cash received (paid) from acquisitions and divestitures
|
2,683
|
|
|
(9,452
|
)
|
|
1,542
|
|
|
Net cash flows provided by (used in) investing activities
|
54,110
|
|
|
(59,291
|
)
|
|
(45,795
|
)
|
|
Financing activities
|
|
|
|
|
|
|
Payments on notes payable
|
(101,938
|
)
|
|
(130,450
|
)
|
|
(74,263
|
)
|
|
Proceeds from notes payable
|
15,773
|
|
|
146,888
|
|
|
110,550
|
|
|
Capitalized closing costs for notes payable
|
(202
|
)
|
|
(1,692
|
)
|
|
—
|
|
|
Payments for initial public offering costs
|
—
|
|
|
—
|
|
|
(826
|
)
|
|
Payments on redeemable preferred stock
|
—
|
|
|
—
|
|
|
(11,040
|
)
|
|
Net proceeds from exercise of stock options
|
49
|
|
|
20
|
|
|
607
|
|
|
Excess tax benefits from stock-based compensation
|
—
|
|
|
—
|
|
|
45
|
|
|
Purchase of treasury stock
|
(1,372
|
)
|
|
(3,923
|
)
|
|
(2,552
|
)
|
|
Net proceeds received from stock issued in the Employee Stock Purchase Plan
|
357
|
|
|
330
|
|
|
58
|
|
|
Distributions to non-controlling interest partners
|
(720
|
)
|
|
—
|
|
|
—
|
|
|
Dividends paid to non-controlling interests
|
(43
|
)
|
|
—
|
|
|
—
|
|
|
Net cash flows (used in) provided by financing activities
|
(88,096
|
)
|
|
11,173
|
|
|
22,579
|
|
|
Net increase (decrease) in cash and cash equivalents
|
6,472
|
|
|
(16,130
|
)
|
|
(12,050
|
)
|
|
Cash and cash equivalents, beginning of period
|
15,209
|
|
|
31,339
|
|
|
43,389
|
|
|
Cash and cash equivalents, end of period
|
$
|
21,681
|
|
|
$
|
15,209
|
|
|
$
|
31,339
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash payments for:
|
|
|
|
|
|
|
Interest
|
$
|
5,493
|
|
|
$
|
5,292
|
|
|
$
|
6,184
|
|
|
Income taxes
|
3,877
|
|
|
8,684
|
|
|
3,451
|
|
|
Non-cash investing activities
|
|
|
|
|
|
|
Non-cash consideration received from the sale of subsidiary
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,143
|
|
See accompanying Notes to Consolidated Financial Statements.
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Nature of Operations
Fortegra Financial Corporation (references in this
Form 10-K
to "Fortegra Financial," "Fortegra," "we," "us," "the Company" or similar terms refer to Fortegra Financial Corporation and its subsidiaries), traded on the New York Stock Exchange under the symbol:
FRF
, is an insurance services company headquartered in Jacksonville, Florida. Fortegra offers a wide array of revenue enhancing products, including payment protection products, motor club memberships, service contracts, device and warranty services, and administration services, to our business partners, including insurance companies, retailers, dealers, insurance brokers and agents and financial services companies. In 2008, the Company changed its name from Life of the South Corporation to Fortegra Financial Corporation. The Company was incorporated in 1981 in the State of Georgia and re-incorporated in the State of Delaware in 2010. Most of the Company's business is generated through networks of small to mid-sized community and regional banks, small loan companies, independent wireless retailers and automobile dealerships. The Company's subsidiaries (100% direct or indirect ownership, unless otherwise noted below) at
December 31, 2013
, are as follows:
|
|
|
|
•
|
4Warranty Corporation ("4Warranty")
|
|
|
|
|
•
|
Auto Knight Motor Club, Inc. ("Auto Knight")
|
|
|
|
|
•
|
Continental Car Club, Inc. ("Continental")
|
|
|
|
|
•
|
CRC Reassurance Company, Ltd. ("CRC") *
|
|
|
|
|
•
|
Digital Leash, LLC, d/b/a ProtectCELL ("ProtectCELL"),
62.4%
owned
|
|
|
|
|
•
|
Insurance Company of the South ("ICOTS") *
|
|
|
|
|
•
|
Life of the South Insurance Company ("LOTS") * and its subsidiary, Bankers Life of Louisiana ("Bankers Life") *
|
|
|
|
|
•
|
LOTS Intermediate Co. ("LOTS IM")
|
|
|
|
|
•
|
LOTS Reassurance Company ("LOTS RE") *
|
|
|
|
|
•
|
Lyndon Southern Insurance Company ("Lyndon Southern") *
|
|
|
|
|
•
|
Pacific Benefits Group Northwest, LLC ("PBG")
|
|
|
|
|
•
|
Response Indemnity Company of California ("RICC") *
|
|
|
|
|
•
|
South Bay Acceptance Corporation ("South Bay")
|
|
|
|
|
•
|
South Bay Financial Services, LLC ("SBFS")
|
|
|
|
|
•
|
Southern Financial Life Insurance Company ("SFLAC"),
85.0%
owned *
|
|
|
|
|
•
|
United Motor Club of America, Inc. ("United")
|
* = Insurance company subsidiary
1. Basis of Presentation
These Consolidated Financial Statements reflect the consolidated financial statements of Fortegra Financial Corporation and its subsidiaries. The accompanying Consolidated Financial Statements of Fortegra have been prepared in conformity with generally accepted accounting principles in the United States of America ("U.S. GAAP") promulgated by the Financial Accounting Standards Board ("FASB") and the Accounting Standards Codification ("ASC").
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed in the preparation of the Consolidated Financial Statements:
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Fortegra Financial Corporation and its majority-owned and controlled subsidiaries. All material intercompany account balances and transactions have been eliminated.
Non-Controlling Interests
The third-party ownership of the common stock of SFLAC and of the ownership interests of ProtectCELL, which is treated as a partnership for income tax purposes, have been reflected as non-controlling interests on the Consolidated Balance Sheets. The following table shows the amount outstanding and the percentage of non-controlling interest by entity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
Amount
|
Percent
|
|
Amount
|
Percent
|
|
Amount
|
Percent
|
|
ProtectCELL
|
$
|
5,471
|
|
37.6
|
%
|
|
$
|
4,745
|
|
37.6
|
%
|
|
$
|
—
|
|
—
|
%
|
|
SFLAC
|
562
|
|
15.0
|
%
|
|
587
|
|
15.0
|
%
|
|
511
|
|
15.0
|
%
|
|
Total non-controlling interests
|
$
|
6,033
|
|
|
|
$
|
5,332
|
|
|
|
$
|
511
|
|
|
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Income (loss) attributable to these non-controlling interests has been reflected on the Consolidated Statements of Income as net income (loss) attributable to non-controlling interests and on the Consolidated Statements of Comprehensive Income as comprehensive income (loss) attributable to non-controlling interests.
Certain changes to the Consolidated Balance Sheet amounts for December 31, 2012 have been made in accordance with accounting for business combinations, to reflect the retrospective final valuation adjustments made to the fair values of acquired net assets and the non-controlling interests of ProtectCELL. Please see the Note, "Business Acquisitions," for more information on the final valuation adjustments.
Reportable Segment
The Company reports operating results and financial data in one operating and one reportable segment, Protection Products and Services. Prior to the fourth quarter of 2013, the Company operated in three business segments: (i) Payment Protection, (ii) Business Process Outsourcing and (iii) Brokerage. In connection with the Company's decision to dispose of Bliss and Glennon, Inc. ("Bliss and Glennon") and eReinsure.com, Inc. ("eReinsure") in the fourth quarter of 2013, the Company realigned its reporting structure, to manage its business as a single profit center. Accordingly, we now have one reportable segment. This change is consistent with the Chief Operating Decision Maker's approach to managing the business and related resources. The Company has determined that it's Chief Executive Officer is the Chief Operating Decision Maker. The financial results of the Company's single segment are equal to the net income from continuing operations reported in the Consolidated Statements of Income for all periods presented.
Discontinued Operations
The results of operations of a business of the Company that either has been disposed of or is classified as held-for-sale are reported in discontinued operations if: 1) the operations and cash flows of the component have been or will be eliminated from the ongoing operations of the Company as a result of the disposal transaction and 2) the Company will not have any significant continuing involvement in the operations of the component after the disposal transaction. The Company presents the operations of business(es) that meet the criteria for reporting as discontinued operations, and retrospectively reclassifies operating results for all prior periods presented.
On December 31, 2013, the Company completed the sale of its 100% ownership of Bliss and Glennon and eReinsure, and recognized a gain related to the sale of these businesses in the line "Gain on sale of discontinued operations - net of tax" in the Consolidated Statements of Income for the year ended December 31, 2013. The operating results of these businesses are reported in the line "Income from discontinued operations - net of tax" in the Consolidated Statements of Income for all periods presented. In accordance with accounting guidance, the Company has elected to not separately disclose the cash flows related to the Bliss and Glennon and eReinsure discontinued operations.
In addition, certain assets and liabilities associated with the disposition of Bliss and Glennon and eReinsure that are still subject to final settlement have been reclassified into the line items "Assets of discontinued operations" and "Liabilities of discontinued operations," in the Consolidated Balance Sheet at December 31, 2013. See the Note, "Divestitures," for more information on discontinued operations.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income and other items of comprehensive income. These other items are generally comprised of unrealized gains and losses on investment securities classified as available-for-sale and unrealized gains and losses on the interest rate swap, net of the related tax effects.
Use of Estimates
Preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications and Revision of Previously Issued Consolidated Financial Statements
Certain items in prior consolidated financial statements have been reclassified to conform to the current presentation, which had no impact on net income, comprehensive income or loss, net cash provided by operating activities or stockholders' equity.
Change in Accounting Estimate - Unearned Premium Reserves
Prior to September 30, 2012, the Company's method of estimating unearned premium reserves in relation to the loss patterns and the related recognition of income for certain types of credit property and vendor single interest payment protection products was based on the pro-rata method. The use of the pro-rata method was based on the best information available at the time the Company's financial statements were prepared.
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
During 2011 and 2012, the Company had increased the volume of business related to these product types, thereby increasing the volume of policy and claims data specific to those product types. During the three months ended September 30, 2012, the Company determined it had accumulated a sufficient volume of policy and claims data to be able to perform an actuarial analysis in order to determine the preferable estimation approach. As a result of the analysis of the additional data, the Company gained better insight into its product loss patterns, resulting in improved judgment and estimation to more accurately calculate the unearned premium reserves and the associated recognition of income. Upon completion of the analysis, Management determined that the Rule of 78's applied on a daily basis provides a more accurate representation of historical loss patterns and the recognition of the related income for these products; as such, the estimation method was changed. The change in approach has been accounted for as a change in accounting estimate that is effected by a change in accounting principle and is justifiable in that it is the preferable approach for income recognition based on the Company's actuarial study. This change in accounting estimate was applied prospectively. Summarized below is the effect of the change in accounting estimate on the Consolidated Statement of Income for the following period:
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
September 30, 2012
|
|
Revenues:
|
|
|
Net earned premium
|
$
|
1,845
|
|
|
Ceding commissions
|
2,135
|
|
|
Net increase to total revenues from the change in accounting estimate
|
3,980
|
|
|
Expenses:
|
|
|
Commissions
|
2,739
|
|
|
Other operating expenses
|
(268
|
)
|
|
Net increase to total expenses from the change in accounting estimate
|
2,471
|
|
|
Net increase to income before income taxes from the change in accounting estimate
|
1,509
|
|
|
Income taxes
|
533
|
|
|
Net increase to net income from the change in accounting estimate
|
$
|
976
|
|
|
|
|
|
Increase to earnings per share from the change in accounting estimate:
|
|
|
Basic
|
$
|
0.05
|
|
|
Diluted
|
$
|
0.05
|
|
Subsequent Events
The Company reviewed all material events subsequent to
December 31, 2013
that occurred up to the date the Company's Consolidated Financial Statements were issued to determine whether any event required recognition or disclosure in these Consolidated Financial Statements and/or disclosure in the notes thereto. For more information, please see the Note, "Subsequent Events."
Fair Value
Fair value is defined in the ASC as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The ASC established a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets or liabilities fall within different levels of the hierarchy, the classification is based on the lowest level input that is significant to the fair value measurement of the asset or liability. Classification of assets and liabilities within the hierarchy considers the markets in which the assets and liabilities are traded and the reliability and transparency of the assumptions used to determine fair value. The hierarchy requires the use of observable market data when available. The levels of the hierarchy and those investments included in each are as follows:
Level 1
- Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities traded in active
markets.
Level 2
- Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted
prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable
for the asset or liability and market-corroborated inputs.
Level 3
- Inputs to the valuation methodology are unobservable for the asset or liability and are significant to the fair value
measurement. These unobservable inputs are derived from the Company's internal calculations, estimates and assumptions and
require significant management judgment or estimation.
The Company's policy is to recognize transfers between levels as of the actual date of the event or change in circumstances that caused the transfer.
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash and cash equivalents and restricted cash:
The estimated fair value of cash and cash equivalents and restricted cash approximates their carrying value.
Fixed maturity securities:
Fair values were obtained from market value quotations provided by an independent pricing service.
Equity securities:
The fair values of publicly traded common and preferred stocks were obtained from market value quotations provided by an independent pricing service. The fair values of non-publicly traded common and preferred stocks were based on prices obtained from an independent pricing service.
Notes receivable
:
The carrying amounts approximate fair value because the interest rates charged approximate current market rates for similar credit risks. These values are net of allowance for doubtful accounts.
Accounts and premiums receivable, net, and other receivables:
The carrying amounts approximate fair value since no interest rate is charged on these short duration assets.
Short-term investments:
The carrying amounts approximate fair value because of the short maturities of these instruments.
Notes payable and preferred trust securities:
The carrying amounts approximate fair value because the applicable interest rates approximate current rates offered to the Company for similar instruments.
Interest rate swap:
The fair value of the interest rate swap is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the interest rate swap. This analysis reflects the contractual terms of the interest rate swap, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.
The estimated fair values presented for the Company's investment portfolio are based on prices provided by an independent pricing service and a third party investment manager. The prices provided by these services are based on quoted market prices, when available, non-binding broker quotes, or matrix pricing. The independent pricing service and the third party investment manager provide a single price or quote per security. The Company obtains an understanding of the methods, models and inputs used by the independent pricing service and the third party investment manager, and has controls in place to validate that the amounts provided represent fair values.
Revenue Recognition
The Company's revenues are primarily derived from service and administrative fees, ceding commissions, net investment income and net earned premium.
Service and Administrative Fees
The Company earns service and administrative fees from a variety of activities. Such fees are typically positively correlated with transaction volume and are recognized as revenue as they become both realized and earned.
Service Fees. S
ervice fee revenue is recognized as the services are performed. These services include fulfillment, software development, and claims handling for our customers. Collateral tracking fee income is recognized when the service is performed and billed. Management reviews the financial results under each significant contract on a monthly basis. Any losses that may occur due to a specific contract would be recognized in the period in which the loss is determined probable. During the years ended
December 31, 2013, 2012 and 2011
, the Company has not incurred a loss with respect to a specific significant service fee contract.
Administrative Fees.
Administrative fee revenue includes the administration of credit insurance, debt cancellation programs, motor club programs, and warranty programs. Related administrative fee revenue is recognized consistent with the earnings recognition pattern of the underlying insurance policies, debt cancellation contracts and motor club memberships being administered, using Rule of 78's, modified Rule of 78's, pro rata, or other methods as appropriate for the contract. Management selects the appropriate method based on available information, and periodically reviews the selections as additional information becomes available.
Ceding Commissions
Ceding commissions earned under coinsurance agreements are based on contractual formulas that take into account, in part, underwriting performance and investment returns experienced by the assuming companies. As experience changes, adjustments to the ceding commissions are reflected in the period incurred and are based on the claim experience of the related policy.
The adjustment is calculated by adding the earned premium and investment income from the assets held in trust for the Company's benefit less earned commissions, incurred claims and the reinsurer's fee for the coverage.
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Net Investment Income
The Company earns net investment income from interest and dividends received from the investment portfolio, less portfolio management expenses and interest earned on cash accounts and notes receivable. Investment income also includes any amortization of premiums and accretion of discounts on securities acquired at other than par value.
Net Earned Premium
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.
Net Losses and Loss Adjustment Expenses
Net losses and loss adjustment expenses include actual claims paid and the change in unpaid claim reserves, net of amounts ceded. Incurred claims are impacted by loss frequency, which is the measure of the number of claims per unit of insured exposure, and loss severity, which is based on the average size of claims. Factors affecting loss frequency and loss severity include changes in claims reporting patterns, claims settlement patterns, judicial decisions, legislation, economic conditions, morbidity patterns and the attitudes of claimants towards settlements.
Actual claims paid are claims payments made to the policyholder or beneficiary during the accounting period. The change in unpaid claim reserve is an increase or reduction to the unpaid claim reserve in the accounting period to maintain the unpaid claim reserve at the levels evaluated by our actuaries.
Unpaid claims are reserve estimates that are established in accordance with U.S. GAAP using generally accepted actuarial methods. Credit life and AD&D unpaid claims reserves include claims in the course of settlement and incurred but not reported ("IBNR"). Credit disability unpaid claims reserves also include continuing claim reserves for open disability claims. For all other product lines, unpaid claims reserves are bulk reserves and are entirely IBNR. The Company uses a number of algorithms in establishing its unpaid claims reserves. These algorithms are used to calculate unpaid claims as a function of paid losses, earned premium, target loss ratios, in-force amounts, unearned premium reserves, industry recognized morbidity tables or a combination of these factors.
In arriving at the unpaid claims reserves, the Company conducts an actuarial analysis on a basis gross of reinsurance. The same estimates used as a basis in calculating the gross unpaid claims reserves are then used as the basis for calculating the net unpaid claims reserves, which take into account the impact of reinsurance. Anticipated future loss development patterns form a key assumption underlying these analyses. Our claims are generally reported and settled quickly, resulting in consistent historical loss development patterns. From the anticipated loss development patterns, a variety of actuarial loss projection techniques are employed, such as the chain ladder method, the Bornhuetter-Ferguson method and expected loss ratio method.
The unpaid claims reserves represent the Company's best estimates, generally involving actuarial projections at a given time. Actual claim costs are dependent upon a number of complex factors such as changes in doctrines of legal liabilities and damage awards. These factors are not directly quantifiable, particularly on a prospective basis. The Company periodically reviews and updates its methods of making such unpaid claims reserve estimates and establishing the related liabilities based on our actual experience. The Company has not made any changes to its methodologies for determining unpaid claims reserves in the periods presented.
Member Benefit Claims
Member benefit claims represent claims paid on behalf of contract holders directly to third party providers for roadside assistance and for the repair or replacement of covered products. Claims can also be paid directly to contract holders as a reimbursement payment, provided supporting documentation of loss is submitted to the Company. Claims are recognized as expense when incurred.
Investments
Both fixed maturity securities and equity securities are classified as available-for-sale and carried at fair value with unrealized gains and losses reflected in other comprehensive income, net of tax. The cost of investments sold and any resulting gain or loss is based on the specific identification method and is recognized as of the trade date.
The Company conducts a quarterly review of all fixed maturity and equity securities with fair values less than their cost basis or amortized cost to determine if the decline in the fair value is other-than-temporary. In estimating other-than-temporary impairment ("OTTI") losses, the Company considers the following factors in assessing OTTI for fixed maturity and equity securities:
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•
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the length of time and the extent to which fair value has been less than cost;
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FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
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•
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the Company's intent and ability to hold the investment for a sufficient period to allow for any anticipated recovery in fair value;
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•
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evidence supporting that the decline is not other-than-temporary. Supporting evidence could include a recovery in the investment's fair value subsequent to the date of the statement of financial position, a return of the investee to profitability and the investee's improved financial performance and future prospects (such as earnings trends or recent dividend payments), or the improvement of financial condition and prospects for the investee's geographic region and industry;
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•
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issuer-specific considerations, including an event of missed or late payment or default, adverse changes in key financial ratios, an increase in nonperforming loans, a decline in earnings substantially below that of the investee's peers, downgrading of the investee's debt rating or suspension of trading in the security;
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•
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the occurrence of a significant economic event that may affect the industry in which an issuer participates, including a change that might adversely impact the investee's ability to achieve profitability in its operations; and
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•
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with regards to commercial mortgage-backed securities ("CMBS"), the Company also evaluates key assumptions such as breakeven constant default rates and credit enhancement levels. The breakeven constant default rate indicates the percentage of the pool's outstanding loans that must default each and every year with
40
percent loss severity (i.e., a recovery rate of 60 percent) for a CMBS class/tranche to experience its first dollar of principal loss. Credit enhancements indicate how much protection, or "cushion," there is to absorb losses in a particular deal before an actual loss would impact a specific security.
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When, in the opinion of management, a decline in the estimated fair value of an investment is considered to be other-than-temporary or management intends to sell or is required to sell the investment prior to the recovery of cost, the investment is written
down to its estimated fair value with the impairment loss charged to earnings and included in net realized gains (losses) in the Consolidated Statements of Income. OTTI losses on equity securities and losses related to the credit component of the impairment on fixed maturity securities are recorded in the Consolidated Statements of Income as realized losses on investments and result in a permanent reduction of the cost basis of the underlying investment. Losses relating to the non-credit component of OTTI losses on fixed maturity securities are recorded in accumulated other comprehensive income (loss) ("AOCI") in the Consolidated Balance Sheets. The determination of OTTI is a subjective process, and different judgments and assumptions could affect the fair value determination and the timing of loss realization.
Short-term Investments
Short-term investments consist of certificates of deposit issued by federally insured depository institutions and normally have maturities of less than one year. At various times throughout the year, the Company may have certificates of deposit with financial institutions that exceed the Federal Deposit Insurance Corporation ("FDIC") insurance limit amount of $250,000. The Company did not have any certificates of deposit at
December 31, 2013
and
2012
, respectively, which exceeded the FDIC insurance limit of $250,000. Management reviews the financial viability of these financial institutions on a periodic basis and does not anticipate nonperformance by the financial institutions.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of highly liquid investments, with original maturities of three months or less when purchased. At various times throughout the year, the Company may have cash deposited with financial institutions that exceed the federally insured deposit amount. Management reviews the financial viability of these financial institutions on a periodic basis and does not anticipate nonperformance by the financial institutions. The Company had approximately
$18.9 million
and
$8.2 million
of cash in interest bearing money market accounts at
December 31, 2013
and
2012
, respectively, which exceeded the FDIC insurance limit of $250,000.
Restricted Cash
Restricted cash primarily represents unremitted premiums received from agents, unremitted claims received from insurers, fiduciary cash for reinsurers and pledged assets for the protection of policy holders in various state jurisdictions. Restricted cash is generally required to be kept in certain bank accounts subject to guidelines, which emphasize capital preservation and liquidity; pursuant to the laws of certain states in which the Company's subsidiaries operate and applicable contractual obligations, such funds are not available to service the Company's debt or for other general corporate purposes. The Company is entitled to retain investment income earned on these fiduciary funds. At
December 31, 2013
and
2012
, none of the Company's restricted cash was held in interest bearing money market accounts subject to the FDIC insurance limit of $250,000.
Accounts and Premiums Receivable, Net
Accounts and premiums receivable 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
$0.5 million
and
$0.5 million
at
December 31, 2013
and
2012
, respectively,
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Other Receivables
Other receivables primarily represent amounts due to the Company from its business partners for retrospective commissions net of allowance and for motor club membership fees.
Reinsurance Receivables
The Company has various reinsurance agreements in place whereby the amount of risk in excess of the Company's retention goals is reinsured by unrelated domestic and foreign insurance companies. The Company remains liable to policyholders in the event that the assuming companies are unable to meet their obligations. Reinsurance receivables include amounts related to paid benefits, unpaid benefits and prepaid reinsurance premiums. Reinsurance receivables are based upon estimates and are reported on the Consolidated Balance Sheets separately as assets, as reinsurance does not relieve the Company of its legal liability to policyholders. The Company is required to pay losses even if a reinsurer fails to meet its obligations under the applicable reinsurance agreement. Management continually monitors the financial condition and agency ratings of the Company's reinsurers and believes that the reinsurance receivables accrued are collectible. Balances recoverable from reinsurers and amounts ceded to reinsurers relating to the unexpired portion of reinsured policies are presented as assets. Experience refunds from reinsurers are recognized based on the underwriting experience of the underlying contracts.
Deferred Acquisition Costs
Deferred Acquisition Costs - Insurance Related
The Company defers certain costs of acquiring new and renewal business. These costs are limited to direct costs that resulted from successful contract transactions and would not have been incurred by the Company's insurance company subsidiaries had the transactions not occurred. These capitalized costs are amortized as the related premium is earned. The following table shows the amortization of deferred acquisition costs for the Company's insurance contracts:
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For the Years Ended December 31,
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2013
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2012
|
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2011
|
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Total amortization of deferred acquisition costs - insurance related
|
$
|
67,629
|
|
|
$
|
61,042
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$
|
55,958
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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 years ending
December 31, 2013, 2012 and 2011
.
Deferred Acquisition Costs - Non-insurance Related
The Company defers certain costs of acquiring new and renewal business related to non-insurance subsidiary transactions. These costs are limited to prepaid direct costs, typically commissions and contract transaction fees, that resulted from successful contract transactions and would not have been incurred by the Company had the transactions not occurred. These capitalized costs are amortized as the related service and administrative fees are earned. The following table shows the amortization of deferred acquisition costs for the Company's non-insurance products:
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For the Years Ended December 31,
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2013
|
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2012
|
|
2011
|
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Total amortization of deferred acquisition costs - non-insurance related
|
$
|
64,009
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|
|
$
|
52,539
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|
|
$
|
57,358
|
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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 years ending
December 31, 2013, 2012 and 2011
.
Inventory
Inventory, which is included in other assets as a result of the 2012 acquisition of ProtectCELL, consists of mobile electronic devices and totaled
$2.1 million
and
$1.4 million
at
December 31, 2013
and
2012
, respectively.
A
ll inventoried handsets are recorded at actual cost, using the specific identification method, with the exception of repaired devices received from a single supplier relationship, which are recorded using an average cost method. Damaged or obsolete inventory is adjusted out of inventory on a monthly basis and recorded as an expense for the period. Mobile electronic devices that are either obsolete or beyond economical repair are used for parts in refurbishing other devices, or disposed of. Devices that are refurbished are recorded into inventory at their repair costs.
Property and Equipment
Property and equipment is carried at cost, net of accumulated depreciation and amortization. Gains and losses on sales and disposals of property and equipment are based on the net book value of the related asset at the disposal date using the specific identification method with the corresponding gain or loss recorded to operations when incurred. Maintenance and repairs, which do not materially extend asset useful life and minor replacements, are charged to earnings when incurred. Depreciation expense is computed using the straight-line method over the estimated useful lives of the respective assets with
three
years for computers and
five
years for furniture,
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
fixtures and equipment. Leasehold improvements are depreciated over the remaining life of the lease.
Leases
The Company leases certain equipment under a single capital lease. The assets and liabilities under the capital lease are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets under the capital lease are depreciated over the lesser of the remaining life of the lease or their estimated productive lives.
The Company also leases certain office space and equipment under operating leases. The Company evaluates its operating leases for the impact of rent escalation clauses, renewal options, lease incentives and rent abatements. Rent escalation clauses, renewal options and lease incentives are considered in determining total rent expense to be recognized during the term of the lease, which begins on the date the Company takes control of the leased space. Rent expense related to lease agreements that contain escalation clauses are recorded on a straight-line basis. Renewal options are considered by evaluating the overall term of the lease. In the event that the Company terminates a lease prior to the expiration, the agreed upon lease termination penalty is charged to expense with a corresponding liability recorded on the Consolidated Balance Sheets. The liability is adjusted for changes, if any, resulting from revisions to the termination amount after the cease-use date.
Internally Developed Software
The Company capitalizes internally developed software costs on a project-by-project basis. Software development costs are carried at unamortized cost and are amortized using the straight-line method over the estimated useful life of the software, typically
five
years. Amortization begins when the software is ready for its intended use.
Business Combinations and Purchase Price Adjustments
Business Combinations
Business combinations are accounted for using the purchase method with the related net assets and results of operations being included in the Company’s Consolidated Financial Statements as of the respective acquisition date(s).
The assets acquired may consist of a book of business, management contracts, customer relationships, non-compete agreements, trade name, and the excess of purchase price over the fair value of identifiable net assets acquired, or goodwill (see Summary of Significant Accounting Policies, "Goodwill" for more information ). The determination of estimated useful lives and the allocation of the purchase price to the intangible assets requires significant judgment and affects the amount of future amortization and possible impairment charges.
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.
Purchase Price Adjustments
The values of certain assets and liabilities acquired in acquisitions are preliminary in nature, and are subject to adjustment as additional information is obtained, including, but not limited to, valuation of separately identifiable intangibles, fixed assets, deferred taxes and deferred revenue. The valuations will be finalized within one year of the close of the acquisition. When the valuations are finalized, any changes to the preliminary valuation of assets acquired or liabilities assumed may result in adjustments to separately identifiable intangible assets and goodwill. A change to the acquisition date value of the identifiable net assets during the measurement period (up to one year from the acquisition date) affects the amount of the purchase price allocated to goodwill. Changes to the purchase price allocation are adjusted retrospectively in the Consolidated Financial Statements.
Goodwill
Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired in a business combination, and is carried as an asset on the Consolidated Balance Sheets. Goodwill is not amortized, but is reviewed for impairment annually in the fourth quarter, or more frequently if certain indicators arise.
The Company's goodwill impairment analysis typically involves an assessment of qualitative factors to determine whether it is more likely than not that fair value of our reporting unit is less than the recorded book value. If it is more likely than not, management must perform a quantitative test to determine fair value. If that fair value is less than the book value of the reporting unit, an impairment charge is recorded equal to the excess of the carrying amount of goodwill over its implied fair value. At its discretion, management may opt to bypass the qualitative analysis and perform the quantitative test.
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The goodwill impairment review is highly judgmental and may involve the use of significant estimates and assumptions impacting the amount of any impairment charge recorded. The estimates and assumptions may have a significant impact on the amount of any impairment charge recorded.
Because the Company changed to one reporting segment in 2013, management bypassed the qualitative analysis, and determined fair value using market based methods including the use of market capitalization plus a control premium. Management assessed goodwill as of
December 31, 2013
and
2012
, respectively.
Other Intangible Assets
The Company has acquired significant other intangible assets through business acquisitions. The Company's other intangible assets consist indefinite-lived trademarks and licenses, and of finite-lived intangibles, including customer related and contract based assets representing primarily client lists and non-compete arrangements and acquired software. Finite-lived intangible assets are amortized over periods ranging from
0.3
years to
15
years. Certain trademarks are not amortized since these assets have been determined to have indefinite useful lives. The costs to periodically renew other intangible assets are expensed as incurred.
Indefinite-lived intangible assets are tested for impairment at least annually, or whenever events or circumstances indicate that their carrying amount may not be recoverable using an analysis of expected future cash flows. Finite-lived intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans, or changes in anticipated future cash flows. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted cash flows expected to be generated by the assets. If the sum of the expected future undiscounted cash flows is less than the carrying amount, the Company would recognize an impairment loss. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value of the long-lived assets and intangibles.
Management assessed other intangible assets as of
December 31, 2013, 2012 and 2011
and determined that no impairment existed as of those dates.
Unpaid Claims
Unpaid claims include estimates for losses reported prior to the close of the accounting period and other estimates, including amounts for incurred but not reported claims. These liabilities are continuously reviewed and updated by management. Management believes that such liabilities are adequate to cover the estimated cost of the related claims. When management determines that changes in estimates are required, such changes are included in current operations.
The liability for unpaid claims includes estimates of the ultimate cost of known claims plus supplemental reserves calculated based upon loss projections utilizing certain actuarial assumptions and historical and industry data. In establishing its liability for unpaid claims, the Company utilizes the findings of actuaries.
Considerable uncertainty and variability are inherent in such estimates, and accordingly, the subsequent development of these reserves may not conform to the assumptions inherent in the determination. Management believes that the amounts recorded as the liability for policy and claim liabilities represent its best estimate of such amounts. However, actual loss experience may not conform to the assumptions used in determining the estimated amounts for such liability at the balance sheet date. Accordingly, such ultimate amounts could be significantly in excess of or less than the amounts indicated in the Consolidated Financial Statements. As adjustments to these estimates become necessary, such adjustments are reflected in the Consolidated Statements of Income.
Unearned Premiums
Premiums written are earned over the life of the respective policy using the Rule of 78's, pro rata, or other actuarial methods as appropriate for the type of business. Unearned premiums represent the portion of premiums that will be earned in the future. A premium deficiency reserve is recorded if anticipated losses, loss adjustment expenses, deferred acquisition costs and policy maintenance costs exceed the recorded unearned premium reserve and anticipated investment income. As of
December 31, 2013
and
2012
, no deficiency reserve was recorded.
Policyholder Account Balances
Policyholder account balances relate to investment-type individual annuity contracts in the accumulation phase. Policyholder account balances are carried at accumulated account values, which consist of deposits received, plus interest credited, less withdrawals and assessments. Minimum guaranteed interest credited to these contracts ranges from
3.0%
to
4.0%
.
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Commissions
Commissions are paid to distributors and retailers selling credit insurance policies, motor club memberships, mobile device protection, and warranty service contracts, and are generally deferred and expensed in proportion to the earning of related revenue. Credit insurance commission rates, in many instances, are set by state regulators and are also impacted by market conditions. In certain instances, credit insurance commissions are subject to retrospective adjustment based on the profitability of the related policies. Under these retrospective commission arrangements, the producer of the credit insurance policies receives a retrospective commission if the premium generated by that producer in the accounting period exceeds the costs associated with those policies, which includes the Company's administrative fees, claims, reserves, and premium taxes. The Company analyzes the retrospective commission calculation on a monthly basis for each producer and, based on the analysis associated with each such producer, the Company records a liability for any positive net retrospective commission earned and due to the producer or, conversely, records a receivable, net of allowance, for amounts due from such producer for instances where the net result of the retrospective commission calculation is negative.
The settlement of net positive retrospective commission with the producer in a subsequent period (usually the following month), is made through a cash payment to the producer. If the net result is negative, the Company offsets the receivable amount due from the producer by:
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•
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reducing future retrospective commissions earned and payable against the receivable amount due from the producer;
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•
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reducing the producer's up-front commission associated with current period written premium production, which is credited against the receivable amount due from the producer; or
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•
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invoicing the producer for an amount equal to the amount due to the Company.
|
The Company reviews, on a regular basis, all instances where the retrospective result is a net negative amount (receivable due from the producer) to determine the action to be implemented with respect to such producer in order to collect any receivable amount.
Deferred Revenues
Deferred revenues represent the portion of income that will be earned in the future attributable to motor club memberships, mobile device protection plans, and other non-insurance service contracts that are earned over the respective contract periods using Rule of 78's, modified Rule of 78's, pro rata, or other methods as appropriate for the contract. A deficiency reserve would be recorded if anticipated contract benefits, deferred acquisition costs and contract service costs exceed the recorded deferred revenues and anticipated investment income. As of
December 31, 2013
and
2012
, no deficiency reserve was recorded.
Derivative Financial Instruments
Cash Flow Hedge
The Company uses interest rate swaps as part of its risk management strategy to manage interest rate risk and cash flow risk that may arise in connection with the variable interest rate provision of the Company's preferred trust securities. The Company's derivative financial instruments are carried at fair value on the balance sheet.
Changes in fair value associated with the effective portion of a derivative instrument designated as a qualifying cash flow hedge are recognized initially in other comprehensive income (loss). When the cash flows for which the derivative is hedging materialize and are recorded in income or expense, the associated gain or (loss) from the hedging derivative previously recorded in AOCI is recognized in earnings. If a cash flow hedge is de-designated because it is no longer highly effective, or if the hedge relationship is terminated, the cumulative gain or loss on the hedging derivative to that date will continue to be reported in AOCI unless the hedged forecasted transaction is no longer expected to occur, at which time the cumulative gain or loss is recorded into earnings.
The Company records the fair value of the derivative instrument in other assets or other liabilities. 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 trading or speculative purposes.
Income Taxes
Under Internal Revenue Code Section 1501, the Company files a consolidated federal income tax return with its affiliates which are at least 80% owned by the group. The Company has a tax sharing agreement with its subsidiaries where each company is apportioned the amount of tax equal to that which would be reported on a separate company basis. The components of other comprehensive income or loss included on the Consolidated Statements of Comprehensive Income and on the Consolidated Statements of Stockholders' Equity have been computed based upon the
35%
federal tax rate.
Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Consolidated Statements of Income in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized.
The Company uses the two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, based on the technical merits of the position. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. The Company accounts for penalties and interest related to uncertain tax positions as part of its provision for federal and state income taxes.
Stock-Based Compensation
Stock Options and Restricted Stock Awards
The Company has time-based stock options outstanding under its 2005 Equity Incentive Plan (the "2005 Plan") and time-based and performance-based stock options and restricted stock awards outstanding under The 2010 Omnibus Incentive Plan (the "2010 Plan"). Time-based stock options and restricted stock awards are grants that vest based on the passage of time; whereas, performance-based stock options and restricted stock awards are grants that vest based on the Company attaining certain financial metrics.
Stock-based compensation expense is measured using fair value and is recorded over the requisite service or performance period of the awards, or to an employee’s eligible retirement date under the award agreement, if earlier. The Company measures stock-based compensation expense using the calculated value method. Under this method, the Company estimates the fair value of each stock option on the grant date using the Black-Scholes valuation model. The Company uses historical data to estimate expected employee behavior related to stock award exercises and forfeitures. Since there is not sufficient historical market experience for shares of the Company's stock, the Company has chosen to estimate volatility, by using the average volatility of a selected peer group of publicly traded companies operating in the same industry. Expected dividends are based on the assumption that no dividends were expected to be distributed in the near future. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the options. The fair value of restricted stock awards are based on the market price of Fortegra's common stock at the grant date. The Company typically recognizes stock-based compensation expense for time-based awards on a straight-line basis over the requisite service period and on a graded vesting attribution model for performance-based awards when meeting the performance target is probable. Stock-based compensation expense for time-based and performance-based stock options and restricted stock awards for employee grants is recognized in personnel costs, while expense for restricted stock awards to directors is included in other operating expenses on the Consolidated Statements of Income. The related income tax expense (benefit) on stock-based compensation is recognized in income tax expense on the Consolidated Statements of Income. The Company's current policy is to issue new shares upon the exercise of stock options.
Earnings Per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding adjusted to include the effect of potentially dilutive common shares, which includes outstanding stock options and non-vested restricted stock awards, using the treasury stock method. Common shares that are considered anti-dilutive are excluded from the computation of diluted earnings per share.
Treasury Stock
All repurchased common shares are recorded as treasury stock and are accounted for under the cost method.
Variable Interest Entities
The Company's investments in less than majority-owned companies in which it has the ability to exercise significant influence over operating and financial policies are accounted for using the equity method except when they qualify as Variable Interest Entities ("VIEs") and the Company is the primary beneficiary, in which case the investments are consolidated. Investments that do not meet the above criteria are accounted for under the cost method.
Advertising and Promotion
Advertising and promotional costs are expensed as incurred. Advertising expense for the following periods is presented below:
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For the Years Ended December 31,
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2013
|
|
2012
|
|
2011
|
|
Advertising expense
|
$
|
3,223
|
|
|
$
|
1,567
|
|
|
$
|
509
|
|
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
3. Recent Accounting Standards
Recently Adopted Accounting Pronouncements
In July 2013, the FASB issued ASU No. 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (a consensus of the FASB Emerging Issues Task Force). ASU No. 2013-10 allows the use of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a benchmark interest rate for hedge accounting purposes in addition to interest rates on direct Treasury obligations of the United States government and London Interbank Offered Rate and also removes the restriction on using different benchmark rates for similar hedges. ASU No. 2013-10 became effective on a prospective basis for qualifying new or designated hedging relationships entered into on or after July 17, 2013. The adoption of ASU No. 2013-10 did not have an impact on the Company's consolidated financial position, results of operations or cash flows.
In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU No. 2013-02 requires an entity to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income ("AOCI") by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. ASU No. 2013-02 is effective for reporting periods beginning after December 15, 2012. Accordingly, the Company has included an enhanced footnote disclosure in the Note, "Other Comprehensive Income." The adoption of ASU No. 2013-02 did not impact the Company's consolidated financial position, results of operations or cash flows.
In July 2012, the FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. ASU No. 2012-02 permits entities to perform an optional qualitative assessment for determining whether it is more likely than not that an indefinite-lived intangible asset is impaired. ASU No. 2012-02 is effective for annual and interim impairment tests performed for years beginning after September 15, 2012. The adoption of ASU No. 2012-02 did not impact the Company's consolidated financial position, results of operations or cash flows.
In December 2011, the FASB issued ASU No. 2011-11, Disclosures About Offsetting Assets and Liabilities. ASU No. 2011-11 requires the disclosure of both gross and net information about instruments and transactions eligible for offset in the statement of financial position, as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, ASU No. 2011-11 requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. ASU No. 2011-11 is effective for the Company beginning on January 1, 2013. The adoption of ASU No. 2011-11 did not impact the Company's consolidated financial position, results of operations or cash flows.
Recently Issued Accounting Pronouncements
In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, to clarify the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU No. 2013-11 is effective prospectively for years and interim periods within those years beginning after December 15, 2013. The adoption of ASU No. 2013-11 is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
4. Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share is calculated as follows:
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Numerator:
(for both basic and diluted earnings per share)
|
|
|
|
|
|
|
Income from continuing operations before non-controlling interests
|
$
|
11,807
|
|
|
$
|
12,962
|
|
|
$
|
11,562
|
|
|
Less: net income (loss) attributable to non-controlling interests
|
1,482
|
|
|
72
|
|
|
(170
|
)
|
|
Net income from continuing operations - net of tax
|
10,325
|
|
|
12,890
|
|
|
11,732
|
|
|
Discontinued operations - net of tax
|
12,390
|
|
|
2,275
|
|
|
1,777
|
|
|
Net income attributable to Fortegra Financial Corporation
|
$
|
22,715
|
|
|
$
|
15,165
|
|
|
$
|
13,509
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Total weighted average basic common shares outstanding
|
19,477,802
|
|
|
19,655,492
|
|
|
20,352,027
|
|
|
Effect of dilutive stock options and restricted stock awards
|
1,004,850
|
|
|
944,870
|
|
|
913,774
|
|
|
Total weighted average diluted common shares outstanding
|
20,482,652
|
|
|
20,600,362
|
|
|
21,265,801
|
|
|
|
|
|
|
|
|
|
Earnings per share - Basic:
|
|
|
|
|
|
|
Net income from continuing operations - net of tax
|
$
|
0.53
|
|
|
$
|
0.65
|
|
|
$
|
0.57
|
|
|
Discontinued operations - net of tax
|
0.64
|
|
|
0.12
|
|
|
0.09
|
|
|
Net income attributable to Fortegra Financial Corporation
|
$
|
1.17
|
|
|
$
|
0.77
|
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
Earnings per share - Diluted:
|
|
|
|
|
|
|
Net income from continuing operations - net of tax
|
$
|
0.50
|
|
|
$
|
0.63
|
|
|
$
|
0.55
|
|
|
Discontinued operations - net of tax
|
0.61
|
|
|
0.11
|
|
|
0.09
|
|
|
Net income attributable to Fortegra Financial Corporation
|
$
|
1.11
|
|
|
$
|
0.74
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
Weighted average anti-dilutive common shares
|
509,314
|
|
|
480,795
|
|
|
301,010
|
|
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
5. Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the activity in AOCI for the following periods:
|
Net unrealized gains (losses) on available-for-sale securities
|
|
Net unrealized gain (loss) on interest rate swap
|
|
Total
|
|
Balance at December 31, 2010, net of tax
|
$
|
2,293
|
|
|
$
|
—
|
|
|
$
|
2,293
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications:
|
|
|
|
|
|
|
Pre-tax income (loss)
|
1,568
|
|
|
(3,601
|
)
|
|
(2,033
|
)
|
|
Income tax (expense) benefit
|
(550
|
)
|
|
1,260
|
|
|
710
|
|
|
Other comprehensive income (loss) before reclassifications, net of tax
|
1,018
|
|
|
(2,341
|
)
|
|
(1,323
|
)
|
|
Amounts reclassified from accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
Pre-tax (income)
|
(4,193
|
)
|
|
—
|
|
|
(4,193
|
)
|
|
Income tax expense
|
1,468
|
|
|
—
|
|
|
1,468
|
|
|
Amounts reclassified from accumulated other comprehensive (loss), net of tax
|
(2,725
|
)
|
|
—
|
|
|
(2,725
|
)
|
|
Current period other comprehensive (loss), net of tax
|
(1,707
|
)
|
|
(2,341
|
)
|
|
(4,048
|
)
|
|
Less: comprehensive (loss) attributable to non-controlling interest
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
Balance at December 31, 2011, net of tax
|
$
|
587
|
|
|
$
|
(2,341
|
)
|
|
$
|
(1,754
|
)
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications:
|
|
|
|
|
|
|
Pre-tax income (loss)
|
2,473
|
|
|
(1,007
|
)
|
|
1,466
|
|
|
Income tax (expense) benefit
|
(865
|
)
|
|
352
|
|
|
(513
|
)
|
|
Other comprehensive income (loss) before reclassifications, net of tax
|
1,608
|
|
|
(655
|
)
|
|
953
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
Pre-tax (income) loss
|
(3
|
)
|
|
270
|
|
|
267
|
|
|
Income tax expense (benefit)
|
1
|
|
|
(94
|
)
|
|
(93
|
)
|
|
Amounts reclassified from accumulated other comprehensive (loss)income, net of tax
|
(2
|
)
|
|
176
|
|
|
174
|
|
|
Current period other comprehensive income (loss), net of tax
|
1,606
|
|
|
(479
|
)
|
|
1,127
|
|
|
Less: comprehensive income attributable to non-controlling interest
|
4
|
|
|
—
|
|
|
4
|
|
|
Balance at December 31, 2012, net of tax
|
$
|
2,189
|
|
|
$
|
(2,820
|
)
|
|
$
|
(631
|
)
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications:
|
|
|
|
|
|
|
Pre-tax (loss) income
|
(4,061
|
)
|
|
277
|
|
|
(3,784
|
)
|
|
Income tax benefit (expense)
|
1,421
|
|
|
(97
|
)
|
|
1,324
|
|
|
Other comprehensive (loss) income before reclassifications, net of tax
|
(2,640
|
)
|
|
180
|
|
|
(2,460
|
)
|
|
Amounts reclassified from accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
Pre-tax (income) loss
|
(2,043
|
)
|
|
1,132
|
|
|
(911
|
)
|
|
Income tax expense (benefit)
|
715
|
|
|
(396
|
)
|
|
319
|
|
|
Amounts reclassified from accumulated other comprehensive (loss) income, net of tax
|
(1,328
|
)
|
|
736
|
|
|
(592
|
)
|
|
Current period other comprehensive (loss) income, net of tax
|
(3,968
|
)
|
|
916
|
|
|
(3,052
|
)
|
|
Less: comprehensive (loss) attributable to non-controlling interest
|
(18
|
)
|
|
—
|
|
|
(18
|
)
|
|
Balance at December 31, 2013, net of tax
|
$
|
(1,761
|
)
|
|
$
|
(1,904
|
)
|
|
$
|
(3,665
|
)
|
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The following table presents the reclassifications out of AOCI for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
Consolidated Statement of Income Location
|
|
Unrealized gains (losses) on available-for-sale securities:
|
|
|
|
|
|
|
|
Reclassification of gains included in net income
|
$
|
2,043
|
|
|
$
|
3
|
|
|
$
|
4,193
|
|
Net realized investment gains (losses)
|
|
Related tax (expense)
|
(715
|
)
|
|
(1
|
)
|
|
(1,468
|
)
|
Income taxes
|
|
Net of tax
|
$
|
1,328
|
|
|
$
|
2
|
|
|
$
|
2,725
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on interest rate swap:
|
|
|
|
|
|
|
|
Reclassification of (losses) included in net income
|
$
|
(1,132
|
)
|
|
$
|
(270
|
)
|
|
$
|
—
|
|
Interest expense
|
|
Related tax benefit
|
396
|
|
|
94
|
|
|
—
|
|
Income taxes
|
|
Net of tax
|
$
|
(736
|
)
|
|
$
|
(176
|
)
|
|
$
|
—
|
|
Net Income
|
6. Consolidation of Operations Charges
Consolidation of Operations Plan
As disclosed on January 18, 2013 in the Company's Current Report on Form 8-K, effective
January 14, 2013
, the Company committed to a plan to consolidate the Company's fulfillment, claims administration and information technology functions (the "Plan"). Prior to the Plan, such functions resided in the Company's individual business units. The decision is part of the Company's efforts to streamline its operations, focus its resources and provide first in class service to its customers. The following is a summary of the charges incurred by the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Severance and benefit costs included in personnel expense
|
$
|
1,234
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Total consolidation of operations costs
|
$
|
1,234
|
|
|
$
|
—
|
|
|
$
|
—
|
|
7. Variable Interest Entity
In
July 2011
, the Company sold its
100%
interest in Creative Investigations Recovery Group, LLC ("CIRG"). The consideration included a note receivable, included on the Consolidated Balance Sheets, with a first priority lien security interest in the assets of CIRG and other property of the buyers. The Company performed a detailed analysis of the CIRG sale transaction and determined that CIRG is considered a VIE because the Company has an interest due to the note financing. The Company further determined that it is not the primary beneficiary because the Company does not have the power to direct the activities of the VIE and has no right to receive the residual returns of CIRG. Therefore, CIRG is not consolidated in the Company's results of operations for any of the periods presented. During 2013, the Company suspended recognition of interest income on the note and engaged the buyer in discussions, because the buyer was experiencing short-term cash flow constraints. The Company determined that it would not pursue remedies available under the note at this time, and the parties executed a forbearance agreement along with a security agreement and a subordination agreement designed to allow more flexibility in timing of repayment; the principal amount and interest rate are unchanged. These contracts do not give the Company control over the business, and the Company may still leverage the remedies of the note should it deem such action necessary. The Company also provided an additional
$0.1 million
in short term funding, and the buyer has begun to repay that balance.
The Company's maximum exposure to loss in the VIE is limited to the outstanding balance of the note receivable (including accrued interest receivable) and the remaining balance of the short term funding, presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2013
|
|
2012
|
|
The Company's maximum exposure to loss in the VIE
|
$
|
1,234
|
|
|
$
|
1,139
|
|
8. Business Acquisitions
Acquisition in 2013
On
February 1, 2013
, the Company acquired
100%
of the outstanding stock of
RICC
, from subsidiaries of the Kemper Corporation ("Kemper") for
$4.8 million
. RICC is a property/casualty insurance company domiciled and licensed in California, which the Company intends to use for geographic expansion. RICC had, at the time of purchase, no policies in force. All remaining claim liabilities for previously issued policies are fully reinsured by Kemper's subsidiary, Trinity Universal Insurance Company.
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Acquisitions in 2012
On
December 31, 2012
, the Company acquired a
62.4%
ownership interest of
Digital Leash, LLC, d/b/a ProtectCELL
for
$20.0 million
, which amount is deemed a Series A Contribution under the provisions of the related agreements. ProtectCELL provides membership plans for the protection of mobile wireless devices and other benefits including data management and identity theft protection. ProtectCELL is one of the leaders in mobile device protection plans and is spearheading Fortegra's efforts to expand its warranty and service contract business in the mobile and wireless device space. As part of the acquisition, the Company also has an option, commencing after 2014, to acquire the remaining
37.6%
ownership interest in ProtectCELL at a price based on a sliding scale multiple of ProtectCELL's trailing twelve-month EBITDA ("Earnings before interest, taxes, depreciation and amortization"), less the Series A Contributions, multiplied by
37.6%
("option price"). The option has no expiration, though the owners of the non-controlling interest have the right to defer the option commencement date for one year under certain conditions. The option must be exercised with respect to not less than all of the non-controlling interest, and is accounted for as an embedded derivative within the value of non-controlling interest.
On
December 31, 2012
, the Company acquired
100%
of the outstanding stock ownership of
4Warranty Corporation
, a leading warranty and extended service contract administrator with extensive expertise in the furniture, electronics, appliance, lawn and garden, and fitness equipment markets. 4Warranty complements the Company's expanding warranty business.
The Consolidated Balance Sheets at December 31, 2012, include the accounts of both ProtectCELL and 4Warranty as of December 31, 2012. The financial results for the 2012 acquisitions of ProtectCELL and 4Warranty have not been included in the Company's Consolidated Statements of Income for the year ended December 31, 2012, because both acquisitions closed after business on December 31, 2012.
On
April 24, 2012
, the Company acquired a
100%
ownership interest in
MHA & Associates LLC
("MHA"), for
$0.3 million
, obtaining the renewal rights of the business and hiring the prior owner to maintain and increase the block of business.
The Company did not issue shares of its common stock in connection with any of the acquisitions completed during the years ended December 31, 2013, 2012 and 2011, respectively.
Balance Sheets and Allocation of Purchase Price
During 2013, the Company received the final valuation studies prepared by external valuation experts for identifiable intangible assets, goodwill, deferred revenues, and non-controlling interest for the 2012 acquisitions of ProtectCELL and 4Warranty. Accordingly, the Consolidated Balance Sheet at December 31, 2012, has been retrospectively adjusted to include the effect of the final valuation adjustments and other fair value determinations, for ProtectCELL and 4Warranty. Final valuation adjustments were recorded to the values of intangible assets and deferred revenues based upon completion of valuation models in the studies, and refinement of assumptions supporting those models, using discounted cash flow, relief from royalty, and/or other analytical techniques as presented in the valuation studies. With respect to ProtectCELL, the final valuations of these balances allowed for a determination of the total value of the enterprise at December 31, 2012. Using this enterprise value, and a break-even analysis to determine the relative attribution of the Company's
$20.0 million
investment between the common and preferred units acquired, the final valuation study assigned values of
$7.9 million
and
$12.1 million
to the acquired common and preferred units, respectively, and a fair value of
$4.7 million
to the non-controlling interest as shown in the table below. The adjustments noted above result in offsetting adjustments to goodwill. Please see the Notes, "Goodwill," and "Other Intangible Assets," for more information.
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The following table presents the allocation of the purchase price recorded for the 2013 acquisition of RICC and the 2012 acquisitions of ProtectCELL and 4Warranty, including the effects of the final valuation adjustments recorded in 2013 for the 2012 acquisitions, as discussed above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2013
|
|
|
Acquisitions
|
|
Acquisition
|
|
|
4Warranty
|
|
ProtectCELL
|
|
RICC
|
|
Assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
703
|
|
|
$
|
350
|
|
|
$
|
1,893
|
|
|
Restricted cash
|
72
|
|
|
7,438
|
|
|
—
|
|
|
Investments
|
—
|
|
|
—
|
|
|
2,488
|
|
|
Short-term investments
|
—
|
|
|
252
|
|
|
—
|
|
|
Accrued investment income
|
—
|
|
|
—
|
|
|
38
|
|
|
Notes receivable, net
|
—
|
|
|
6,341
|
|
|
—
|
|
|
Other receivables
|
357
|
|
|
2,312
|
|
|
—
|
|
|
Reinsurance receivables
|
—
|
|
|
—
|
|
|
200
|
|
|
Property and equipment, net
|
61
|
|
|
628
|
|
|
—
|
|
|
Other intangible assets, net
|
1,870
|
|
|
18,815
|
|
|
375
|
|
|
Other assets
|
—
|
|
|
1,470
|
|
|
10
|
|
|
Liabilities:
|
|
|
|
|
|
|
Unpaid claims
|
—
|
|
|
(176
|
)
|
|
(200
|
)
|
|
Accrued expenses, accounts payable and other liabilities
|
(310
|
)
|
|
(2,644
|
)
|
|
(9
|
)
|
|
Deferred revenue
|
(1,260
|
)
|
|
(30,000
|
)
|
|
—
|
|
|
Income taxes payable
|
(273
|
)
|
|
—
|
|
|
—
|
|
|
Deferred income taxes, net
|
(259
|
)
|
|
—
|
|
|
—
|
|
|
Net assets acquired
|
961
|
|
|
4,786
|
|
|
4,795
|
|
|
Non-controlling interest
|
—
|
|
|
(4,745
|
)
|
|
—
|
|
|
Purchase consideration
(1) (2)
|
3,625
|
|
|
20,000
|
|
|
4,795
|
|
|
Goodwill
|
$
|
2,664
|
|
|
$
|
19,959
|
|
|
$
|
—
|
|
(1)
- The purchase consideration for the 4Warranty acquisition includes
$0.3 million
of contingent consideration and
$0.3 million
of hold back reserves, which estimates are unchanged in the current period and are expected to be paid out based on the agreed terms of the Stock Purchase Agreement.
(2)
- The purchase consideration of
$20.0 million
for the ProtectCELL acquisition represents the
62.4%
ownership interest acquired in the transaction, comprised of
62,400
common units and
20,000
preferred units, valued at
$7.9 million
and
$12.1 million
respectively.
Tax Deductible Goodwill Associated with Acquisitions
The following table presents goodwill attributable to acquisitions that is expected to be tax deductible by year of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year of the Acquisition
|
|
|
2013
|
|
2012
|
|
2011
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,069
|
|
9. Divestitures
Discontinued Operations
On
December 31, 2013
, the Company completed the previously announced sale of all of the issued and outstanding stock of its subsidiaries, Bliss and Glennon and eReinsure.com, to AmWINS Holdings, LLC, a North Carolina limited liability company ("AmWINS") (the "Disposition"), pursuant to the terms of the Stock Purchase Agreement ("Purchase Agreement"), dated
December 2, 2013
.
The Company received net cash proceeds of
$81.8 million
for the Disposition, representing gross proceeds of
$83.5 million
less
$1.0 million
in transaction fees paid at the time of closing and
$0.7 million
of cash held by the disposed entities. The proceeds are subject to certain purchase price adjustments as set forth in the Purchase Agreement to reflect fluctuations in working capital, including adjustments for any receivable balances as of the disposition date that are not collected within
one
year.
As a result of the Disposition, the Company no longer operates in the businesses of wholesale insurance brokerage and selling or licensing of a computerized system or platform for the negotiation and/or placement of facultative reinsurance. Further, the Company has agreed not to compete with the Bliss and Glennon and eReinsure businesses for
five
years, and has agreed not to solicit former
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
employees of the divested businesses. As of and after December 31, 2013, the Company does not beneficially own the disposed businesses and will no longer consolidate Bliss and Glennon or eReinsure into its financial results. The historical financial results of the disposed businesses for periods prior to the Disposition will be reflected in the Company's Consolidated Statements of Income as income from discontinued operations - net of tax. As discussed more fully in the Note, "Notes Payable", the Company was required to repay its debt under the Wells Fargo Credit Agreement from the net proceeds of the Disposition. The Company would have been required to repay its debt under the SunTrust Facility if the Disposition had occurred during the time the SunTrust Facility was in effect. Accordingly, interest expense allocated to the discontinued operations was based on the anticipated net proceeds that would be applied to the repayment of these credit facilities outstanding at the respective time, multiplied by the respective interest rate of the credit facilities at the respective time. The following table provides the amounts related to discontinued operations in the Consolidated Statements of Income for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Income from discontinued operations:
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Brokerage commissions and fees
|
$
|
36,823
|
|
|
$
|
35,306
|
|
|
$
|
34,396
|
|
|
Net investment income
|
22
|
|
|
1
|
|
|
—
|
|
|
Other income
|
40
|
|
|
—
|
|
|
—
|
|
|
Total revenues
|
36,885
|
|
|
35,307
|
|
|
34,396
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
Personnel costs
|
20,251
|
|
|
20,173
|
|
|
18,526
|
|
|
Other operating expenses
|
5,778
|
|
|
6,121
|
|
|
7,401
|
|
|
Depreciation and amortization
|
615
|
|
|
658
|
|
|
415
|
|
|
Amortization of intangibles
|
1,929
|
|
|
2,211
|
|
|
2,133
|
|
|
Interest expense
|
2,318
|
|
|
2,290
|
|
|
2,951
|
|
|
Total expenses
|
30,891
|
|
|
31,453
|
|
|
31,426
|
|
|
Income from discontinued operations before income taxes
|
5,994
|
|
|
3,854
|
|
|
2,970
|
|
|
Income taxes - discontinued operations
|
2,448
|
|
|
1,579
|
|
|
1,193
|
|
|
Income from discontinued operations - net of tax
|
3,546
|
|
|
2,275
|
|
|
1,777
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations:
|
|
|
|
|
|
|
Gain on sale of discontinued operations before income taxes
|
14,739
|
|
|
—
|
|
|
—
|
|
|
Income taxes - gain on sale of discontinued operations
|
5,895
|
|
|
—
|
|
|
—
|
|
|
Gain on sale of discontinued operations - net of tax
|
8,844
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Discontinued operations - net of tax
|
$
|
12,390
|
|
|
$
|
2,275
|
|
|
$
|
1,777
|
|
The gain on sale represents the gross proceeds of $83.5 million, plus an estimated
$0.8 million
adjustment for working capital, less the assets sold and liabilities disposed of
$98.6 million
and
$32.5 million
, respectively, and costs of
$3.5 million
. Costs included $1.0 million of fees paid at the time of closing noted above, retention and bonus compensation, insurance claims-made "tail" coverage, and accruals for the Company's guarantee of accounts receivable and other retained obligations related to the divested businesses.
The following table provides details of the assets and liabilities of the discontinued operations on the Consolidated Balance Sheet at:
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
Assets:
|
|
|
Other receivables
|
$
|
791
|
|
|
Assets of discontinued operations
|
$
|
791
|
|
|
|
|
|
Liabilities:
|
|
|
Accrued expenses, accounts payable and other liabilities
|
$
|
2,708
|
|
|
Income taxes payable
|
5,895
|
|
|
Liabilities of discontinued operations
|
$
|
8,603
|
|
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Other Sales of Subsidiaries
The Company completed the following divestitures that were not considered to be discontinued operations:
In
June 2013
, the Company sold its wholly owned subsidiary Magna for a gross sales price of
$3.0 million
, less cash held by Magna, transferred in the sale, of
$0.8 million
. For the year ended December 31, 2013, the Company recorded a
$0.4 million
pre-tax gain on the sale of Magna, which is included on the Consolidated Statements of Income line item, "Gain on sale of subsidiary."
In
July 2011
, the Company sold its wholly owned subsidiary, CIRG, for a sales price of
$1.2 million
, comprised of cash and a
$1.1 million
secured note receivable. For the year ended December 31, 2011, the Company recorded a
$0.5 million
loss on the sale of CIRG. This sale resulted in a non-consolidated VIE. For more information, see the Note, "Variable Interest Entity."
10. Goodwill
In 2012, the Company recorded goodwill in conjunction with the ProtectCELL and 4Warranty acquisitions. During 2013, the Company determined the final valuations for the 2012 acquisitions of ProtectCELL and 4Warranty acquisitions. The following table presents the activity in goodwill and includes the retrospective adjustments made to the balance of goodwill at December 31, 2012 to reflect the effect of the final valuation adjustments made for the acquisitions of ProtectCELL and 4Warranty and the reduction to goodwill attributable to the 2013 Disposition.
|
|
|
|
|
|
|
|
|
Total
|
|
Balance at December 31, 2011
|
$
|
104,888
|
|
|
Goodwill acquired - purchased book of business
|
168
|
|
|
Goodwill acquired - ProtectCELL acquisition
|
11,732
|
|
|
Goodwill acquired - 4Warranty acquisition
|
2,724
|
|
|
Balance as originally reported at December 31, 2012
|
$
|
119,512
|
|
|
Final valuation adjustments for ProtectCELL
|
8,227
|
|
|
Final valuation adjustments for 4Warranty
|
(60
|
)
|
|
Adjusted balance at December 31, 2012
|
127,679
|
|
|
Goodwill divested - discontinued operations
|
(53,978
|
)
|
|
Balance at December 31, 2013
|
$
|
73,701
|
|
11. Other Intangible Assets
The following table shows finite-lived other intangible assets and their respective amortization periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013
|
|
At December 31, 2012
|
|
|
Amortization Period (Years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Customer and agent relationships
|
7
|
to
|
15
|
|
$
|
40,075
|
|
|
$
|
(13,262
|
)
|
|
$
|
26,813
|
|
|
$
|
52,230
|
|
|
$
|
(12,340
|
)
|
|
$
|
39,890
|
|
|
Tradenames
|
8
|
to
|
10
|
|
1,460
|
|
|
(128
|
)
|
|
1,332
|
|
|
1,200
|
|
|
—
|
|
|
1,200
|
|
|
Software
|
2.25
|
to
|
10
|
|
5,336
|
|
|
(2,930
|
)
|
|
2,406
|
|
|
10,138
|
|
|
(3,385
|
)
|
|
6,753
|
|
|
Present value of future profits
|
0.3
|
to
|
0.75
|
|
548
|
|
|
(548
|
)
|
|
—
|
|
|
548
|
|
|
(548
|
)
|
|
—
|
|
|
Non-compete agreements
|
1.5
|
to
|
6
|
|
1,378
|
|
|
(895
|
)
|
|
483
|
|
|
3,308
|
|
|
(2,716
|
)
|
|
592
|
|
|
Total finite-lived other intangible assets
|
|
|
|
|
$
|
48,797
|
|
|
$
|
(17,763
|
)
|
|
$
|
31,034
|
|
|
$
|
67,424
|
|
|
$
|
(18,989
|
)
|
|
$
|
48,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the carrying amount of indefinite-lived other intangible assets:
|
At December 31,
|
|
|
2013
|
|
2012
|
|
Tradenames
|
$
|
17,764
|
|
|
$
|
21,875
|
|
|
Licenses
|
375
|
|
|
—
|
|
|
Total
|
$
|
18,139
|
|
|
$
|
21,875
|
|
The finite-lived and indefinite-lived other intangible assets acquired in 2012 relate to the acquisition of ProtectCELL and 4Warranty and for the purchase of a book of business. In 2013, the Company determined the final valuations for the 2012 acquisitions of ProtectCELL and 4Warranty and made retrospective adjustments to other intangible assets. See the Note "Business Acquisitions," for more information.
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The following table presents the activity in other intangible assets and includes the final valuation adjustments made to the balance of other intangible assets at December 31, 2012 to reflect the effect of these adjustments made for the acquisitions of ProtectCELL and 4Warranty and the reduction to other intangible assets attributable to the discontinued operations for the 2013 Disposition.
|
|
|
|
|
|
|
|
Balance at January 1, 2012
|
$
|
54,410
|
|
|
Intangible assets acquired in 2012 - Purchased book of business
|
168
|
|
|
Intangible assets acquired in 2012 - ProtectCELL acquisition
|
27,815
|
|
|
Intangible assets acquired in 2012 - 4Warranty acquisition
|
1,900
|
|
|
Less: amortization expense
|
2,742
|
|
|
Less: amortization expense - discontinued operations
|
2,211
|
|
|
Balance as originally reported at December 31, 2012
|
$
|
79,340
|
|
|
Final adjustments for ProtectCELL
|
(9,000
|
)
|
|
Final adjustments for 4Warranty
|
(30
|
)
|
|
Adjusted balance at December 31, 2012
|
70,310
|
|
|
Intangible assets acquired in 2013
|
427
|
|
|
Intangible assets divested - discontinued operations
|
(14,108
|
)
|
|
Less: amortization expense - discontinued operations
|
1,929
|
|
|
Less: amortization expense
|
5,527
|
|
|
Balance at December 31, 2013
|
$
|
49,173
|
|
Estimated amortization of finite-lived other intangible assets for the next five years and thereafter ending December 31 is presented below:
|
|
|
|
|
|
|
|
2014
|
$
|
5,270
|
|
|
2015
|
5,115
|
|
|
2016
|
4,869
|
|
|
2017
|
3,648
|
|
|
2018
|
2,230
|
|
|
Thereafter
|
9,902
|
|
|
Total
|
$
|
31,034
|
|
12. Investments
The following table summarizes the Company's available-for-sale fixed maturity and equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013
|
|
Description of Security
|
Cost or Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Obligations of the U.S. Treasury and U.S. Government agencies
|
$
|
51,971
|
|
|
$
|
142
|
|
|
$
|
(678
|
)
|
|
$
|
51,435
|
|
|
Municipal securities
|
24,856
|
|
|
104
|
|
|
(413
|
)
|
|
24,547
|
|
|
Corporate securities
|
56,050
|
|
|
210
|
|
|
(900
|
)
|
|
55,360
|
|
|
Obligations of foreign governments
|
411
|
|
|
—
|
|
|
(2
|
)
|
|
409
|
|
|
Total fixed maturity securities
|
$
|
133,288
|
|
|
$
|
456
|
|
|
$
|
(1,993
|
)
|
|
$
|
131,751
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - publicly traded
|
$
|
39
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
47
|
|
|
Preferred stock - publicly traded
|
5,974
|
|
|
—
|
|
|
(887
|
)
|
|
5,087
|
|
|
Common stock - non-publicly traded
|
59
|
|
|
5
|
|
|
(13
|
)
|
|
51
|
|
|
Preferred stock - non-publicly traded
|
1,009
|
|
|
4
|
|
|
—
|
|
|
1,013
|
|
|
Total equity securities
|
$
|
7,081
|
|
|
$
|
17
|
|
|
$
|
(900
|
)
|
|
$
|
6,198
|
|
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012
|
|
Description of Security
|
Cost or Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Obligations of the U.S. Treasury and U.S. Government agencies
|
$
|
22,424
|
|
|
$
|
761
|
|
|
$
|
(7
|
)
|
|
$
|
23,178
|
|
|
Municipal securities
|
16,636
|
|
|
413
|
|
|
(8
|
)
|
|
17,041
|
|
|
Corporate securities
|
67,627
|
|
|
2,461
|
|
|
(80
|
)
|
|
70,008
|
|
|
Mortgage-backed securities
|
285
|
|
|
4
|
|
|
—
|
|
|
289
|
|
|
Asset-backed securities
|
123
|
|
|
2
|
|
|
—
|
|
|
125
|
|
|
Total fixed maturity securities
|
$
|
107,095
|
|
|
$
|
3,641
|
|
|
$
|
(95
|
)
|
|
$
|
110,641
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - publicly traded
|
$
|
39
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
42
|
|
|
Preferred stock - publicly traded
|
4,975
|
|
|
133
|
|
|
(1
|
)
|
|
5,107
|
|
|
Common stock - non-publicly traded
|
59
|
|
|
4
|
|
|
(5
|
)
|
|
58
|
|
|
Preferred stock - non-publicly traded
|
1,009
|
|
|
4
|
|
|
—
|
|
|
1,013
|
|
|
Total equity securities
|
$
|
6,082
|
|
|
$
|
144
|
|
|
$
|
(6
|
)
|
|
$
|
6,220
|
|
Pursuant to certain reinsurance agreements and statutory licensing requirements, the Company has deposited invested assets in custody accounts or insurance department safekeeping accounts. The Company is not permitted to remove invested assets from these accounts without prior approval of the contractual party or regulatory authority, as applicable. The following table details the Company's restricted investments included in the Company's available-for-sale fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2013
|
|
2012
|
|
Fair value of restricted investments for special deposits required by state insurance departments
|
$
|
10,339
|
|
|
$
|
10,988
|
|
|
Fair value of restricted investments in trust pursuant to reinsurance agreements
|
6,134
|
|
|
6,954
|
|
|
Fair value of restricted investments
|
$
|
16,473
|
|
|
$
|
17,942
|
|
The amortized cost and fair value of fixed maturity securities by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013
|
|
At December 31, 2012
|
|
|
Amortized Cost
|
|
Fair Value
|
|
Amortized Cost
|
|
Fair Value
|
|
Due in one year or less
|
$
|
18,766
|
|
|
$
|
18,771
|
|
|
$
|
5,557
|
|
|
$
|
5,608
|
|
|
Due after one year through five years
|
69,380
|
|
|
69,355
|
|
|
58,378
|
|
|
60,323
|
|
|
Due after five years through ten years
|
22,622
|
|
|
21,731
|
|
|
24,983
|
|
|
25,900
|
|
|
Due after ten years
|
22,520
|
|
|
21,894
|
|
|
17,769
|
|
|
18,396
|
|
|
Mortgage-backed securities
|
—
|
|
|
—
|
|
|
285
|
|
|
289
|
|
|
Asset-backed securities
|
—
|
|
|
—
|
|
|
123
|
|
|
125
|
|
|
Total fixed maturity securities
|
$
|
133,288
|
|
|
$
|
131,751
|
|
|
$
|
107,095
|
|
|
$
|
110,641
|
|
The following table provides information on unrealized losses on investment securities that have been in an unrealized loss position for less than twelve months, and twelve months or greater:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013
|
|
|
Less than Twelve Months
|
|
Twelve Months or Greater
|
|
Total
|
|
Description of Security
|
Fair Value
|
Unrealized Losses
|
# of Securities
|
|
Fair Value
|
Unrealized Losses
|
# of Securities
|
|
Fair Value
|
Unrealized Losses
|
# of Securities
|
|
Obligations of the U.S. Treasury and U.S. Government agencies
|
$
|
37,385
|
|
$
|
672
|
|
67
|
|
|
$
|
234
|
|
$
|
6
|
|
7
|
|
|
$
|
37,619
|
|
$
|
678
|
|
74
|
|
|
Municipal securities
|
10,080
|
|
413
|
|
23
|
|
|
—
|
|
—
|
|
—
|
|
|
10,080
|
|
413
|
|
23
|
|
|
Corporate securities
|
27,866
|
|
734
|
|
55
|
|
|
7,676
|
|
166
|
|
8
|
|
|
35,542
|
|
900
|
|
63
|
|
|
Obligations of foreign governments
|
409
|
|
2
|
|
1
|
|
|
—
|
|
—
|
|
—
|
|
|
409
|
|
2
|
|
1
|
|
|
Total fixed maturity securities
|
$
|
75,740
|
|
$
|
1,821
|
|
146
|
|
|
$
|
7,910
|
|
$
|
172
|
|
15
|
|
|
$
|
83,650
|
|
$
|
1,993
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock - publicly traded
|
5,087
|
|
887
|
|
9
|
|
|
—
|
|
—
|
|
—
|
|
|
5,087
|
|
887
|
|
9
|
|
|
Common stock - non-publicly traded
|
—
|
|
—
|
|
—
|
|
|
31
|
|
13
|
|
2
|
|
|
31
|
|
13
|
|
2
|
|
|
Total equity securities
|
$
|
5,087
|
|
$
|
887
|
|
9
|
|
|
$
|
31
|
|
$
|
13
|
|
2
|
|
|
$
|
5,118
|
|
$
|
900
|
|
11
|
|
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012
|
|
|
Less than Twelve Months
|
|
Twelve Months or Greater
|
|
Total
|
|
Description of Security
|
Fair Value
|
Unrealized Losses
|
# of Securities
|
|
Fair Value
|
Unrealized Losses
|
# of Securities
|
|
Fair Value
|
Unrealized Losses
|
# of Securities
|
|
Obligations of the U.S. Treasury and U.S. Government agencies
|
$
|
857
|
|
$
|
7
|
|
11
|
|
|
$
|
—
|
|
$
|
—
|
|
—
|
|
|
$
|
857
|
|
$
|
7
|
|
11
|
|
|
Municipal securities
|
734
|
|
8
|
|
1
|
|
|
—
|
|
—
|
|
—
|
|
|
734
|
|
8
|
|
1
|
|
|
Corporate securities
|
12,625
|
|
63
|
|
16
|
|
|
183
|
|
17
|
|
1
|
|
|
12,808
|
|
80
|
|
17
|
|
|
Total fixed maturity securities
|
$
|
14,216
|
|
$
|
78
|
|
28
|
|
|
$
|
183
|
|
$
|
17
|
|
1
|
|
|
$
|
14,399
|
|
$
|
95
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock - publicly traded
|
198
|
|
1
|
|
1
|
|
|
—
|
|
—
|
|
—
|
|
|
198
|
|
1
|
|
1
|
|
|
Common stock - non-publicly traded
|
—
|
|
—
|
|
—
|
|
|
39
|
|
5
|
|
2
|
|
|
39
|
|
5
|
|
2
|
|
|
Total equity securities
|
$
|
198
|
|
$
|
1
|
|
1
|
|
|
$
|
39
|
|
$
|
5
|
|
2
|
|
|
$
|
237
|
|
$
|
6
|
|
3
|
|
The Company does not intend to sell the investments that are in an unrealized loss position at
December 31, 2013
and it is more likely than not that the Company will be able to hold these securities until full recovery of their amortized cost basis for fixed maturity securities or cost for equity securities. As of
December 31, 2013
, based on the Company's review, none of the fixed maturity or equity securities were deemed to be other-than-temporarily impaired based on the Company's analysis of the securities and its intent to hold the securities until recovery. At
December 31, 2012
, based on management's review, the Company deemed that
one
individual equity security was other than temporarily impaired and recorded an impairment charge of
$16.0 thousand
for the year ended
December 31, 2012
.
The following table summarizes the gross proceeds from the sale of available-for-sale investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Gross proceeds from sales
|
$
|
54,663
|
|
|
$
|
8,364
|
|
|
$
|
62,300
|
|
The following table summarizes the gross realized gains and gross realized losses for both fixed maturity and equity securities and realized losses for other-than-temporary impairments for available-for-sale investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Gross realized gains
|
$
|
2,118
|
|
|
$
|
33
|
|
|
$
|
4,456
|
|
|
Gross realized losses
|
(75
|
)
|
|
(14
|
)
|
|
(91
|
)
|
|
Total net gains from investment sales
|
2,043
|
|
|
19
|
|
|
4,365
|
|
|
Impairment write-downs (other-than-temporary impairments)
|
—
|
|
|
(16
|
)
|
|
(172
|
)
|
|
Net realized investment gains
|
$
|
2,043
|
|
|
$
|
3
|
|
|
$
|
4,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table details the components of net investment income:
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Fixed income securities
|
$
|
2,635
|
|
|
$
|
2,669
|
|
|
$
|
3,188
|
|
|
Cash on hand and on deposit
|
30
|
|
|
193
|
|
|
333
|
|
|
Common and preferred stock dividends
|
373
|
|
|
275
|
|
|
59
|
|
|
Notes receivable
|
321
|
|
|
267
|
|
|
155
|
|
|
Other income
|
119
|
|
|
138
|
|
|
141
|
|
|
Investment expenses
|
(428
|
)
|
|
(475
|
)
|
|
(508
|
)
|
|
Net investment income
|
$
|
3,050
|
|
|
$
|
3,067
|
|
|
$
|
3,368
|
|
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
13. Reinsurance Receivables
The effects of reinsurance on premiums written and earned and on losses and loss adjustment expenses ("LAE") incurred are presented in the tables below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
Written
|
Earned
|
|
Written
|
Earned
|
|
Written
|
Earned
|
|
Direct and assumed
|
$
|
410,243
|
|
$
|
389,763
|
|
|
$
|
367,791
|
|
$
|
359,820
|
|
|
$
|
338,869
|
|
$
|
321,412
|
|
|
Ceded
|
(267,737
|
)
|
(252,976
|
)
|
|
(236,121
|
)
|
(232,195
|
)
|
|
(214,485
|
)
|
(205,909
|
)
|
|
Net
|
$
|
142,506
|
|
$
|
136,787
|
|
|
$
|
131,670
|
|
$
|
127,625
|
|
|
$
|
124,384
|
|
$
|
115,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE incurred
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Direct and assumed
|
$
|
90,804
|
|
|
$
|
86,409
|
|
|
$
|
81,843
|
|
|
Ceded
|
(49,237
|
)
|
|
(46,190
|
)
|
|
(43,894
|
)
|
|
Net losses and LAE incurred
|
$
|
41,567
|
|
|
$
|
40,219
|
|
|
$
|
37,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reflects the components of the reinsurance receivables:
|
At December 31,
|
|
|
2013
|
|
2012
|
|
Prepaid reinsurance premiums:
|
|
|
|
|
Life
(1)
|
$
|
51,355
|
|
|
$
|
53,117
|
|
|
Accident and health
(1)
|
36,214
|
|
|
34,266
|
|
|
Property
|
98,650
|
|
|
85,805
|
|
|
Total
|
186,219
|
|
|
173,188
|
|
|
Ceded claim reserves:
|
|
|
|
|
Life
|
1,594
|
|
|
1,786
|
|
|
Accident and health
|
7,826
|
|
|
9,263
|
|
|
Property
|
12,102
|
|
|
8,663
|
|
|
Total ceded claim reserves recoverable
|
21,522
|
|
|
19,712
|
|
|
Other reinsurance settlements recoverable
|
7,343
|
|
|
11,088
|
|
|
Reinsurance receivables
|
$
|
215,084
|
|
|
$
|
203,988
|
|
(1)
Including policyholder account balances ceded.
The following table shows the aggregate amount included in reinsurance receivables that is comprised of the three largest receivable balances from unrelated reinsurers:
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2013
|
|
2012
|
|
Total of the three largest receivable balances from unrelated reinsurers
|
$
|
136,061
|
|
|
$
|
126,633
|
|
At
December 31, 2013
and December 31, 2012, respectively, the three unrelated reinsurers from whom the Company has the largest receivable balances were: London Life Reinsurance Company (A. M. Best Rating: A); London Life International Reinsurance Corporation (A. M. Best Rating: Not rated) and Spartan Property Insurance Company (A. M. Best Rating: Not rated). The related receivables of Spartan Property Insurance Company and London Life International Reinsurance Corporation are collateralized by assets held in trust accounts and letters of credit due to their offshore relationships. At
December 31, 2013
, the Company does not believe there is a risk of loss as a result of the concentration of credit risk in the reinsurance program.
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
14. Property and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
The components of property and equipment are as follows:
|
At December 31,
|
|
|
2013
|
|
2012
|
|
Furniture, fixtures and equipment
|
$
|
3,592
|
|
|
$
|
2,992
|
|
|
Computer equipment
|
2,862
|
|
|
4,126
|
|
|
Equipment and software under capital lease
|
229
|
|
|
229
|
|
|
Software
(1)
|
19,057
|
|
|
18,632
|
|
|
Leasehold improvements
|
888
|
|
|
568
|
|
|
Property and equipment, gross
|
26,628
|
|
|
26,547
|
|
|
Less: accumulated depreciation and amortization
|
12,296
|
|
|
8,647
|
|
|
Property and equipment, net
|
$
|
14,332
|
|
|
$
|
17,900
|
|
|
|
|
|
|
|
(1)
Internally developed software not yet placed in service, included in software
|
$
|
657
|
|
|
$
|
942
|
|
The following reflects depreciation on property and equipment and amortization expense related to capitalized software costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Depreciation expense on property and equipment
|
$
|
1,792
|
|
|
$
|
1,336
|
|
|
$
|
1,217
|
|
|
Amortization expense on capitalized software
|
3,066
|
|
|
1,939
|
|
|
1,445
|
|
|
Total depreciation and amortization
|
$
|
4,858
|
|
|
$
|
3,275
|
|
|
$
|
2,662
|
|
15. Leases
Operating Leases
The Company leases certain office space and equipment under operating leases expiring on various dates from
2014
through
2022
. The Company assumed operating leases for office space from related parties in conjunction with the ProtectCELL and 4Warranty acquisitions. The terms of the related party leases are substantially the same as those offered for comparable transactions with non-related parties. Please see the Note, "Related Party Transactions," for more information on the amount of related party lease payments made in 2013. The following table shows the Company's future minimum lease payments under operating leases with initial or remaining non-cancelable lease terms in excess of one year at:
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
2014
|
$
|
2,034
|
|
|
2015
|
2,082
|
|
|
2016
|
2,111
|
|
|
2017
|
2,104
|
|
|
2018
|
1,667
|
|
|
Thereafter
|
5,419
|
|
|
Total future minimum lease payments
|
$
|
15,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized rent expense:
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Total rent expense
|
$
|
2,449
|
|
|
$
|
1,611
|
|
|
$
|
1,732
|
|
Capital Lease
The Company leases equipment and software under a single capital lease expiring in 2014. The following table shows the Company's future minimum lease payments for its capital lease at:
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
2014
|
$
|
134
|
|
|
Amounts representing interest
|
(7
|
)
|
|
Obligations under capital lease
|
$
|
127
|
|
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
16. Notes Payable
|
|
|
|
|
|
|
|
|
|
|
|
The Company's Notes Payable consisted of the following at:
|
At December 31,
|
|
|
2013
|
|
2012
|
|
Wells Fargo Bank, N.A. credit facility, maturing August 2017
|
$
|
—
|
|
|
$
|
89,438
|
|
|
Synovus Bank, line of credit, maturing April 2017
|
3,273
|
|
|
—
|
|
|
Total
|
$
|
3,273
|
|
|
$
|
89,438
|
|
|
|
|
|
|
|
Maximum balance allowed on the Wells Fargo Bank, N.A. credit facility
|
$
|
75,000
|
|
|
$
|
123,750
|
|
|
Interest rate at the end of the respective period, Wells Fargo Bank, N.A. credit facility
(1)
|
—
|
%
|
|
2.76
|
%
|
|
|
|
|
|
|
Maximum balance allowed on the Synovus Bank, line of credit
|
$
|
15,000
|
|
|
$
|
—
|
|
|
Interest rate at the end of the respective period, Synovus Bank, line of credit
|
3.24
|
%
|
|
—
|
%
|
(1)
- At December 31, 2013 the Company had no borrowings outstanding under the Revolving Facility, thus no interest rate can be defined.
|
|
|
|
|
|
|
|
Aggregate maturities for the Company's notes payable at December 31, 2013, by year, are as follows:
|
Maturities
|
|
2014
|
$
|
3,273
|
|
|
Total maturities
|
$
|
3,273
|
|
$75.0 million
Secured Credit Agreement - Wells Fargo Bank, N.A.
At
December 31, 2013
, the Company had a secured credit agreement (the "Credit Agreement"), entered into on
August 2, 2012
, with a syndicate of lenders, among them Wells Fargo Bank, N.A., who also serves as administrative agent ("Wells Fargo" or the "Administrative Agent"). The Credit Agreement has a five year term, with an initial capacity of
$125.0 million
comprised of a
$50.0 million
term loan facility (the "Term Loan Facility"), and a
$75.0 million
revolving credit facility (the "Revolving Facility" and collectively with the Term Loan Facility, the "Facilities") with a sub-limit of
$10.0 million
for swingline loans and
$10.0 million
for letters of credit. As required by the terms of the Credit Agreement, the Company used the proceeds from the Disposition to pay off the balances of both the Term Loan Facility and the Revolving Facility. Accordingly, the Term Loan Facility is no longer available for future borrowings, while the Revolving Facility remains available. Subject to earlier termination, the Credit Agreement terminates on
August 2, 2017
. The Credit Agreement includes a provision pursuant to which, from time to time, the Company may request that the lenders in their discretion increase the maximum amount of commitments under the Facilities by an amount not to exceed
$50.0 million
.
At the Company's election, borrowings under the Revolving Facility will bear interest either at the base rate plus an applicable interest margin or the adjusted LIBO rate plus an applicable interest margin; provided, however, that all swingline loans will be base rate loans. The base rate is a fluctuating interest rate equal to the highest of: (i) Wells Fargo's publicly announced prime lending rate; (ii) the federal funds rate plus
0.50%
; and (iii) the adjusted LIBO rate, determined on a daily basis for an interest period of one month, plus
1.0%
. The adjusted LIBO rate is the rate per annum obtained by dividing (i) the London interbank offered rate (\"LIBOR") for such interest period by (ii) a percentage equal to
1.00
minus
the Eurodollar Reserve Percentage (as defined in the Credit Agreement). The interest margin over the adjusted LIBO rate, initially set at
2.75%
, may increase (to a maximum amount of
3.0%
) or decrease (to a minimum amount of
2.0%
) based on changes in the Company's leverage ratio. The interest margin over the base rate, initially set at
1.75%
, may increase (to a maximum amount of
2.0%
) or decrease (to a minimum amount of
1.0%
) based on changes in the Company's leverage ratio.
In addition to interest payable on the principal amount of indebtedness outstanding from time to time under the Credit Agreement, the Company is required to pay a commitment fee, initially equal to
0.40%
per annum of the unused amount of the Revolving Facility. The percentage rate of such fee may increase (to a maximum amount of
0.45%
) or decrease (to a minimum amount of
0.25%
) based on changes in the Borrowers' leverage ratio. The amount of outstanding swingline loans is not considered usage of the Revolving Facility for the purpose of calculating the commitment fee. The Company is also required to pay letter of credit participation fees on the undrawn amount of all outstanding letters of credit. The Company paid fees of approximately
$1.7 million
to Wells Fargo in connection with the execution of the Credit Agreement, which have been capitalized and are being amortized using a straight line method over the life of the Credit Agreement.
The Company, at its option, may prepay any borrowing, in whole or in part, at any time and from time to time without premium or penalty. However, after the end of the Company's fiscal year (commencing with the fiscal year ending December 31, 2015), the Company is required to make mandatory principal prepayments of loans under the Facilities in an amount determined under the Credit Agreement based upon a percentage of the Company's Excess Cash Flow (as defined in the Credit Agreement) minus certain offset amounts relating to permitted acquisitions. In addition, the Company is required to make principal payments upon the occurrence of certain events, including upon certain dispositions of the Company's assets.
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The Credit Agreement contains certain customary representations, warranties and covenants applicable to the Company for the benefit of the Administrative Agent and the lenders. The Company may not assign, sell, transfer or dispose of any collateral or effect certain changes to the Company's capital structure and the capital structure of its subsidiaries without the Administrative Agent's prior consent. The Company's obligations under the Facilities may be accelerated or the commitments terminated upon the occurrence of an event of default under the Credit Agreement, including payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency related defaults, cross defaults to other material indebtedness, defaults arising in connection with changes in control and other customary events of default. The Credit Agreement also contains financial covenants, which the Company must maintain. See the section below, "Financial Covenants" for a presentation of the Company's more significant covenants associated with the Credit Agreement.
$85.0 million
Revolving Credit Facility - SunTrust Bank, N.A.
During 2012 and 2011, the Company had an
$85.0 million
revolving credit facility with SunTrust Bank, N.A., (the "Facility"). The Facility had an original maturity of June 2013. The Facility bore interest at a variable rate determined based upon the higher of (i) the prime rate, (ii) the federal funds rate plus
0.50%
or (iii) LIBOR plus
1%
, plus a margin tied to the Company's leverage ratio. The Company could select at its discretion to convert the interest rate for all or a portion of the outstanding balance for a period of up to six months to a fixed EURO Dollar Funding rate which is equal to the adjusted LIBOR rate for the elected interest period in effect at the time of election, plus a margin tied to the Company's leverage ratio.
Termination of the $85.0 million Facility
On
August 2, 2012
, the Company terminated the Facility and entered into the Credit Agreement. In connection with the termination of the Facility, the Company recorded a charge of
$0.7 million
to interest expense for the year ending December 31, 2012, for previously capitalized transaction costs associated with the Facility.
Financial Covenants - Secured Credit Agreement - Wells Fargo Bank, N.A.
At
December 31, 2013
and December 31, 2012, respectively, the Company was required to comply with various financial covenants set forth in the Credit Agreement. The following describes the Credit Agreement's more significant financial covenants in effect at
December 31, 2013
and the calculations used to arrive at each ratio (capitalized terms used but not defined in this paragraph are defined in the Credit Agreement or as otherwise provided below):
Total Leverage Ratio
- the ratio of (i) Consolidated Total Debt as of such date to (ii) Consolidated Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") for the Measurement Period ending on or immediately prior to such date.
Fixed Charge Coverage Ratio
-
the ratio of (a) Consolidated Adjusted EBITDA
less
the actual amount paid by the Borrowers and their Subsidiaries in cash on account of Capital Expenditures
less
cash taxes paid by the Borrowers and their Subsidiaries to (b) Consolidated Fixed Charges, in each case for the Measurement Period ending on or immediately prior to such date.
Reinsurance Ratio
- the ratio (expressed as a percentage) of (a) the aggregate amounts recoverable by the Borrowers and its Subsidiaries from reinsurers
divided by
(b) the sum of (i) policy and claim liabilities
plus
(ii) unearned premiums, in each case of the Borrowers and their Subsidiaries determined in accordance with U.S. GAAP.
Risk-Based Capital ("RBC") Ratio
-
the ratio (expressed as a percentage) of NAIC RBC (as defined in the NAIC standards) for any Regulated Insurance Company on an individual basis, calculated at the end of any Fiscal Year, to the "authorized control level" (as defined in the NAIC standards).
|
|
|
|
|
|
|
|
|
|
The following is a summary of the Credit Agreement's more significant financial covenants:
|
|
Actual At
|
|
Covenant
|
Covenant Requirement
|
|
December 31, 2013
|
|
December 31, 2012
|
|
Total leverage ratio
(1)
|
not more than 3.25
|
|
0.70
|
|
3.10
|
|
Fixed charge coverage ratio
|
not less than 2.00
|
|
3.01
|
|
2.33
|
|
Reinsurance ratio
|
not less than 50%
|
|
68.0%
|
|
69.0%
|
|
RBC Ratios:
|
|
|
|
|
|
|
RBC Ratio - Bankers Life of Louisiana
|
not less than 250%
|
|
435.0%
|
|
469.0%
|
|
RBC Ratio - Southern Financial Life Insurance Company
|
not less than 250%
|
|
2,096.0%
|
|
2,155.0%
|
|
RBC Ratio - Insurance Company of the South
|
not less than 250%
|
|
366.0%
|
|
378.0%
|
|
RBC Ratio - Lyndon Southern Insurance Company
|
not less than 250%
|
|
305.0%
|
|
255.0%
|
|
RBC Ratio - Life of the South Insurance Company
|
not less than 250%
|
|
430.0%
|
|
386.0%
|
|
RBC Ratio - Response Indemnity Company of California
|
not less than 250%
|
|
39,754.0%
|
|
—%
|
(1)
- The total leverage ratio in effect at December 31, 2012 was "not more than
3.50
".
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
$15.0 million Revolving Line of Credit - Synovus Bank
At
December 31, 2013
, the Company's subsidiary
,
South Bay had a
$15.0 million
revolving line of credit agreement (the "Line of Credit") with Synovus Bank, entered into in
October 2013
, with a maturity date of
April 2017
. The Line of Credit bears interest at a
rate of
300
basis points plus the 90-day LIBOR. The Line of Cre
dit is used by South Bay for its premium financing product. The Line of Credit allows South Bay to finance up to
90%
of the eligible receivables less an applicable reserve of
$500,000
. At
December 31, 2013
, the balance of premium financing receivables included in notes receivable, net on the Consolidated Balance Sheet, totaled
$5.4 million
. The Company paid fees of approximately
$0.2 million
to Synovus Bank in connection with the execution of the Line of Credit, which have been capitalized and are being amortized using a straight-line method over the term of the Line of Credit.
17. Derivative Financial Instruments - Interest Rate Swap
The Company has an interest rate swap (the "Swap") with Wells Fargo Bank, N.A., pursuant to which the Company swapped the floating rate portion of its outstanding preferred trust securities to a fixed rate. The Swap, which is designated as a cash flow hedge, commenced in June 2012 and expires in June 2017. The following table summarizes the fair value (including accrued interest) and the related outstanding notional amount of the Company's single derivative instrument and indicates where within the Consolidated Balance Sheets each amount is reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
At December 31,
|
|
|
|
2013
|
|
2012
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
Interest rate swap - notional value
|
|
|
$
|
35,000
|
|
|
$
|
35,000
|
|
|
Fair value of the Swap
|
Accrued expenses, accounts payable and other liabilities
|
|
2,930
|
|
|
4,338
|
|
|
Unrealized loss, net of tax, on the fair value of the Swap
|
AOCI
|
|
1,904
|
|
|
2,820
|
|
|
Variable rate of the interest rate swap
|
|
|
0.24
|
%
|
|
0.31
|
%
|
|
Fixed rate of the interest rate swap
|
|
|
3.47
|
%
|
|
3.47
|
%
|
The following table summarizes the pretax impact of the Swap on the Consolidated Financial Statements for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Gain (loss) recognized in AOCI on the derivative-effective portion
|
$
|
277
|
|
|
$
|
(1,007
|
)
|
|
$
|
(3,601
|
)
|
|
|
|
|
|
|
|
|
Loss reclassified from AOCI into income-effective portion
|
$
|
1,132
|
|
|
$
|
270
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in income on the derivative-ineffective portion
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The table below shows the estimated amount to be reclassified to earnings from AOCI during the next 12 months. These net losses reclassified into earnings are expected to primarily increase net interest expense related to the respective hedged item.
|
|
|
|
|
|
|
|
|
At
|
|
|
December 31, 2013
|
|
Estimated loss to be reclassified to earnings from AOCI during the next 12 months
|
$
|
1,122
|
|
18. Stock-Based Compensation
At
December 31, 2013
, the Company had outstanding time-based stock options under its 2005 Plan and outstanding time-based and performance-based stock options and restricted stock awards under its 2010 Plan. The 2005 Plan permits awards of (i) Incentive Stock Options, (ii) Non-qualified Stock Options, (iii) Stock Appreciation Rights, (iv) Restricted Stock and (v) Restricted Stock Units. The 2010 Plan permits awards of (i) Incentive Stock Options, (ii) Non-qualified Stock Options, (iii) Stock Appreciation Rights, (iv) Restricted Stock, (v) Other Stock-Based Awards and (vi) Performance-Based Compensation Awards.
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The following table details the 2005 Plan and the 2010 Plan at
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
2005 Plan
|
|
2010 Plan
|
|
Date the plan was established
|
October 18, 2005
|
|
December 13, 2010
|
|
Share permitted to be issued under the plan
|
1,312,500
|
|
|
4,000,000
|
|
|
Maximum contractual term of grants under the plan (in years)
|
10.0
|
|
|
10.0
|
|
|
Time-based stock options outstanding under the plan
|
1,545,462
|
|
|
384,945
|
|
|
Performance-based stock options outstanding under the plan
|
—
|
|
|
289,306
|
|
|
Time-based restricted stock awards under the plan
|
—
|
|
|
139,680
|
|
|
Performance-based restricted stock awards outstanding under the plan
|
—
|
|
|
130,629
|
|
Stock Options
The Company granted
60,000
time-based stock options to employees during
the year ended December 31, 2013
, which vest in equal portions on each of the four anniversaries of the grant date. During
the year ended December 31, 2013
, the Company granted
228,981
performance-based stock options under the Company's Long-Term Incentive Plan ("LTIP"). The performance-based awards will vest, if at all, should the Company achieve
three
-year performance goals on or before December 31, 2015 for (i) net revenue (Compound Annual Growth Rate), (ii) earnings growth (Net Income) and (iii) profitable growth (Return on Average Equity). The performance metrics are equally weighted such that achievement of any one target results in vesting of one-third of the total equity award. If any of the target(s) are not attained by December 31, 2015, the one-third portion(s) of the award associated with the unattained target(s) will be canceled. The Company's time-based and performance-based stock option activity for the following periods is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-Based
|
|
Performance-Based
|
|
|
Options Outstanding
|
|
Weighted Average Exercise Price (in dollars per share)
|
|
Options Exercisable
|
|
Weighted Average Exercise Price (in dollars per share)
|
|
Options Outstanding (1)
|
|
Weighted Average Exercise Price (in dollars per share)
|
|
Options Exercisable
|
|
Weighted Average Exercise Price (in dollars per share)
|
|
Balance, January 1, 2012
|
1,893,731
|
|
|
$
|
4.15
|
|
|
1,607,307
|
|
|
$
|
3.41
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
Granted
|
125,000
|
|
|
7.97
|
|
|
—
|
|
|
—
|
|
|
185,000
|
|
|
8.00
|
|
|
—
|
|
|
—
|
|
|
Vested
|
—
|
|
|
—
|
|
|
85,233
|
|
|
8.50
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Exercised
|
(2,500
|
)
|
|
7.84
|
|
|
(2,500
|
)
|
|
7.84
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Canceled/forfeited
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Balance, December 31, 2012
|
2,016,231
|
|
|
$
|
4.38
|
|
|
1,690,040
|
|
|
$
|
3.66
|
|
|
185,000
|
|
|
$
|
8.00
|
|
|
—
|
|
|
$
|
—
|
|
|
Granted
|
60,000
|
|
|
7.62
|
|
|
—
|
|
|
—
|
|
|
228,981
|
|
|
8.89
|
|
|
—
|
|
|
—
|
|
|
Vested
|
—
|
|
|
—
|
|
|
122,461
|
|
|
8.50
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Exercised
|
(6,250
|
)
|
|
7.84
|
|
|
(6,250
|
)
|
|
7.84
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Canceled/forfeited
|
(139,574
|
)
|
|
7.91
|
|
|
—
|
|
|
—
|
|
|
(124,675
|
)
|
|
8.57
|
|
|
—
|
|
|
—
|
|
|
Balance, December 31, 2013
|
1,930,407
|
|
|
$
|
4.22
|
|
|
1,806,251
|
|
|
$
|
3.98
|
|
|
289,306
|
|
|
$
|
8.46
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining contractual term at December 31, 2013 (in years)
|
3.8
|
|
|
|
|
3.5
|
|
|
|
|
8.8
|
|
|
|
|
0
|
|
|
|
(1)
The performance-based stock options granted during the year ended December 31, 2012 will begin to vest equally over
three years
upon the Company's compensation committee determining that the Company has attained an Adjusted EBITDA of
$46.0 million
.
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The following table presents the Company's outstanding and exercisable time-based and performance-based stock options by exercise price at
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Exercise Price
|
|
Option Shares Outstanding
|
Weighted Average Remaining Contractual Life (in years)
|
Weighted Average Exercise Price (in dollars per share)
|
|
Option Shares Outstanding
|
Weighted Average Remaining Contractual Life (in years)
|
Weighted Average Exercise Price (in dollars per share)
|
|
$3.03
|
|
787,500
|
|
1.88
|
$
|
3.03
|
|
|
787,500
|
|
1.88
|
|
$
|
3.03
|
|
|
3.25
|
|
757,963
|
|
3.82
|
3.25
|
|
|
757,963
|
|
3.82
|
|
3.25
|
|
|
7.62
|
|
60,000
|
|
9.67
|
7.62
|
|
|
—
|
|
—
|
|
—
|
|
|
7.84
|
|
195,000
|
|
7.50
|
7.84
|
|
|
135,844
|
|
7.50
|
|
7.84
|
|
|
7.93
|
|
5,000
|
|
8.75
|
7.93
|
|
|
—
|
|
—
|
|
—
|
|
|
7.97
|
|
36,676
|
|
8.67
|
7.97
|
|
|
36,676
|
|
8.67
|
|
7.97
|
|
|
8.00
|
|
140,000
|
|
8.50
|
8.00
|
|
|
—
|
|
—
|
|
—
|
|
|
8.89
|
|
149,306
|
|
9.00
|
8.89
|
|
|
—
|
|
—
|
|
—
|
|
|
11.00
|
|
88,268
|
|
6.96
|
11.00
|
|
|
88,268
|
|
6.96
|
|
11.00
|
|
|
Totals
|
|
2,219,713
|
|
4.47
|
$
|
4.77
|
|
|
1,806,251
|
|
3.50
|
|
$
|
3.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information on time-based and performance-based stock options, vested and expected to vest, is as follows:
|
|
|
At
|
|
|
December 31, 2013
|
|
|
Time-Based
|
|
Performance-Based
|
|
Number of shares vested and expected to vest
|
1,922,398
|
|
|
133,001
|
|
|
Weighted average remaining contractual life (in years)
|
3.8
|
|
|
8.5
|
|
|
Weighted average exercise price per option (in dollars)
|
$
|
4.20
|
|
|
$
|
8.00
|
|
|
Intrinsic value (in thousands)
|
$
|
8,060
|
|
|
$
|
36
|
|
Additional information on time-based and performance-based options granted, vested and exercised is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Weighted-average grant date fair value of stock options granted (in dollars)
|
$
|
2.99
|
|
|
$
|
2.80
|
|
|
$
|
2.92
|
|
|
Total stock options granted (in shares)
|
288,981
|
|
|
310,000
|
|
|
280,000
|
|
|
Total fair value of stock options vested during the year
|
$
|
366
|
|
|
$
|
268
|
|
|
$
|
268
|
|
|
Total intrinsic value of stock options exercised
(1)
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
2,920
|
|
|
Cash received from stock option exercises
|
$
|
49
|
|
|
$
|
20
|
|
|
$
|
607
|
|
|
Tax benefits realized from exercised stock options
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
45
|
|
|
Cash used to settle equity instruments granted under stock-based compensation awards
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
New shares issued upon the exercise of stock options
|
6,250
|
|
|
2,500
|
|
|
322,061
|
|
|
Outstanding stock options issued outside of existing plans (in shares)
|
272,338
|
|
|
272,338
|
|
|
272,338
|
|
(1)
Calculated as the difference between the market value at the exercise date and the exercise price of the shares.
The weighted average assumptions used to estimate the fair values of all stock options granted is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Expected term (years)
|
6.3
|
|
|
6.2
|
|
|
6.1
|
|
|
Expected volatility
|
34.14
|
%
|
|
34.34
|
%
|
|
33.95
|
%
|
|
Expected dividends
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
Risk-free rate
|
1.22
|
%
|
|
0.91
|
%
|
|
2.22
|
%
|
Restricted Stock Awards
The Company granted
6,016
time-based restricted stock awards to employees during
the year ended December 31, 2013
, which vest in equal portions on each of the four anniversaries of the grant date. During
the year ended December 31, 2013
, the Company granted
76,326
performance-based restricted stock awards to employees under the LTIP. The performance-based restricted stock awards will vest based on the same criteria as the performance based stock options described in the above section titled, "
Stock Options."
In addition, during
the year ended December 31, 2013
, the Company granted
75,000
time-based restricted stock awards, equally distributed to
five
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
of its Directors, which vest in equal portions on each of the three anniversaries of the grant date. The Company's time-based and performance-based restricted stock award activity for the following periods is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-Based
|
|
Performance-Based
|
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Shares outstanding at January 1, 2012
|
33,000
|
|
|
$
|
10.69
|
|
|
80,861
|
|
|
$
|
11.00
|
|
|
Grants
|
88,000
|
|
|
7.48
|
|
|
—
|
|
|
—
|
|
|
Vests
|
(18,000
|
)
|
|
10.43
|
|
|
—
|
|
|
—
|
|
|
Forfeitures
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Shares outstanding at December 31, 2012
|
103,000
|
|
|
8.00
|
|
|
80,861
|
|
|
11.00
|
|
|
Grants
|
81,016
|
|
|
9.39
|
|
|
76,326
|
|
|
8.89
|
|
|
Vests
|
(44,336
|
)
|
|
8.67
|
|
|
—
|
|
|
—
|
|
|
Forfeitures
|
—
|
|
|
—
|
|
|
(26,558
|
)
|
|
8.89
|
|
|
Shares outstanding at December 31, 2013
|
139,680
|
|
|
$
|
8.59
|
|
|
130,629
|
|
|
$
|
10.20
|
|
Stock-based Compensation Expense
Total time-based and performance-based stock-based compensation expense and the related income tax (benefit) recognized on the Consolidated Statements of Income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Personnel costs
|
$
|
722
|
|
|
$
|
661
|
|
|
$
|
593
|
|
|
Other operating expenses
|
506
|
|
|
293
|
|
|
154
|
|
|
Income tax benefit
|
(470
|
)
|
|
(365
|
)
|
|
(286
|
)
|
|
Net stock-based compensation expense
|
$
|
758
|
|
|
$
|
589
|
|
|
$
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional information on total non-vested stock-based compensation is as follows:
|
At December 31, 2013
|
|
|
Stock Options
|
|
Restricted Stock Awards
|
|
Unrecognized compensation cost related to non-vested awards
|
$
|
431
|
|
|
$
|
986
|
|
|
Weighted-average recognition period (in years)
|
2.4
|
|
|
4.7
|
|
For
the year ended December 31, 2013
, the Company did not recognize expense on
149,306
performance-based stock options and
49,768
performance-based restricted stock awards because the attainment of the performance metrics associated with these awards was not probable based on current projections.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan ("ESPP"), which allows the Company to issue up to
1,000,000
shares of common stock to all eligible employees, including the Company's named executive officers, under the same offering and eligibility terms. The ESPP qualifies under Section 423 of the Internal Revenue Code and allows eligible employees to contribute, at their discretion, up to
10%
of their payroll, up to
$25,000
per year, to purchase up to a maximum of
3,500
shares of the Company's common stock per offering period. The purchase price of Fortegra's common stock is equal to
85%
of the lesser of the fair market value of the closing stock price of Fortegra's common stock on either the first day of the offering period or the last day of the offering period. Each offering period has a duration of six months and begins on January 1st and July 1st of each year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information related to the Company's ESPP is as follows:
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
(1)
|
|
Common stock issued under the ESPP (in shares)
|
61,336
|
|
|
53,511
|
|
|
10,167
|
|
|
Weighted-average purchase price per share by participant in the ESPP
|
$
|
5.83
|
|
|
$
|
6.18
|
|
|
$
|
5.68
|
|
|
Total cash proceeds received from the issuance of common shares under the ESPP
|
$
|
357
|
|
|
$
|
330
|
|
|
$
|
58
|
|
|
ESPP compensation costs recognized
|
$
|
101
|
|
|
$
|
90
|
|
|
$
|
15
|
|
(1)
The Company's ESPP began open enrollment in July 2011.
19. Share Repurchase Plan
Fortegra has an active share repurchase plan, which allows the Company to purchase up to
$15.0 million
in total of the Company's common stock to be purchased from time to time through open market or private transactions. The Board of Directors approved a
$10.0
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
million
share repurchase pla
n in November 2011 and in August 2013 increased th
e size of the plan by
$5.0 million
. At
December 31, 2013
, the Company had
$7.2 million
still available for repurchase under the plan. The share repurchase plan has no expiration date and provides for shares to be repurchased for general corporate purposes, which may include serving as a resource for funding potential acquisitions and employee benefit plans. The timing, price and quantity of purchases are at the discretion of Fortegra. The plan may be discontinued or suspended at any time and has no expiration date. None of the shares repurchased during the years ended
December 31, 2013
and
2012
, respectively, have been retired. The following table shows the shares repurchased during the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
Shares repurchased during the period
|
200,000
|
|
|
508,080
|
|
|
Total cost of shares repurchased during the period
|
$
|
1,357
|
|
|
$
|
3,923
|
|
|
Average price paid per share for shares purchased during the period
|
$
|
6.79
|
|
|
$
|
7.72
|
|
20. 401(k) Profit Sharing Plan
The Company has a 401(k) plan (the "401(k) Plan") available to employees meeting certain eligibility requirements. The 401(k) Plan allows employees to contribute, at their discretion, a percentage of their pre-tax annual compensation and allows employees to select from various investment options based on their individual investment goals and risk tolerances. Under the 401(k) Plan, the Company will match 100% of each dollar of the employee contribution up to the maximum of
5%
of the employee's annual compensation. The contributions of the 401(k) Plan are invested at the election of the employee in one or more investment options by a third party plan administrator. In August 2010, the Company suspended the matching contribution and therefore has not recorded a matching contribution expense for the years ending
December 31, 2013, 2012 and 2011
.
21. Deferred Compensation Plan
The Company has a nonqualified deferred compensation plan for certain officers. Provision has been made for the compensation which is payable upon their retirement or death. The deferred compensation is to be paid to the individual or their beneficiaries over a period of ten years commencing with the first year following retirement or death. As of
December 31, 2013
, there were no further payments required under the plan.
The Company also has deferred bonus agreements with several key executives whereby funds are contributed to "rabbi" trusts held for the benefit of the executives. The funds held in the rabbi trusts are included in cash and cash equivalents and the corresponding deferred compensation obligation is included in the line item, "Accrued expenses, accounts payable and other liabilities," on the Consolidated Balance Sheets. Pursuant to U.S. GAAP, the portion of the rabbi trusts invested in shares of the Company has been reflected in the treasury stock balance on the Consolidated Balance Sheets at
December 31, 2013
and
2012
.
22. Income Taxes
The provision for income taxes for both continuing and discontinued operations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Income taxes - continuing operations
|
$
|
5,660
|
|
|
$
|
6,716
|
|
|
$
|
5,947
|
|
|
Income taxes - discontinued operations
|
8,343
|
|
|
1,579
|
|
|
1,193
|
|
|
Income taxes
|
$
|
14,003
|
|
|
$
|
8,295
|
|
|
$
|
7,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes from continuing operations consisted of the following:
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Current
|
$
|
7,978
|
|
|
$
|
4,272
|
|
|
$
|
4,797
|
|
|
Deferred
|
(2,318
|
)
|
|
2,444
|
|
|
1,150
|
|
|
Income taxes - continuing operations
|
$
|
5,660
|
|
|
$
|
6,716
|
|
|
$
|
5,947
|
|
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The following table shows a reconciliation of income taxes from continuing operations calculated at the federal statutory rate of
35%
and the income tax expense attributable to continuing operations for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2013
|
2012
|
|
2011
|
|
|
Amount
|
|
Percent of Pre-tax Income
|
|
Amount
|
|
Percent of Pre-tax Income
|
|
Amount
|
|
Percent of Pre-tax Income
|
|
Income taxes at federal income tax rate
|
$
|
6,113
|
|
|
35.00
|
%
|
|
$
|
6,887
|
|
|
35.00
|
%
|
|
$
|
6,129
|
|
|
35.00
|
%
|
|
Effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Small life deduction
|
(516
|
)
|
|
(2.95
|
)
|
|
(444
|
)
|
|
(2.26
|
)
|
|
(375
|
)
|
|
(2.14
|
)
|
|
Non-deductible expenses
|
91
|
|
|
0.52
|
|
|
33
|
|
|
0.17
|
|
|
233
|
|
|
1.33
|
|
|
Non-deductible preferred dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
105
|
|
|
0.60
|
|
|
Tax exempt interest
|
(136
|
)
|
|
(0.78
|
)
|
|
(123
|
)
|
|
(0.63
|
)
|
|
(120
|
)
|
|
(0.69
|
)
|
|
State taxes
|
414
|
|
|
2.37
|
|
|
324
|
|
|
1.65
|
|
|
219
|
|
|
1.25
|
|
|
Prior year tax true up
|
247
|
|
|
1.41
|
|
|
98
|
|
|
0.50
|
|
|
(506
|
)
|
|
(2.89
|
)
|
|
Non-controlling interest
|
(516
|
)
|
|
(2.95
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other, net
|
(37
|
)
|
|
(0.21
|
)
|
|
(59
|
)
|
|
(0.30
|
)
|
|
262
|
|
|
1.50
|
|
|
Income taxes - continuing operations
|
$
|
5,660
|
|
|
32.41
|
%
|
|
$
|
6,716
|
|
|
34.13
|
%
|
|
$
|
5,947
|
|
|
33.96
|
%
|
The components of the Company's deferred income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2013
|
|
2012
|
|
Gross deferred tax assets
|
|
|
|
|
Unearned premiums
|
$
|
5,052
|
|
|
$
|
4,852
|
|
|
Deferred revenue
|
8,080
|
|
|
7,960
|
|
|
Net operating loss carryforward
|
245
|
|
|
516
|
|
|
Unrealized losses on investments
|
796
|
|
|
—
|
|
|
Other basis differences in investments
|
109
|
|
|
—
|
|
|
Unrealized loss on interest rate swap
|
1,341
|
|
|
1,636
|
|
|
Research credit
|
—
|
|
|
671
|
|
|
Unpaid claims
|
115
|
|
|
146
|
|
|
Deferred compensation
|
977
|
|
|
483
|
|
|
Bad debt allowance
|
60
|
|
|
238
|
|
|
Other deferred assets
|
122
|
|
|
108
|
|
|
Total gross deferred tax assets
|
16,897
|
|
|
16,610
|
|
|
Gross deferred tax liabilities
|
|
|
|
|
Deferred acquisition costs
|
20,228
|
|
|
20,250
|
|
|
Other intangible assets
|
7,769
|
|
|
14,165
|
|
|
Advanced commissions
|
4,524
|
|
|
4,204
|
|
|
Depreciation on property and equipment
|
4,035
|
|
|
5,250
|
|
|
Unrealized gains on investments
|
—
|
|
|
1,290
|
|
|
Other basis differences in investments
|
—
|
|
|
65
|
|
|
Other deferred tax liabilities
|
—
|
|
|
37
|
|
|
Total gross deferred tax liabilities
|
36,556
|
|
|
45,261
|
|
|
Deferred income taxes, net
|
$
|
19,659
|
|
|
$
|
28,651
|
|
At
December 31, 2013
, the Company had a net operating loss carry forward of
$0.6 million
, which is subject to certain limitations under IRC Section 382 and will begin to expire in
2025
. The Company expects to fully utilize the net operating loss carryforward.
At December 31, 2012, the Company had research and experimentation (research) tax credit carry forwards for federal and state income tax purposes in the amount of
$0.5 million
and
$0.2 million
, respectively that were subject to certain limitations under IRC Section 382 and were to begin to expire in
2019
. As part of the valuation determinations of the subsidiary in which the research credit was generated, the Company recorded a
$0.2 million
liability against the research credit carryforward deferred tax asset. At
December 31, 2013
, the research credits were no longer available to the Company since they were generated by eReinsure, which was sold on
December 31, 2013
.
The Company has reviewed its uncertain tax positions and management has concluded that there are no additional amounts required to be recorded.
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
In 2012, the Company was under examination by the Internal Revenue Service ("IRS") for the
2010
and
2009
tax years. In
February 2013
, the IRS completed its field audit for those tax years and presented its findings. The Company has agreed to those findings and paid
$57.0 thousand
, which was expensed in the first quarter of 2013.
The Company's income tax returns are subject to review and examination by federal and state taxing authorities. The Company is currently open to audit under the applicable statutes of limitations by the IRS for the tax years
2011
through
2013
. The years open to examination by state taxing authorities vary by jurisdiction. There are no extensions of the statute of limitations to assess income taxes currently in effect.
23. Fair Value of Financial Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying and fair values of financial instruments are as follows:
|
At
|
|
|
December 31, 2013
|
|
December 31, 2012
|
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
21,681
|
|
|
$
|
21,681
|
|
|
$
|
15,209
|
|
|
$
|
15,209
|
|
|
Restricted cash
|
17,293
|
|
|
17,293
|
|
|
31,142
|
|
|
31,142
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
Obligations of the U.S. Treasury and U.S. Government agencies
|
51,435
|
|
|
51,435
|
|
|
23,178
|
|
|
23,178
|
|
|
Municipal securities
|
24,547
|
|
|
24,547
|
|
|
17,041
|
|
|
17,041
|
|
|
Corporate securities
|
55,360
|
|
|
55,360
|
|
|
70,008
|
|
|
70,008
|
|
|
Mortgage-backed securities
|
—
|
|
|
—
|
|
|
289
|
|
|
289
|
|
|
Obligations of foreign governments
|
409
|
|
|
409
|
|
|
—
|
|
|
—
|
|
|
Asset-backed securities
|
—
|
|
|
—
|
|
|
125
|
|
|
125
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
Common stock - publicly traded
|
47
|
|
|
47
|
|
|
42
|
|
|
42
|
|
|
Preferred stock - publicly traded
|
5,087
|
|
|
5,087
|
|
|
5,107
|
|
|
5,107
|
|
|
Common stock - non-publicly traded
|
51
|
|
|
51
|
|
|
58
|
|
|
58
|
|
|
Preferred stock - non-publicly traded
|
1,013
|
|
|
1,013
|
|
|
1,013
|
|
|
1,013
|
|
|
Notes receivable
|
11,920
|
|
|
11,920
|
|
|
11,290
|
|
|
11,290
|
|
|
Accounts and premiums receivable, net
|
18,702
|
|
|
18,702
|
|
|
27,302
|
|
|
27,302
|
|
|
Other receivables
|
33,409
|
|
|
33,409
|
|
|
13,393
|
|
|
13,393
|
|
|
Short-term investments
|
871
|
|
|
871
|
|
|
1,222
|
|
|
1,222
|
|
|
Total financial assets
|
$
|
241,825
|
|
|
$
|
241,825
|
|
|
$
|
216,419
|
|
|
$
|
216,419
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
Notes payable
|
$
|
3,273
|
|
|
$
|
3,273
|
|
|
$
|
89,438
|
|
|
$
|
89,438
|
|
|
Preferred trust securities
|
35,000
|
|
|
35,000
|
|
|
35,000
|
|
|
35,000
|
|
|
Interest rate swap
|
2,930
|
|
|
2,930
|
|
|
4,338
|
|
|
4,338
|
|
|
Total financial liabilities
|
$
|
41,203
|
|
|
$
|
41,203
|
|
|
$
|
128,776
|
|
|
$
|
128,776
|
|
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The Company's financial assets and liabilities accounted for at fair value by level within the fair value hierarchy are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013
|
|
|
|
Fair Value Measurements Using:
|
|
|
|
Quoted prices in active markets for identical assets
|
Significant other observable inputs
|
Significant unobservable inputs
|
|
|
Fair Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|
Financial Assets:
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
Obligations of the U.S. Treasury and U.S. Government agencies
|
$
|
51,435
|
|
$
|
—
|
|
$
|
51,435
|
|
$
|
—
|
|
|
Municipal securities
|
24,547
|
|
—
|
|
24,547
|
|
—
|
|
|
Corporate securities
|
55,360
|
|
—
|
|
55,360
|
|
—
|
|
|
Obligations of foreign governments
|
409
|
|
—
|
|
409
|
|
—
|
|
|
Equity securities:
|
|
|
|
|
|
Common stock - publicly traded
|
47
|
|
47
|
|
—
|
|
—
|
|
|
Preferred stock - publicly traded
|
5,087
|
|
5,087
|
|
—
|
|
—
|
|
|
Common stock - non-publicly traded
|
51
|
|
—
|
|
—
|
|
51
|
|
|
Preferred stock - non-publicly traded
|
1,013
|
|
—
|
|
—
|
|
1,013
|
|
|
Short-term investments
|
871
|
|
871
|
|
—
|
|
—
|
|
|
Total assets
|
$
|
138,820
|
|
$
|
6,005
|
|
$
|
131,751
|
|
$
|
1,064
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
Interest rate swap
|
$
|
2,930
|
|
$
|
—
|
|
$
|
2,930
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012
|
|
|
|
Fair Value Measurements Using:
|
|
|
|
Quoted prices in active markets for identical assets
|
Significant other observable inputs
|
Significant unobservable inputs
|
|
|
Fair Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|
Financial Assets:
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
Obligations of the U.S. Treasury and U.S. Government agencies
|
$
|
23,178
|
|
$
|
—
|
|
$
|
23,178
|
|
$
|
—
|
|
|
Municipal securities
|
17,041
|
|
—
|
|
17,041
|
|
—
|
|
|
Corporate securities
|
70,008
|
|
—
|
|
69,956
|
|
52
|
|
|
Mortgage-backed securities
|
289
|
|
—
|
|
289
|
|
—
|
|
|
Asset-backed securities
|
125
|
|
—
|
|
125
|
|
—
|
|
|
Equity securities:
|
|
|
|
|
|
Common stock - publicly traded
|
42
|
|
42
|
|
|
|
—
|
|
|
Preferred stock - publicly traded
|
5,107
|
|
5,107
|
|
—
|
|
—
|
|
|
Common stock - non-publicly traded
|
58
|
|
—
|
|
—
|
|
58
|
|
|
Preferred stock - non-publicly traded
|
1,013
|
|
—
|
|
—
|
|
1,013
|
|
|
Short-term investments
|
1,222
|
|
1,222
|
|
—
|
|
—
|
|
|
Total Assets
|
$
|
118,083
|
|
$
|
6,371
|
|
$
|
110,589
|
|
$
|
1,123
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
Interest rate swap
|
$
|
4,338
|
|
$
|
—
|
|
$
|
4,338
|
|
$
|
—
|
|
There were
no
transfers between Level 1 and Level 2 for the year ended
December 31, 2013
. For the year ended
December 31, 2013
,
one
corporate security was transferred from Level 3 to Level 2. This transfer occurred due to the availability of Level 2 pricing for the equity security, which was unavailable in prior periods. The Company's use of Level 3 unobservable inputs included
six
individual securities that accounted for
0.8%
of total investments at
December 31, 2013
. The Company utilized an independent third party pricing service to value
four
of the Level 3 securities. The values of
two
equity securities in Level 3, which are non-publicly traded preferred stocks, were calculated by the Company.
One
of the equity securities, with a value of
$1.0 million
was valued by taking into account the strength of the issuer's parent company guaranteeing the dividend of the issuer. While
one
of the Level 3 equity securities, with a value of
$13.0 thousand
, was valued by estimating the total value of the Class-A shares outstanding by the issuer and a review of the
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
company's audited financial statements. At
December 31, 2012
, the Company had
seven
individual securities valued under Level 3 that accounted for
1.0%
of total investments.
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the changes in Level 3 assets measured at fair value:
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
Beginning balance, January 1,
|
$
|
1,123
|
|
|
$
|
1,204
|
|
|
Total investment gains or losses (realized/unrealized):
|
|
|
|
|
Included in net income
|
—
|
|
|
—
|
|
|
Included in other comprehensive (loss)
|
(32
|
)
|
|
(31
|
)
|
|
Sales
|
—
|
|
|
(47
|
)
|
|
Transfers (out of) Level 3
|
(27
|
)
|
|
(3
|
)
|
|
Ending balance, December 31,
|
$
|
1,064
|
|
|
$
|
1,123
|
|
24. Statutory Reporting and Insurance Company Subsidiaries Dividend Restrictions
The Company's insurance company subsidiaries may pay dividends to the Company, subject to statutory restrictions. Payments in excess of statutory restrictions (extraordinary dividends) to the Company are permitted only with prior approval of the insurance department of the applicable state of domicile. All dividends from subsidiaries were eliminated in the Consolidated Financial Statements. The following table sets forth the dividends paid to the Company by its insurance company subsidiaries for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
Ordinary dividends
|
$
|
2,383
|
|
|
$
|
2,783
|
|
|
Extraordinary dividends
|
—
|
|
|
—
|
|
|
Total dividends
|
$
|
2,383
|
|
|
$
|
2,783
|
|
The following table details the combined statutory capital and surplus of the Company's insurance company subsidiaries, the required minimum statutory capital and surplus, as required by the laws of the states in which they are domiciled and the combined amount available for ordinary dividends of the Company's insurance company subsidiaries for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2013
|
|
2012
|
|
Combined statutory capital and surplus of the Company's insurance company subsidiaries
|
$
|
69,269
|
|
|
$
|
53,885
|
|
|
|
|
|
|
|
Required minimum statutory capital and surplus
|
$
|
17,200
|
|
|
$
|
15,300
|
|
|
|
|
|
|
|
|
|
Amount available for ordinary dividends of the Company's insurance company subsidiaries
|
$
|
3,989
|
|
|
$
|
4,500
|
|
For the year ended
December 31, 2013
, the maximum amount of dividends that our regulated insurance company subsidiaries could pay under applicable laws and regulations without regulatory approval was
$4.0 million
. The Company may seek regulatory approval to pay dividends in excess of this permitted amount, but there can be no assurance that the Company would receive regulatory approval if sought.
Under the NAIC's Risk-Based Capital Act of 1995, a company's Risk-Based Capital ("RBC") is calculated by applying certain risk factors to various asset, claim and reserve items. If a company's adjusted surplus falls below calculated RBC thresholds, regulatory intervention or oversight is required. The Company's insurance company subsidiaries' RBC levels, as calculated in accordance with the NAIC's RBC instructions, exceeded all RBC thresholds as of
December 31, 2013
and
2012
, respectively.
The amount of ordinary dividends available from the Company's two insurance company subsidiaries domiciled in the state of Georgia, Life of the South Insurance Company and The Insurance Company of the South, was impacted in the third quarter of 2013 by a change in Georgia's Insurance Regulations. Previously, the maximum amount of ordinary dividends payable in any one year by an insurer domiciled in Georgia was defined as the greater of a) 10 percent of the insurer's surplus with regards to policyholders as of December 31 of the preceding year, or b) the net gain from operations of the insurer (for life companies) or the net income not including realized capital gains (for non-life companies) for the 12 month period ending December 31 of the preceding year. Now, the maximum ordinary dividend is defined as the lesser of these two measures. This regulation change reduced the amount of ordinary dividends available from these insurance company subsidiaries at
December 31, 2013
by
$2.2 million
.
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
25. Commitments and Contingencies
Commitments
The Company may, from time to time and in the ordinary course of normal business, enter into certain contractual obligations or commitments.
As part of the 2012 acquisition of ProtectCELL, the Company has a conditional commitment to provide up to
$10.2 million
of additional capital ("Additional Fortegra Capital Contributions") to ProtectCELL if the board of directors of ProtectCELL (the "PC Board") determines that ProtectCELL requires additional funds to support expansion and growth, or other appropriate business needs.
The Company is obligated to evaluate any such funding request received from the PC Board in good faith to determine whether in the Company's reasonable business judgment the requested capital should be contributed. Fortegra is not required to honor the funding request from the PC Board if it in good faith deems the request to be imprudent or unjustified.
The benefits of such additional funding would inure to the Company and to the non-controlling ownership interest of ProtectCELL, in proportion to their respective ownership interests. However, in return for each
$1,000
of Additional Fortegra Capital Contributions, the Fortegra Members shall receive one Series A Preferred Unit. Any unreturned Series A Preferred contribution is deducted from ProtectCELL's valuation in determining the option price.
Contingencies
The Company is a party to claims and litigation in the normal course of its operations. Management believes that the ultimate outcome of these matters in existence at
December 31, 2013
are reserved against, covered by insurance or would not have a material adverse effect on the consolidated financial condition, results of operations or cash flows of the Company.
The Company is currently a defendant in Mullins v. Southern Financial Life Insurance Co., which was filed on February 2, 2006, in the Pike Circuit Court, in the Commonwealth of Kentucky. A class was certified on June 25, 2010. At issue is the duration or term of coverage under certain policies. The action alleges violations of the Consumer Protection Act and certain insurance statutes, as well as common law fraud. The action seeks compensatory and punitive damages, attorney fees and interest. The parties are currently involved in the merits discovery phase and discovery disputes have arisen. Plaintiffs filed a Motion for Sanctions on April 5, 2012 in connection with the Company's efforts to locate and gather certificates and other documents from the Company's agents. While the court did not award sanctions, it did order the Company to subpoena certain records from its agents. In an effort to prevent the trial court from enforcing the order, the Company filed a Writ of Prohibition, which the Kentucky Court of Appeals denied on August 31, 2012. In response, the Company filed a motion for discretionary review of the Writ of Prohibition. The Company also filed a direct appeal of the same order, on the grounds that the order could be construed as a finding of contempt on the part of the Company. The Court of Appeals dismissed the direct appeal on September 13, 2013, which prompted the Company to file a motion for discretionary review of the direct appeal. The Kentucky Supreme Court denied the Writ of Prohibition on November 21, 2013, but the direct appeal is still pending. No motions will be heard by the trial court while the direct appeal remains pending. To date, no trial date has been set.
The Company considers such litigation customary in its lines of business. In management's opinion, based on information available at this time, the ultimate resolution of such litigation, which it is vigorously defending, should not be materially adverse to the financial position, results of operations or cash flows of the Company. It should be noted that large punitive damage awards, bearing little relation to actual damages sustained by plaintiffs, have been awarded in certain states against other companies in the credit insurance business. Loss contingencies may be taken as developments warrant, although such amounts are not reasonably estimable at this time.
26. Related Party Transactions
In conjunction with the December 31, 2012 acquisition of ProtectCELL, the Company assumed an office space lease between ProtectCELL and 39500 High Pointe, LLC ("High Pointe"). The ownership of High Pointe includes three members who were the founding members of ProtectCELL and are now employees of the Company. The Company made lease payments to High Pointe during the year ended
December 31, 2013
, which are reflected in the table below. The Company did not make any lease payments to High Pointe for the year ended December 31, 2012.
At December 31, 2012, ProtectCELL held a
$6.1 million
note receivable carrying an interest rate of
8.00%
from High Pointe, which is fully secured by a mortgage on the office building owned by High Pointe (see the lease described above). For the year ending December 31, 2012, the Company did not receive payments from High Pointe on the note receivable. On
March 15, 2013
, ProtectCELL received
$6.1 million
from High Pointe, representing the full payoff of the outstanding balance of the note receivable. The Company only recorded interest income on this note receivable during the three months ended March 31, 2013.
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
An executive officer of ProtectCELL owns multiple wireless retail locations, which sell ProtectCELL protection plans to wireless retail customers. For the year ended
December 31, 2013
, the Company recorded income from and paid commissions for this related party arrangement, which are reflected in the table below. For the year ending December 31, 2012, the Company did not record income related to this related party arrangement.
In conjunction with the December 31, 2012 acquisition of 4Warranty, the Company assumed an office space lease between 4Warranty and Source International Incorporated ("Source"), effective January 1, 2013. The ownership of Source is comprised of two individuals who have consulting relationships with the Company. The Company made lease payments to Source for the year ended
December 31, 2013
, which are reflected in the table below. The Company did not make any lease payments to Source for the year ended December 31, 2012.
In January 2012, the Company recorded a note receivable due from an officer of the Company relating to the 2010 acquisition of South Bay Acceptance Corporation, which has a balance of
$0.1 million
at December 31, 2012.
In December 2011, the Company entered into an information technology support services agreement (the "IT Agreement") with a company for which a member serving on the Company's Board of Directors also serves on the board of the company receiving the information technology support services from the Company. The IT Agreement has no set term and calls for a total of
$0.3 million
plus reimbursement of expenses to be received by the Company over the duration of the agreement. The Company only recorded income from the IT Agreement during the year ended December 31, 2012, which is reflected in the table below.
In December 2011, the Company entered into a marketing and referral agreement (the "Marketing Agreement") with a company in which a member serving on the Company's Board of Directors also serves on the board of the company providing the marketing services (the "Marketer"). The Marketing Agreement has a five year term and requires the Company to pay the Marketer a per account fee per month based on the number of enrolled customers the Marketer obtains for the Company. In conjunction with this Marketing Agreement, during April 2013, the Company entered into an agreement under which the Marketer began selling insurance-related products of the Company to the Marketer's customers. The Company recorded income and paid claims, associated with the sale of the Company's insurance-related products, for the year ended
December 31, 2013
, which are reflected in the table below.
The following table details the amounts recorded on the Company's Consolidated Statements of Income resulting from related party transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Income recorded by ProtectCELL for protection plans sold
|
$
|
2,159
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Income recorded for the sale of the Company's insurance-related products under the Marketing Agreement
|
948
|
|
|
—
|
|
|
—
|
|
|
Income recorded from the IT Agreement
|
—
|
|
|
218
|
|
|
—
|
|
|
Total related party income recorded by the Company
|
$
|
3,107
|
|
|
$
|
218
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Interest income recorded on the High Pointe note receivable
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Lease expense paid to High Pointe
|
$
|
403
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Lease expense paid to Source
|
118
|
|
|
—
|
|
|
—
|
|
|
Total related party lease expense
|
$
|
521
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Commissions paid by ProtectCELL for protection plans sold
|
$
|
852
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Claims paid on the Company's insurance-related products under the Marketing Agreement
|
$
|
63
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
The following table details the amounts recorded on the Company's Consolidated Balance Sheets from related party transactions:
|
|
|
|
|
At December 31,
|
|
|
|
|
2013
|
|
2012
|
|
Accounts receivable from related parties
|
|
|
$
|
113
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Notes receivable from related parties
|
|
|
|
$
|
—
|
|
|
$
|
6,269
|
|
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
27. Subsequent Events
Subsequent events have been measured through the date on which the Consolidated Financial Statements were filed. Management has determined that the following events merit disclosure as subsequent events:
Stock-Based Compensation Awards
In February 2014, the
Company granted
30,000
time-based restricted stock awards to its Chief Executive Officer and
75,000
time-based restricted stock awards, equally distributed, to
five
of its Directors. The restricted stock vests equally on each of the three anniversaries of the grant date.
28. Summarized Quarterly Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
First Quarter
|
Second Quarter
(2)
|
Third Quarter
(2)
|
Fourth Quarter
|
|
Revenues
|
$
|
79,254
|
|
$
|
82,921
|
|
$
|
88,755
|
|
$
|
91,844
|
|
|
Net investment income
|
903
|
|
746
|
|
766
|
|
635
|
|
|
Net realized investment gains
|
7
|
|
1,280
|
|
756
|
|
—
|
|
|
Total revenues
|
80,164
|
|
84,947
|
|
90,277
|
|
92,479
|
|
|
Total expenses
|
77,633
|
|
79,934
|
|
85,939
|
|
86,894
|
|
|
Income from continuing operations before income taxes
|
2,531
|
|
5,013
|
|
4,338
|
|
5,585
|
|
|
Income taxes
|
482
|
|
1,593
|
|
1,852
|
|
1,733
|
|
|
Income from continuing operations before non-controlling interests
|
2,049
|
|
3,420
|
|
2,486
|
|
3,852
|
|
|
Discontinued operations - net of tax
|
1,262
|
|
1,207
|
|
601
|
|
9,320
|
|
|
Net income before non-controlling interests
|
3,311
|
|
4,627
|
|
3,087
|
|
13,172
|
|
|
Less: net income (loss) attributable to non-controlling interests
|
818
|
|
185
|
|
(135
|
)
|
614
|
|
|
Net income attributable to Fortegra Financial Corporation
|
$
|
2,493
|
|
$
|
4,442
|
|
$
|
3,222
|
|
$
|
12,558
|
|
|
|
|
|
|
|
|
Earnings per share - Basic:
(1)
|
|
|
|
|
|
Net income from continuing operations - net of tax
|
$
|
0.06
|
|
$
|
0.17
|
|
$
|
0.14
|
|
$
|
0.17
|
|
|
Discontinued operations - net of tax
|
0.07
|
|
0.06
|
|
0.03
|
|
0.48
|
|
|
Net income attributable to Fortegra Financial Corporation
|
$
|
0.13
|
|
$
|
0.23
|
|
$
|
0.17
|
|
$
|
0.65
|
|
|
|
|
|
|
|
|
Earnings per share - Diluted:
(1)
|
|
|
|
|
|
Net income from continuing operations - net of tax
|
$
|
0.06
|
|
$
|
0.16
|
|
$
|
0.13
|
|
$
|
0.16
|
|
|
Discontinued operations - net of tax
|
0.06
|
|
0.06
|
|
0.03
|
|
0.46
|
|
|
Net income attributable to Fortegra Financial Corporation
|
$
|
0.12
|
|
$
|
0.22
|
|
$
|
0.16
|
|
$
|
0.62
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
Basic
|
19,556,743
|
|
19,540,610
|
|
19,405,597
|
|
19,410,655
|
|
|
Diluted
|
20,625,041
|
|
20,523,090
|
|
20,404,508
|
|
20,388,890
|
|
(1)
- Earnings per share amounts may not recalculate due to rounding.
(2)
- During 2013, certain immaterial reclassifications were identified that impacted amounts for service and administrative fees in total revenues and commissions and other operating expenses in total expenses that were previously reported in the Company's Form 10-Q's for the quarters ended June 30, 2013 and September 30, 2013. These reclassification adjustments, separately and in the aggregate did not have a material impact on results previously reported for those quarterly periods and had no effect on reported net income. For the quarters ended June 30, 2013 and September 30,
2013, total revenues were decreased by
$4.9 million
and
$3.5 million
, respectively, while total expenses were reduced by the same amounts for the respective periods.
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
|
Revenues
|
$
|
61,619
|
|
$
|
60,949
|
|
$
|
67,965
|
|
$
|
62,736
|
|
|
Net investment income
|
743
|
|
732
|
|
744
|
|
848
|
|
|
Net realized investment gains (losses)
|
(3
|
)
|
13
|
|
(16
|
)
|
9
|
|
|
Total revenues
|
62,359
|
|
61,694
|
|
68,693
|
|
63,593
|
|
|
Total expenses
|
58,731
|
|
56,793
|
|
62,896
|
|
58,241
|
|
|
Income from continuing operations before income taxes
|
3,628
|
|
4,901
|
|
5,797
|
|
5,352
|
|
|
Income taxes
|
1,195
|
|
1,630
|
|
2,130
|
|
1,761
|
|
|
Income from continuing operations before non-controlling interests
|
2,433
|
|
3,271
|
|
3,667
|
|
3,591
|
|
|
Discontinued operations - net of tax
|
999
|
|
688
|
|
386
|
|
202
|
|
|
Net income before non-controlling interests
|
3,432
|
|
3,959
|
|
4,053
|
|
3,793
|
|
|
Less: net income attributable to non-controlling interests
|
18
|
|
15
|
|
29
|
|
10
|
|
|
Net income attributable to Fortegra Financial Corporation
|
$
|
3,414
|
|
$
|
3,944
|
|
$
|
4,024
|
|
$
|
3,783
|
|
|
|
|
|
|
|
|
Earnings per share - Basic:
(1)
|
|
|
|
|
|
Net income from continuing operations - net of tax
|
$
|
0.12
|
|
$
|
0.17
|
|
$
|
0.19
|
|
$
|
0.18
|
|
|
Discontinued operations - net of tax
|
0.05
|
|
0.03
|
|
0.02
|
|
0.01
|
|
|
Net income attributable to Fortegra Financial Corporation
|
$
|
0.17
|
|
$
|
0.20
|
|
$
|
0.21
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
Earnings per share - Diluted:
(1)
|
|
|
|
|
|
Net income from continuing operations - net of tax
|
$
|
0.11
|
|
$
|
0.16
|
|
$
|
0.18
|
|
$
|
0.17
|
|
|
Discontinued operations - net of tax
|
0.05
|
|
0.03
|
|
0.02
|
|
0.01
|
|
|
Net income attributable to Fortegra Financial Corporation
|
$
|
0.16
|
|
$
|
0.19
|
|
$
|
0.20
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
Basic
|
19,904,819
|
|
19,705,276
|
|
19,531,694
|
|
19,507,733
|
|
|
Diluted
|
20,739,196
|
|
20,632,233
|
|
20,463,238
|
|
20,507,329
|
|
(1)
- Earnings per share amounts may not recalculate due to rounding.