Our principal executive offices are located at 780 Third Avenue, 21st Floor, New York, New York 10017. The table below outlines the Company’s leased properties as of December 31, 2013, all of which are used as administrative offices. All facilities are considered adequate and suitable for the Company’s current level of operations. We do not own any properties for administrative purposes.
The following table sets forth certain selected historical financial information for the periods and as of the dates presented and should be read in conjunction with the Company’s accompanying consolidated financial statements and the related notes thereto referenced in Item 8 of this report and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in
Tiptree is a diversified holding company engaged through its consolidated subsidiaries in a number of businesses and is an active acquirer of new businesses. Tiptree, whose operations date back to 2007, currently has subsidiaries that operate in four industry segments:
Our specialty finance operations include MFCA, a wholly-owned business which provides financing for tax-exempt organizations, a 62% ownership interest in Siena, a recently formed asset-based lender that offers asset-based loans to small and mid-sized U.S. businesses, and a debt interest and a 67.5% ownership interest in Luxury, a residential mortgage lender that originates conforming prime jumbo and super jumbo mortgages for sale to institutional investors. As of December 31, 2013, MFCA's investments had an aggregate principal balance of $37.1 million and a fair value of $31.0 million. As of December 31, 2013, Siena has funded 11 loans with an aggregate principal balance of $16.5 million of aggregate principal amount outstanding.
Our asset management operations include TAMCO, an SEC-registered investment adviser that, among other managerial and advisory entities, wholly-owns Telos Asset Management LLC (“Telos”), an asset manager focused on investing in corporate credit through managed accounts and structured investment vehicles, such as CLOs. As of December 31, 2013, Telos had approximately $1.5 billion of AUM. Our asset management operations also include MCM which manages NPPF I, a structured tax-exempt pass-through entity that holds tax-exempt bonds for the benefit of its investors. Interests in NPPF I in the form of tranched trust certificates are held solely by third parties unaffiliated with Tiptree. As of December 31, 2013, the underlying tax-exempt bonds held by NPPF I had an aggregate principal balance of $213.0 million.
Tiptree intends to continue to invest in its existing businesses and to opportunistically acquire majority control of new businesses, both in existing financial service sectors and complementary sectors; make seed investments in funds or products managed by TAMCO; and make minority debt or equity investments similar to those investments that Tiptree has made in the past. Accordingly, changes in the mix of Tiptree’s businesses, assets and investments should be expected. Management intends to take a disciplined approach by focusing on investing for the long-term in stable, cash flow positive businesses.
Care Inc. sold its membership interests in an entity that owned fourteen senior living facilities, which we refer to as the Bickford Portfolio, on June 28, 2013 for cash of $44 million and a net gain of approximately $15.5 million.
We made a $5 million term loan to Luxury in April 2013 and in January 2014 completed a strategic transaction resulting in Tiptree owning 67.5% of the equity of Luxury.
Debt Financing. Operating Company borrowed $50 million under a credit agreement entered into with Fortress Credit Corp. (“Fortress”) on September 18, 2013. The Credit Agreement includes an option for Operating Company to borrow up to an additional $125 million, subject to satisfaction of certain customary conditions.
Equity Activity. Our Class A common stock began trading on the Nasdaq Capital Market under the symbol “TIPT” on August 9, 2013. A registration statement facilitating public resales of approximately 7.2 million shares of our Class A common stock owned by TFP prior to the Contribution Transactions became effective on October 18, 2013.
A significant portion of Tiptree’s 2013 revenues were generated from administrative fees from our servicing of COLI/BOLI policies. We expect the amount of administrative fees to remain relatively constant in 2014 unless significant policy holders terminate policies, in which case our revenues could decline.
As a result of the Contribution Transactions, the assets of Operating Company are held by an entity taxable as a C corporation, rather than flow through entities for tax purposes, resulting in a one-time increase in our provision for income taxes in 2013.
Our asset based lending business was acquired in 2013 and continues to ramp up its operations. This start-up business was a negative contributor to net income in 2013 and we intend to reverse this trend as the company achieves profitable scale in 2014 although we cannot assure you that will be the case.
The mortgage market in which we operate is sensitive to interest rates and expected changes in interest rates. For example, in the late summer and fall of 2013, the volume of mortgages dropped sharply because of changes and expected changes in interest rates. In addition, it is unclear what impact the Consumer Finance Protection Bureau's new mortgage rules on qualified mortgages may have on volume and profitability in 2014.
GAAP requires the consolidation of a VIE into the financial statements of the entity that is considered the VIE’s primary beneficiary. Generally, TAMCO’s contractual relationship as collateral manager of the CLOS satisfies the criteria for TAMCO to be deemed the primary beneficiary of the CLOs that it manages. As a result, Tiptree is required to consolidate the CLOs into its financial statements. As of December 31, 2013 the fair value of Tiptree’s direct investments in the subordinated notes of the CLOs is $61.1 million.
Income and expenses attributable to consolidated CLOs reflect all of the components of CLOs: the interest income, interest expense, other related expenses, and most significantly, the mark-to-market of the underlying collateral assets. The unrealized gains and losses of the collateral assets are most affected by credit risk on the individual loans held by the CLOs. If, as a result of movement in the credit market, new loans are made at credit spreads wider than those held by the CLOs, the market value of loans held by the CLOs would decrease and could result in realized and unrealized losses. Since, under GAAP, we do not value the debt issued by the CLOs at market value, we would not recognize an offsetting decrease in the liabilities from such a change in credit spreads, which could make the reported realized and unrealized gains and losses appear larger or smaller than the economic impact on our results of operations. For economic purposes, we reverse the impact of the CLO consolidation and focus on the mark-to-market value of our underlying subordinated note positions. See “- Economic Net Income and Economic Book Value.”
Separate account fees increased $2.4 million, or 11.9%, for the year ended December 31, 2013 compared to the prior year. This increase is the result of better performance of, and an increases in, separate account assets under administration within PFG’s life insurance portfolio.
Total expenses for 2013 were $99.1 million compared to $67.3 million for 2012, an increase of $31.8 million, or 47.2%. The primary drivers of this increase were $9.4 million of increased interest expense, a $14.1 million increase in payroll expenses, a $2.2 million increase in depreciation and amortization expense, and a $7.7 million increase in other expenses.
The $9.4 million increase in interest expense is a result of increased interest expense related to the CLO warehouse credit agreements and interest expense associated with the Company’s credit facility which closed in September 2013.
The $14.1 million increase in payroll expense consists of a $5.9 million increase associated with additional employees as a result of the PFAS Transaction in July 2012. The remaining $8.2 million largely is a result of a full year of payroll expense incurred in 2013 at TAMCO, compared to 2012, as TAMCO was acquired June 30, 2012.
The $7.7 million increase in other expenses primarily consists of $3.7 million related to the PFAS Transaction and $1.7 million related to Care property acquisitions.
Income attributable to consolidated CLOs was $52.7 million in 2013 compared to $71.4 million in 2012, a decrease of $18.7 million, or 26.2%. This decrease resulted from an increase in net realized and unrealized losses in the CLOs of $33 million compared to realized and unrealized gains of $12.8 million in 2012, partially offset by an increase of $15.9 million in additional interest income attributable to the addition of Telos 3 and Telos 4 in 2013.
The $10.4 million increase in expenses attributable to the consolidated CLOs consists of interest payments made by Telos 3 and Telos 4 in 2013.
The provision for income taxes increased $7.3 million in 2013 from an income tax benefit of $0.3 million in the prior year to an income tax expense of $6.9 million in the current year. The effective tax rate on income available to common stockholders for the year ended December 31, 2013 was approximately 15.1%. Prior periods do not have comparable effective tax rates as the Company, as a REIT, was not subject to income taxes.
Discontinued operations, net increased $14.2 million, or 493.7%, for the year ended December 31, 2013 compared to the prior year. This is comprised of the gain on sale of the Bickford portfolio, net of $15.5 million recognized in 2013 along with a decline of $1.2 million, or 42.9%, of income related to Bickford in 2013. For more detail on the Bickford sale see Note 22-Dispositions, Assets Held for Sale and Discontinued Operations within the accompanying consolidated financial statements.
Net income attributable to noncontrolling interest represents the portion of net income generated by consolidated entities that are not attributable to Tiptree’s ownership interest in those entities. Net income attributable to the noncontrolling interest was relatively flat in 2013 compared to 2012.
Net income available to Class A common stockholders for 2013 was $8.8 million compared to $8.7 million for 2012, a increase of $0.1 million, or 1.3%. This increase was primarily due to the $29.1 million decrease representing the net impact of the consolidated CLOs on our net income available to Class A common stockholders offset in part by increases in revenue from administrative service fees of $26.5 million and the gain on the sale of the Bickford portfolio of $15.5 million.
Balance Sheet Information - Year Ended December 31, 2013 compared to December 31, 2012
Tiptree’s total assets increased $1.3 billion, or 24.3%, at December 31, 2013 compared to year end December 31, 2012. This increase was driven primarily by an increase in separate account assets of $590.0 million from PFG as well as an increase of $563.0 million due to the increased assets of the consolidated CLOs related to the addition of Telos 3 and Telos 4 in 2013.
Tiptree has four reportable operating segments: insurance and insurance services, specialty finance, asset management and real estate (see Note 4 of the consolidated financial statements for a more detailed description of our segments). Tiptree’s operating segments are organized in a manner that reflects how management views its operations.
The material components of “corporate eliminations and other” are as follows: (i) for total revenue, rental revenue from discontinued operations as well as Tiptree’s portion of interest income from the consolidated CLOs, (ii) for total expense, interest expense and depreciation/amortization expense associated with discontinued operations, and (iii) for total assets, the assets of the consolidated CLOs.
Total expenses for insurance operations for fiscal 2013 were $62.8 million, compared to $44.6 million for 2012, an increase of $18.2 million, or 40.8%. This increase was primarily the increase in other expense of $6.5 million which was largely the result of a full year of expenses associated with the PFAS Transaction in 2013 as compared to 2012. Also included in the increase in total expenses was the $6.3 million increase in interest expense on the note used to finance the PFAS transaction.
in market values in 2013, primarily related to Telos 1, Telos 2 and MFCA. This decline was partially offset by an increase in interest income of $3.8 million due to the revenue from the additional positions in Telos 3, Telos 4 and Telos 5, related to the warehouses.
Total expenses for asset management were $14.6 million for fiscal 2013 compared to $10.4 million for 2012. This increase of $4.2 million was primarily attributable to the inclusion of payroll expense resulting from the acquisition of TAMCO in June 2012 for a full year in 2013 compared to six months in 2012.
The following table details the individual revenue and expense components of the non-GAAP measure ENI for the periods indicated (in thousands):
(1) Following TFP’s acquisition of TAMCO in June 2012 described in Note 1 to the financial statements, TAMCO no longer pays management or incentive fees.
In addition to the other adjustments indicated in the table below, ENI includes the following adjustments: (i) adjustment to results from real estate to eliminate non-cash items similar to adjusted funds from operations (“AFFO”) which is a non-GAAP financial measure widely used in the real estate industry, (ii) in our insurance segment, adjustment for fair value on available for sale securities, which is a non-GAAP measure frequently used throughout the insurance industry, and (iii) in our specialty finance segment, VIEs are shown as if not consolidated.
The following is a reconciliation of GAAP Net Income attributable to Tiptree to ENI for the years ended December 31, 2013 and 2012 (in thousands):
Economic Book Value (“EBV”) is a non-GAAP financial measure which Tiptree uses to evaluate the performance of its core business. Management believes that EBV provides greater transparency and enhanced visibility into the underlying profitability drivers of our business and provides a useful, alternative view of the economic results of Tiptree’s businesses. EBV includes the following adjustments: (i) reversal of GAAP value for TAMCO and CLO VIEs and replacement with fair value, (ii) addition of life to date AFFO adjustments for real estate operations, (iii) reclassification of convertible preferred distributions to expense and (iv) foreign exchange timing adjustment.
Under GAAP, Tiptree is required to consolidate all of the assets and liabilities of the VIEs managed by TAMCO on Tiptree’s balance sheet regardless of Tiptree’s economic interest. See Note 2(c) to the consolidated financial statements. Adjustment is reversal of consolidation of TAMCO and VIEs.
Adjustments to results from real estate operations reverses the amounts, since inception, related to the effects of straight lining lease revenue, expenses associated with depreciation and amortization, certain transaction expenses, non-cash transactions expenses, non-cash equity compensation expenses, other non-cash charges, and incentive compensation adjustment for unconsolidated partnerships and joint ventures.
A reserve was established for EBV purposes as of December 31, 2012 reflecting a timing difference relative to GAAP recognition of yen foreign exchange. Such reserve was subsequently reversed.
ownership is equal to 2.798 times the number of TFP partnership units outstanding and this ratio is expected to remain 2.798:1. There were 11,068 and 11,016 partnership units outstanding as of December 31, 2013 and 2012, respectively. The basic EBV per partnership unit was $29.16 and $26.58 as of December 31, 2013 and 2012, respectively.
The ability of Tiptree’s subsidiaries to generate sufficient net income and cash flows to make cash distributions to us will be subject to numerous business and other factors, including restrictions contained in our subsidiaries’ financing agreements, regulatory restrictions, availability of sufficient funds at such subsidiaries, general economic and business conditions, tax considerations, strategic plans, financial results and other factors such as target capital ratios and ratio levels anticipated by rating agencies to maintain or improve current ratings. For example, Telos will require additional capital in order to form future CLOs, and PFG may require additional capital to meet regulatory capital requirements.
Cash used in investing activities for the period ended December 31, 2013 was $689.2 million, compared to $144.2 million for the comparable period in 2012, an increase of $545.0 million. Cash used in investing activities from VIEs was $537.9 million for the year ended December 31, 2013, an increase of $534.7 million from cash used of $3.2 million for the year
Note payable relates to the PFAS Transaction and TFP payment for Series A Preferred stock and common shares of PFG. (see Note 12-Debt).
Non-recourse CLO notes payable principal is payable at stated maturity, 2021 for Telos 1, 2022 for Telos 2, 2024 for Telos 3 and Telos 4.
Minimum rental obligation for Care, Siena and PFG office lease. The total rent expense for the Company for fiscal 2013 and 2012 was $1.5 million and $0.9 million, respectively.
The consolidated financial statements reflect the consolidated accounts of Tiptree and (i) its wholly-owned subsidiaries, (ii) subsidiaries in which it has a controlling interest, and (iii) certain VIEs in which Tiptree, through its subsidiaries is deemed to be the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. This consolidation, particularly with respect to the VIEs, significantly impacts these subsidiaries’ financial statements.
ASC Topic 810, Consolidations, requires the consolidation of a VIE into the financial statements of the entity that is considered the VIE’s primary beneficiary. ASC Topic 810 provides a framework for determining whether an entity should be considered a VIE and accordingly evaluated for consolidation. If an entity is a VIE, it would then need to be determined whether Tiptree’s relationship, direct or indirect through subsidiaries to the VIE (whether contractual, through direct investments in the entity, or otherwise) results in a variable interest. If Tiptree does have a variable interest in the entity, it would then need to be determined whether Tiptree is deemed to be the primary beneficiary. For VIEs, if Tiptree is deemed to (i) have the power to direct the activities of the VIE that most significantly impact the economic performance and (ii) either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE, then Tiptree would be deemed to be the primary beneficiary of the VIE and would be required to consolidate the VIE. Generally, TAMCO’s contractual relationship as collateral manager of the CLO described herein satisfies criteria (i) of the prior sentence, and its ownership interests in and/or ability to earn certain incentive or other management fees in certain CLOs can typically satisfy criteria (ii).
Prior to the closing of the acquisition of TAMCO, it was established that TAMCO was the primary beneficiary of two CLOs that it managed at that time. As such, the financial statements of these two CLOs were included in the consolidated financial statements of Tiptree. See Note 1 under “Acquisition of Businesses” for additional details regarding this transaction.
Net income attributable to the VIE subordinated noteholders (“non-Tiptree ownership” presented in the table below) represents the portion of net income generated by the consolidated CLOs that are not attributable to Tiptree’s ownership interest in those entities.
Total net results of consolidated CLOs included in the Company’s Consolidated Statements of Operations were as follows:
Before elimination of management fee expense of $13.2 million and interest expense of $16.9 million as of December 31, 2013 and $16.1 million and $9.6 million as of December 31, 2012, respectively.
The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market, and the current market conditions. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by Tiptree in determining fair value is greatest for instruments categorized within Level 3 of the fair value hierarchy. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Tiptree’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and the consideration of factors specific to the asset. From time to time, Tiptree’s assets and liabilities will transfer between one level to another level. It is Tiptree’s policy to recognize transfers between different levels at the end of each reporting period.
Trading Securities: Trading securities consist primarily of privately held equity securities, exchange-traded equity securities, U.S. Treasury securities (“USTs”), CLOs, collateralized debt obligations (“CDOs”), asset backed securities (“ABSs”), loans, and tax exempt securities. The fair value of privately held equity securities are either valued based on quotes obtained from dealers or internally developed valuation models. Because significant inputs used to determine the dealer quotes or model values are not observable, such as projected future earnings and price volatility, Tiptree has classified them within Level 3 of the fair value hierarchy. Exchange-traded equity securities are valued based on quoted prices from the exchange. These securities are actively traded and valuation adjustments are not applied. Accordingly, they are categorized in Level 1 of the fair value hierarchy. USTs are actively traded and valuation adjustments are not applied. They are categorized in Level 1 of the fair value hierarchy. Positions in securitized products such as CLOs, CDOs, and ABSs are based on quotes obtained from dealers. When these quotes are based directly or indirectly on observable inputs such as quoted prices for similar assets exchanged in an active or inactive market, Tiptree has classified them within Level 2 of the fair value hierarchy. If these quotes are based on valuation models using unobservable inputs such as expected future cash flows, default rates, supply and demand considerations, and market volatility, Tiptree has classified them within Level 3 of the fair value hierarchy.
The fair value of tax exempt securities is determined by obtaining quotations from independent pricing services. In most cases, quotes are obtained from two pricing services and the average of both quotes is used. The independent pricing services determine their quotes using observable inputs such as current interest rates, specific issuer information and other market data for such securities. Therefore, the estimate of fair value is subject to a high degree of variability based upon market conditions, the availability of issuer information and the assumptions made. The valuation inputs used to arrive at fair value for such debt obligations are generally classified within Level 2 or Level 3 of the fair value hierarchy.
Available for Sale Securities: Available for sale securities consist primarily of obligations of states and political subdivisions, USTs, certificates of deposit, ABSs, and corporate bonds. These securities will generally be classified within either Level 1 or Level 2 of the fair value hierarchy. The fair value of fixed maturity securities is based on quoted market prices obtained from an independent pricing service, where available. If listed prices or quotes are not available, fair value is based upon internally developed models that use primarily market-based or independently sourced market parameters, including interest rate yield curves, option volatilities, and currency rates.
Derivative Assets and Liabilities: Derivative assets and liabilities consist of credit default swaps (“CDS”), index credit default swaps (“CDX”) and interest rate swaps (“IRS”). The fair value of derivative assets and liabilities is based upon valuation pricing models, which represent what the Company would expect to receive or pay at the balance sheet date if the contracts were canceled. In general, the fair value of CDSs and CDXs are based on dealer quotes. These derivatives will generally be classified
In times of illiquid markets and financial stress, actual prices and valuations may significantly diverge from results predicted by models. In addition, other factors can affect Tiptree’s estimate of fair value, including market dislocations, incorrect model assumptions, and unexpected correlations. These valuation methods could expose Tiptree to materially different results should the models used or underlying assumptions be inaccurate.
The total income tax expense of $6.9 million for the period ended December 31, 2013 is reflected as a component of net income (loss) from continuing operations. This tax expense represents a consolidated total of all of Tiptree’s subsidiaries and includes $6.4 million related to PFG. In addition, Tiptree incurred approximately $2.1 million current federal and state income tax expense as a result of the gain on sale of the Bickford Portfolio (see Notes 10 and 22). A significant portion of the gain was reduced by available net operating loss carryforwards that were previously unrecorded as a result of Care, Inc.’s historical 0% statutory income tax rate in effect as of December 31, 2012 and June 30, 2013, prior to the Contribution Transaction. The tax associated with the Bickford portfolio gain is included with tax expense from continuing operations, rather than with discontinued operations because it arose as a result of Tiptree’s termination of REIT status, described below.
As a result of the Contribution Transaction on July 1, 2013, Tiptree no longer qualifies as a REIT, therefore Tiptree is no longer eligible to deduct the amount of distributions paid to shareholders and became a fully taxable corporation. Pursuant to the Internal Revenue Code, when a corporation loses REIT status within a tax year it becomes taxable retroactively to the first day of the tax year. As of July 1, 2013, an adjustment of $2.6 million was made to the Company’s deferred tax assets as a result of the Company no longer qualifying as a REIT.
For the year ended December 31, 2013, the Company’s effective tax rate on income from continuing operations is equal to 111.1%, which does not bear a customary relationship to statutory income tax rates. Differences from the statutory income tax
GAAP also requires that an interim test be done whenever events or circumstances occur that may indicate that it is more likely than not that the fair value of any reporting unit might be less than its carrying value. No such events or circumstances have occurred during 2013.
Key judgments in accounting for intangibles include useful life and classification between goodwill and indefinite-lived intangibles or other intangibles requiring amortization. Indefinite-lived intangible assets are evaluated for impairment at least annually by comparing their fair values, estimated using discounted cash flow analyses, to their carrying values. Other amortizing intangible assets ($152.2 million at December 31, 2013) are evaluated for impairment if events and circumstances indicate a possible impairment. Such evaluation of other intangible assets is initially based on undiscounted cash flow projections. See Note 2-Summary of Significant Accounting Policies for further detail.
Tiptree is a holding company that is the sole managing member, and owns approximately 25%, of Operating Company. As the sole managing member of Operating Company, Tiptree operates and controls all of the business and affairs of Operating Company and its subsidiaries and consolidates the financial results of Operating Company and its subsidiaries. TFP’s ownership of approximately 75% of Operating Company is reflected as a non-controlling interest in Tiptree’s consolidated financial statements. See “Business-Structure” and Notes 1 and 15 to the consolidated financial statements for further discussion of the Company’s capital and ownership structure.
Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2013 and 2012
Consolidated Statement of Cash Flows for the years ended December 31, 2013 and 2012
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tiptree Financial, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
Tiptree’s Class A Common Stock is traded on the NASDAQ Capital Market under the symbol “TIPT.”
On July 1, 2013, immediately prior to closing the Contribution Transactions, Care Inc. filed the Fourth Articles of Amendment and Restatement with the Maryland Department of Assessments and Taxation in order to, among other things, (i) change its name from “Care Investment Trust Inc.” to “Tiptree Financial Inc.,” (ii) rename its common stock as “Class A common stock,” with no change to the economic or voting rights of such stock, (iii) reclassify 50,000,000 authorized and unissued shares of its common stock as Class B common stock, and (iv) remove certain provisions related to Care Inc.’s qualification as a real estate investment trust (REIT).
On June 30, 2012, TFP acquired a controlling financial interest in Tiptree Asset Management Company, LLC (TAMCO) from Tricadia Holdings, L.P. (Tricadia) which managed the assets of the subsidiaries of TFP as well as other entities such as collateralized loan obligations (CLOs) and trusts. Given Tricadia’s controlling position in relation to both TAMCO and TFP, this combination was accounted for as a combination of entities under common control. As a result, the assets and liabilities of TAMCO, including the CLOs, have been presented as if they had been consolidated by TFP as of January 1, 2010 and their results of operations included in the TFP’s results of operations going forward. The application of this “as-if pooling of interests” required the previously issued consolidated financial statements of TFP to be recast to reflect such activity. In conjunction with this combination, TFP issued 2,197,347 common units and 750,000 warrants, collectively valued at $57,661, to Tricadia in return for a 99% controlling interest in TAMCO. TFP then contributed its interests in TAMCO to the Operating Company in connection with the Contribution Transactions.
On June 23, 2010, TFP acquired all of the outstanding Common Shares of Philadelphia Financial Group, Inc. (PFGI) (formerly known as PFG Holdings, Inc.) and its subsidiaries (collectively, PFG), a provider of private placement life insurance. TFP paid $28,500 for a 100% controlling financial interest.
On July 13, 2012, Philadelphia Financial Administration Services Company, LLC (PFASC), a newly formed entity capitalized by TFP and PFGI, purchased certain assets of Hartford Life Private Placement, LLC (HLPP) from affiliates of The Hartford Financial Services Group, Inc. (The Hartford) for a purchase price of $117,500. PFASC and certain insurance subsidiaries of The Hartford entered into a long-term servicing agreement whereby PFASC administers approximately $35.0 billion in company owned life insurance (COLI) and bank owned life insurance (BOLI) business previously serviced by HLPP in exchange for a fee. We refer to this transaction as the PFAS Transaction.
Funding for the acquisition was provided in the form of equity of $23,500 and debt of $100,000 issued by PFAS. During the measurement period for this acquisition, the total purchase price was adjusted to $116,000.
In April 2013, the Company committed $10,000 to purchase a majority of the voting equity interests of Siena Capital Finance LLC (Siena). As of June 30, 2013, $7,310 of the commitment had been funded. This transaction resulted in a 59.38% controlling interest in Siena and generated $1,155 in goodwill, which was recorded on the Company’s consolidated balance sheet. On July 24, 2013, the Company funded the remaining commitment amount $2,690, which increased its controlling interest to 66.67%. On October 1, 2013, another investor made a capital commitment to Siena, which decreased the Company’s controlling interest to 62.00% as of December 31, 2013.
Accounting Standards Codification (ASC) Topic 810, Consolidation requires the consolidation of a VIE into the financial statements of the entity that is considered the VIE’s primary beneficiary. ASC Topic 810 provides a framework for determining whether an entity should be considered a VIE and accordingly evaluated for consolidation. If an entity is a VIE, it would then need to be determined whether Tiptree’s relationship, direct or indirect through subsidiaries, to the VIE (whether contractual, through direct investments in the entity, or otherwise) results in a variable interest. If Tiptree does have a variable interest in the entity, it would then need to be determined whether Tiptree is deemed to be the primary beneficiary. For VIEs, if Tiptree is deemed to (i) have the power to direct the activities of the VIE that most significantly impact the economic performance and (ii) either the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE, then Tiptree would be deemed to be the primary beneficiary and would be required to consolidate. Generally, TAMCO’s contractual relationship as collateral manager of the CLOs described herein satisfies criteria (i) of the prior sentence, and its ownership interests in and/or ability to earn certain incentive or other management fees in certain CLOs can typically satisfy criteria (ii). As a result, TAMCO has been deemed the primary beneficiary of the CLOs that it manages.
The consolidation of the CLOs upon acquisition of TAMCO (see Note 1) required the initial recognition of the assets and liabilities at fair value. Since the assets are solely for the benefit of the beneficial interest holders (liability holders) and no residual value from their liquidation is available to TAMCO, the difference between the fair value of the assets of the CLOs and its liabilities upon consolidation have been reflected as appropriated retained earnings. Given the nature and activity of the CLOs, TAMCO has applied the investment company accounting guidance to the CLOs’ financial statements and as such, recognizes changes in fair value of the assets of the CLOs and accreted the fair value adjustment to the liabilities of the CLOs (recorded upon consolidation) in the consolidated statements of operations. A portion of the results of operations of the CLOs are reflected as net income (loss) attributable to the VIE subordinated noteholders and as an adjustment to the appropriated retained earnings as that pertains to the amount of subordinated interests of the CLOs not held by Tiptree.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. The estimates and assumptions most susceptible to change are the valuation of securities, loans, separate account
assets, derivative positions, deferred income taxes and acquired assets and liabilities. Although these and other estimates and assumptions are based on the best available estimates, actual results could differ materially from management’s estimates.
In June 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-08, Financial Services-Investment Companies (ASC Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. This ASU introduces a new approach for assessing whether an entity is an investment company. To determine whether an entity is an investment company for accounting purposes, Tiptree will now be required to evaluate the fundamental and typical characteristics of the entity including its purpose and design. The amendments in the ASU will be effective for Tiptree in the first quarter of 2014. Earlier application is prohibited. The Company has completed its analysis of ASU No. 2013-08 and believes that adoption of this standard will not have a material effect on the Company’s consolidated financial statements.
ASC Topic 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels, from highest to lowest, are defined as follows:
Exchange-traded equity securities are valued based on quoted prices from the exchange. These securities are actively traded and valuation adjustments are not applied. Accordingly, they are categorized in Level 1 of the fair value hierarchy. USTs are actively traded and valuation adjustments are not applied. They are categorized in Level 1 of the fair value hierarchy.
Separate Account Assets: Separate account assets are primarily invested in alternative investments (which include investments in limited partnerships, private equity funds, hedge funds, and fund of funds), mutual funds, fixed maturity securities, and equity securities. The alternative investments are valued at estimated fair value with the assistance of the investment managers of the underlying alternative investments. Since the entities underlying these alternative investments are investment companies for accounting purposes, as a practical expedient, the Company utilizes the separate account’s proportionate interest in the fair value of the underlying net assets to determine the fair value of these investments. The fair value of the underlying net assets of each alternative investment is determined from financial information provided by the investment manager. These alternative investments are generally classified within Level 3 of the fair value hierarchy. Most hedge fund investments are classified as Level 3. However, some hedge fund investments with minimal liquidity restrictions such as no lockup period, redemption notification of 35 days or less, withdrawal frequency greater than annually, and withdrawal payouts within 30 days are classified within Level 2. Mutual funds and equity securities are exchange-traded and are valued based on quoted market prices from independent pricing services and are classified within Level 1 of the fair value hierarchy. U.S. Treasury securities are classified within Level 1 of the fair value hierarchy and all other fixed maturity securities are classified within Level 2.
Cash and Cash Equivalents - Unrestricted: The carrying amounts of cash and cash equivalents - unrestricted are carried at cost which approximates fair value.
Debt securities classified as available for sale are intended to be held for indefinite periods of time and include those debt securities that management may sell as part of its asset/liability management strategy or in response to changes in interest rates, resultant prepayment risk or other factors. Debt securities held as available for sale securities are recorded at fair value, with unrealized gains/(losses), net of related tax effects, excluded from earnings and reported as other comprehensive income.
Realized gains/(losses) on the sale of debt securities are calculated by the specific-identification method. The Company regularly conducts and documents periodic reviews of all securities with unrealized losses to evaluate whether the impairment is other-than-temporary. Under the guidance for debt securities, other-than-temporary impairment (OTTI) is recognized in earnings in the consolidated statement of operations for debt securities that the Company has an intent to sell or that it believes it is more likely than not that it will be required to sell prior to recovery of the amortized cost basis. For those securities that the Company does not intend to sell nor expect to be required to sell, credit-related impairment is recognized in earnings, with the non-credit-related impairment recorded in accumulated other comprehensive income (AOCI). An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in AOCI for AFS securities.
Management’s estimate of OTTI includes, among other things: (i) the duration of time and the relative magnitude to which fair value of the security has been below cost; (ii) the financial condition and near-term prospects of the issuer of the investment; (iii) extraordinary events, including negative news releases and rating agency downgrades, with respect to the issuer of the investment; (iv) the Company’s ability and intent to hold an equity security for a period of time sufficient to allow for any anticipated recovery; (v) whether it is more likely than not that the Company will sell a security before recovery of its amortized cost basis; (vi) whether a debt security exhibits cash flow deterioration; (vii) whether the decline is attributable to specific conditions, such as conditions in an industry or in a geographic location.
Certain loans held for investment are held at amortized cost. The Company periodically reviews these loans for impairment. Impairment losses are taken for impaired loans based on the fair value of collateral on an individual loan basis for those loans held by Care Investment Trust LLC (Care LLC). When it is probable that the Company will be unable to collect all amounts contractually due, the loan would be considered impaired.
Interest income is generally recognized using the effective interest method or on a basis approximating a level rate of return over the term of the loan. Nonaccrual loans are those on which the accrual of interest has been suspended. Loans are placed on nonaccrual status and considered nonperforming when full payment of principal and interest is in doubt, or when principal or interest is 90 days or more past due and collateral, if any, is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against interest income. In addition, the amortization of net deferred loan fees is suspended. Interest income on nonaccrual loans may be recognized only to the extent it is received in cash. However, where there is doubt regarding the ultimate collectability of loan principal, cash receipts on such nonaccrual loans are applied to reduce the carrying value of such loans. Nonaccrual loans may be returned to accrual status when repayment is reasonably assured and there has been demonstrated performance under the terms of the loan or, if applicable, the restructured terms of such loan. The Company did not have any loans on nonaccrual status as of December 31, 2013 or 2012.
The Company defers nonrefundable loan origination and commitment fees collected on originated loans and amortizes the net amount as an adjustment of the yield over the estimated life of the loan. If a loan is prepaid, the net deferred amount is recognized in the consolidated statement of operations at that time. Interest and fees on loans include prepayments fees and late charges collected.
The Company recognizes all derivatives on the consolidated balance sheets at fair value. The Company has not designated any derivative transactions as accounting hedges, and consequently, has not applied hedge accounting treatment. The changes in the fair values of the derivative financial instruments are reported in the consolidated statement of operations.
Real estate properties are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable in accordance with ASC 360, Impairment or Disposal of Long-Lived Assets. If such reviews indicate that the asset is impaired, the asset’s carrying amount is written down to its fair value. An impairment loss is measured based on the excess of the carrying amount over the fair value. The fair value is determined by using a
discounted cash flow model and appropriate discount and capitalization rates. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates, and capital requirements that could differ materially from actual results. If anticipated holdings periods change or estimated cash flows decline based on market conditions or otherwise, an impairment loss may be recognized. Long-lived assets to be disposed of are recorded at the lower of carrying value or fair value less estimated costs to sell. There were no material impairments on our wholly-owned real estate investments for the years ended December 31, 2013 and 2012.
The Company initially records all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite lived intangibles and other intangibles, in accordance with ASC 805 Business Combinations. Goodwill, indefinite-lived intangibles and other intangibles are subsequently accounted for in accordance with ASC 350 Intangibles-Goodwill and Other and ASC 360 Impairment or Disposal of Long-Lived Assets. The initial measurement of goodwill and intangibles requires judgment concerning estimates of the fair value of the acquired assets and liabilities. Goodwill ($4,294 at December 31, 2013) and indefinite-lived intangible assets ($2,518 at December 31, 2013) are not amortized but subject to tests for impairment annually or if events or circumstances indicate it is more likely than not they may be impaired. Other intangible assets are amortized over their estimated useful lives and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount.
Tiptree has two segments of its business which contain goodwill and for which annual goodwill impairment testing is done at a reporting unit level in accordance with ASC 350. These segments are insurance for PFG’s acquisition of The Hartford and specialty finance for its acquisition of Siena. The goodwill impairment testing is performed in two steps. The first step compares the estimated fair value of the reporting unit with its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. However, if the carrying amount of the reporting unit were to exceed its estimated fair value, a second step would be performed that would compare the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. An impairment loss would be recorded to the extent that the carrying amount exceeds the implied fair value of the reporting unit’s goodwill. A substantial goodwill impairment charge would not have a significant impact on our financial condition, but could have an adverse impact on our results of operations.
Key judgments in accounting for intangibles include useful life and classification between goodwill and indefinite-lived intangibles or other intangibles requiring amortization. Indefinite-lived intangible assets are evaluated for impairment at least annually by comparing their fair values, estimated using discounted cash flow analyses, to their carrying values. Other amortizing intangible assets ($152,177 at December 31, 2013) are evaluated for impairment if events and circumstances indicate a possible impairment. Such evaluation of other intangible assets is initially based on undiscounted cash flow projections.
Insurance policies and contracts acquired is an intangible asset held by a subsidiary of the Company which reflects the estimated fair value of insurance policies and contracts in force at the time the subsidiary was acquired by the Company. The amount represents the portion of the purchase price of the subsidiary that is allocated to the value of the right to received future cash flows from the policies and contracts. Insurance policies and contracts acquired is based on actuarially determined projections of premiums, future policy and contract charges, mortality, surrenders/withdrawals, separate account investment performance and operating expenses and is maintained by line of business. Actual experience may vary from these projections. The Company amortizes insurance policies and contracts acquired over the estimated lives of the policies and contracts in proportion to actual and estimated future gross profits. Each reporting period, the Company updates the estimated gross profits with actual gross profits for the period. In addition, assumptions are reviewed and updated as necessary. Cumulative amortization is recalculated and adjusted by a cumulative charge or credit to current earnings. Estimated gross profits are regularly reviewed to determine the recoverability of insurance policies and contracts acquired.
The Company tests intangible assets with finite lives for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with ASC 360, and the Company is required to evaluate whether the carrying amount of the amortizable intangible asset is recoverable. If the carrying amount is not recoverable, the Company tests the carrying amount for impairment. Any impairment loss recognized reduces the asset to its new cost basis. There have been no events or changes in circumstances that required an impairment test for amortizing intangible assets. There has been no impairment recognized on the intangible assets.
The Company invests in real estate-related equity interests that allow it to participate in a percentage of the underlying property’s cash flows from operations and proceeds from a sale or refinancing. At the inception of the investment, it must be determined whether such investment should be accounted for as a loan, joint venture or as real estate. For the periods ended December 31, 2013, and 2012, the Company held three, real estate-related investments and accounted for such investments under the equity method.
The assets of the separate accounts are legally segregated and are not subject to the claims that arise out of any other business of the Company or its subsidiaries.
The Company accounts for equity-based compensation issued to employees, nonemployees, directors, and affiliates of the Company using the current fair value based methodology.
over the required service period, generally defined as the vesting period. There were no issuances of new stock option awards during either 2012 or 2013. The Company also issues restricted stock units as compensation to employees with the difference at grant date between the fair market value and the cost basis of the shares recorded as a reduction to retained earnings or an increase to additional paid-in capital, as applicable. The expense is amortized over the vesting period of the awards, generally three years.
The term CLO generally refers to a special purpose vehicle that owns a portfolio of investments and issues various tranches of debt and subordinated note securities to finance the purchase of those investments. The investment activities of a CLO are governed by extensive investment guidelines, generally contained within a CLO’s “indenture” and other governing documents which limit, among other things, the CLO’s exposure to any single industry or obligor and provide that the CLO’s assets satisfy certain ratings requirements. Most CLOs have a defined investment period during which they are allowed to make investments and reinvest capital as it becomes available.
The following table represents revenue and expenses of the consolidated CLOs included in the Company’s consolidated statements of operations for the periods indicated:
The tables below summarize the debt obligations of the CLOs consolidated by the Company as of December 31, 2013 and 2012:
The Company has four reportable operating segments. The Company’s operating segments are organized in a manner that reflects how management views these strategic business units. A description of each of the reportable segment is as follows:
•Insurance and Insurance Services operations are conducted by PFG, a majority owned subsidiary of Tiptree. PFG’s operating subsidiaries consist of Philadelphia Financial Life Assurance Company (PFLAC), Philadelphia Financial Life Assurance Company of New York (PFLACNY), Philadelphia Financial Distribution Company (PFDC), PFASC, and Philadelphia Financial Agency, Inc. (PFA). Philadelphia Financial’s principal insurance activity is the structuring, underwriting, marketing and administration of variable life insurance and variable annuity products to the high net worth market. Total separate account assets for policies written by PFG are $4,625,099. PFASC, acquired certain assets and administration rights from The Hartford on July 13, 2012. PFASC administers approximately $35.0 billion in COLI and BOLI policies for The Hartford.
•Specialty Finance activities are primarily conducted through the Company’s majority-controlled subsidiaries, MFCA and Siena. MFCA is a specialty finance company that owns and manages a portfolio of non-investment grade and non-rated direct and indirect debt obligations of middle-market tax-exempt borrowers. Siena’s business consists of structuring asset-based loan facilities across diversified industries which include manufacturing, distribution, wholesale, and service companies. In addition to MFCA and Siena, Tiptree’s other specialty finance investments include principal investment holdings of CLO subordinated notes and a structured corporate loan portfolio. Tiptree also holds a debt interest and a right
to receive a controlling equity interest in Luxury Mortgage Corp. (Luxury), a residential mortgage lender that originates conforming FHA, prime jumbo and super jumbo mortgages for sale to institutional investors.
•Real Estate primarily relates to the activities of Care LLC, a wholly-owned subsidiary of Tiptree which has a geographically diverse portfolio of senior housing properties including assisted-living, independent-living, memory care, skilled nursing and other healthcare-related services in the U.S. Care LLC operates the business operated by Care Inc. prior to the Contribution Transactions (and this business as operated by Care Inc. and Care LLC is collectively referred to as Care). In addition, Tiptree holds a 17% interest in Star Asia Finance, Limited (SAF), a 27.59% interest in Star Asia Opportunity, LLC (SAO) and a 50% interest in Star Asia Opportunity II, LLC (SAO II). The Star Asia entities are all Tokyo based real estate holding companies formed to invest in Asian properties and real estate related debt instruments.
Each reportable segment’s measure of profit (loss) is reported before income taxes and includes discontinued operations and non-controlling interest as this is how management views its segments.
The amortized cost and fair values of available for sale securities held as of December 31, 2013 and 2012 are as follows:
The amortized cost and fair values of investments of these debt securities at December 31, 2013, by contractual maturity date, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Proceeds from sales of available for sale debt securities for the year ended December 31, 2013 were $6,812 with associated gains of $83. For the same period in 2012, proceeds from sales of available for sale debt securities were $12,794 with associated gains of $536.
(3) Includes $1,267,612 and $30,543 classified in Level 2 and Level 3, respectively, related to CLOs.
(3) Includes $735,888 and $5,855 classified in Level 2 and Level 3, respectively, related to CLOs.
For the year ended December 31, 2013, $53,538 was transferred between Level 2 and Level 3 primarily due to the temporary restrictions on the liquidation of hedge funds included in the separate accounts balance. For the year ended December 31 2012, $30,211 was transferred from Level 3 into Level 2. The majority of these amounts in 2012 were due to tax exempt municipal securities as quoted prices for these assets were obtained from active markets.
The Company utilizes derivative financial instruments as part of its overall investment activities. Investments in derivative contracts are subject to additional risk that can result in a loss of all or part of an investment. The Company’s derivative activities are primarily classified by underlying credit risk, interest rate risk, and equity price risk. In addition, the Company is also subject to additional counterparty risk should its counterparties fail to meet the contract terms.
The Company entered into a CDX contract during December 2013, with a notional amount of $20,000. The Company is party to one CDS contract with a combined notional amount of $3,985 at December 31, 2013. The Company held three
The components of the Company’s loan portfolio measured at amortized cost were as follows as of December 31, 2013 and 2012:
Siena structures asset-based loan facilities in the $1,000 to $20,000 range across diversified industries which include manufacturing distribution, wholesale, and service companies. As of December 31, 2013, the Company carried $16,493
in loans receivable on its consolidated balance sheet which is net of a participation interest of $1,490. Collateral for asset-backed loan receivables as of December 31, 2013 consisted of inventory, equipment and accounts receivable. Management reviews collateral for these loans on at least a monthly basis or more frequently if a draw is requested and as such has determined that no impairment existed as of December 31, 2013.
As of December 31, 2013, there were no delinquencies in the Siena portfolio and all loans were classified as performing.
In August 2013, Care, through indirect subsidiaries of Care, acquired two assisted living and memory care facilities located in upstate New York for an aggregate purchase price of $21,200 (Terraces Portfolio). The properties are leased to affiliates of Premier Senior Living, LLC (Premier), a privately-held owner and operator of senior housing facilities pursuant to a triple net master lease (Premier Master Lease). In connection therewith, an indirect subsidiary of Care, made a loan to the lessees of the properties. The loan is secured by a pledge of outstanding equity interest in the lessees. The cost basis in the loan at December 31, 2013 was approximately $700 which equals its carrying value. In addition, the Company granted two loans totaling $732 to two principals of Luxury Mortgage Corp.
The following table summarizes the Company’s investments in partially-owned entities at December 31, 2013 and 2012:
The Greenfield Senior Living, Inc. (Greenfield) portfolio was acquired by affiliates of Care in September 2011 and is leased pursuant to a Master Lease to affiliates of Greenfield with an initial term of 12 years with two renewal options of 10 years each. Rent payments during the first year are approximately $1,661, with annual rental increases of 2.75% during the initial term of the lease. At the end of the initial term, Greenfield, subject to certain conditions, holds a one-time purchase option that provides the right to acquire all three of the properties at the then fair market value. Greenfield has guaranteed the obligations of the tenants under the master lease.
On November 15, 2013, affiliates of Care entered into joint ventures to own and operate two senior housing communities with affiliates of Heritage Senior Properties, LLC and Heritage Senior Living, LLC (Heritage), a privately-held owner and operator of senior housing facilities in the northeast and mid-Atlantic. Affiliates of Care own an 80% interest in the joint ventures, while affiliates of Heritage own the remaining 20% interest and continue to provide management services to the communities under a management contract. The aggregate purchase price for the two properties was $43,100, of which
The following table contains information regarding the Company’s investment in real estate as of December 31, 2013 and 2012:
Future minimum annual rental revenue under the noncancelable terms of all operating leases at December 31, 2013 are as follows:
The schedule of minimum future rental revenue excludes residential lease agreements, generally having terms of one year or less. Rental revenue from residential leases was $3,086 for the year ended December 31, 2013. There was no rental income from residential leases for the year ended December 31, 2012.
On June 28, 2013, Care completed the sale of its membership interests in Care YBE Subsidiary LLC (Care YBE), which owns fourteen senior living facilities (Bickford Portfolio) to an affiliate of National Health Investors Inc. (Buyer) for proceeds of $44,021 and a net gain of $15,463, which is classified as a gain on sale from discontinued operations. See Note 22-Dispositions, Assets Held for Sale and Discontinued Operations for further detail. The Bickford Portfolio, developed and managed by affiliates of Bickford Senior Living Group, L.L.C., contained 643 units with six properties located in Iowa, five in Illinois, two in Nebraska and one in Indiana.
The following table summarizes the insurance and insurance services segment identifiable intangible assets and goodwill at:
The insurance and insurance services segment had as of both December 31, 2013 and 2012, $3,088 recorded as goodwill on its balance sheet. The Company assesses annually for impairment its goodwill and intangibles with indefinite lives, or more often if events and circumstances indicate it is more likely than not that impairment exists. As of December 31, 2013 and 2012, there was no impairment recorded on this goodwill or intangibles.
Reflects the reversal of above market leases due to the Bickford properties discontinued operations as of December 31, 2013 (see Notes 10 and 22). As of December 31, 2012, the total above market leases was $2,674.
On December 28, 2012, Operating Company issued a note payable in the amount of $2,500 with an annual interest rate of 5%. This note was payment for 6.60% of the issued and outstanding Series A preferred stock and 8.80% of the issued and outstanding common shares of PFG. The term of this note is eighteen months commencing on December 28, 2012. On December 31, 2013 this note payable was paid in full.
As of December 31, 2013, $49,500 in principal was outstanding and was recorded as part of debt on the consolidated balance sheet of the Company. The company is obligated to pay interest on a monthly basis and has incurred interest expense of $1,119 for the year ended December 31, 2013.
PFG believes it was in compliance with all of the financial covenants contained in the note as of December 31, 2013.
On April 24, 2012, Care refinanced a bridge loan for the acquisition of the Greenfield properties by entering into three separate non-recourse loans (each a Greenfield Loan and collectively the Greenfield Loans) with KeyCorp Real Estate Capital Markets, Inc. (KeyCorp) for an aggregate amount of approximately $15,680. The Greenfield Loans bear interest at a fixed rate of 4.76%, amortize over a thirty-year period, provide for monthly interest and principal payments commencing on June 1, 2012 and mature on May 1, 2022. The Greenfield Loans are secured by separate cross-collateralized, cross-defaulted first priority deeds of trust on each of the Greenfield properties. The Greenfield Loans
are non-recourse to the Company except for certain non-recourse carveouts (customary for transactions of this type), as provided in the related guaranty agreements for each Greenfield Loan. A breach of the representations or covenants could result in a default under each of the Greenfield Loans, which would result in all amounts owing under each of the Greenfield Loans to become immediately due and payable since all of the Greenfield Loans are cross-defaulted. In June 2012, KeyCorp sold each of the Greenfield Loans to Federal Home Loan Mortgage Corporation (Freddie Mac) under Freddie Mac’s Capital Markets Execution (CME) Program.
Effective February 2013, in connection with Care’s acquisition of the Calamar Properties, affiliates of Care entered into two separate loans from Liberty Bank with an aggregate balance of $18,017 as of December 31, 2013. Both of these loans amortize over a thirty year period at a weighted average fixed rate of 4.21%. These loans are secured by separate first priority mortgages on each of the properties. A breach of representations or covenants could result in a default under each of these loans, which would result in all amounts owing under the applicable loan to become immediately due and payable.
Each of these loan transactions described above contains typical representations and covenants for loans of its type. As of December 31, 2013, management believes Care is in compliance with such covenants.
The total income tax expense of $6,941 for the period ended December 31, 2013 is reflected as a component of net income (loss) from continuing operations. This tax expense represents a consolidated total of all of Tiptree’s subsidiaries and includes $6,355 related to PFG. In addition, Tiptree incurred approximately $2,137 current federal and state income tax expense as a result of the gain on sale of the Bickford Portfolio (see Notes 10 and 22). A significant portion of the gain was reduced by available net operating loss carryforwards that were previously unrecorded as a result of Care, Inc.’s historical 0% statutory income tax rate in effect as of December 31, 2012 and June 30, 2013, prior to the Contribution Transaction. The tax associated with the Bickford portfolio gain is included with tax expense from continuing operations, rather than with discontinued operations because it arose as a result of Tiptree’s termination of REIT status, described below.
As a result of the Contribution Transaction on July 1, 2013, Tiptree no longer qualifies as a REIT, therefore Tiptree is no longer eligible to deduct the amount of distributions paid to shareholders and became a fully taxable corporation. Pursuant to the Internal Revenue Code, when a corporation loses REIT status within a tax year it becomes taxable retroactively to the first day of the tax year. As of July 1, 2013, an adjustment of $2,583 was made to the Company’s deferred tax assets as a result of the Company no longer qualifying as a REIT.
The table below outlines the Company’s net deferred tax asset as of the respective balance sheet dates:
As of December 31, 2013, the Company had total net operating loss carryforwards (“NOLs”) equal to $18,665 arising from life insurance operations and $11,510 arising from non-life insurance operations. The NOLs expire according to the following schedule:
Valuation allowances have been established for net operating loss carryforwards generated by MFCA Management, Siena , and a portion of net operating loss carryforwards generated by PFG, to the extent management has assessed it is more likely than not they will expire unutilized based on existing positive and negative evidence. Management believes it is more likely than not the remaining net operating loss carryforwards will be utilized prior to their expiration dates.
The Company’s primary tax jurisdiction is the United States, which currently has a statutory income tax rate equal to 35%. The Company also operates in several state jurisdictions that have an average combined statutory rate equal to approximately 6%. Both the U.S. federal rate and the statutory rates are before the consideration of rate reconciling items. As of December 31, 2013 and 2012, the Company had no material unrecognized tax benefits or accrued interest and penalties. The Company’s policy is to account for interest as a component of interest expense and penalties as a component of other expense. Federal tax years 2010 through 2012 were open for examination as of December 31, 2013.
Information regarding the separate accounts as of and for the periods ended December 31, 2013 and 2012 is as follows:
On July 1, 2013, immediately prior to closing the Contribution Transactions, the Company filed the Fourth Articles of Amendment and Restatement with the Maryland Department of Assessments and Taxation in order to, among other things, rename its common stock as “Class A common stock”, with no change to the economic or voting rights of such stock and reclassify 50,000,000 authorized and unissued shares of its common stock as Class B common stock.
Tiptree’s authorized capital stock consists of 100,000,000 shares of preferred stock, $0.001 par value, 200,000,000 shares of Class A common stock, $0.001 par value, and 50,000,000 shares of Class B common stock, $0.001 par value. As of December 31, 2013 and December 31, 2012, no shares of preferred stock were issued and outstanding. As of December 31, 2013 and December 31, 2012 there were 10,556,390 and 10,226,250 shares of Class A common stock issued and outstanding, respectively. As of December 31, 2013 and December 31, 2012, there were 30,968,877 and no shares of Class B common stock issued and outstanding, respectively.
Pursuant to Operating Company’s limited liability operating agreement, at any time after July 1, 2014, TFP will have the right to redeem common units of Operating Company (including any common units issued upon exercise of the warrants described above) for an equal number of shares of Class A common stock of Tiptree (and an equal number of shares of Class B common stock held by TFP will be canceled). Tiptree may instead, at its election, deliver a cash amount (or combination of cash and Class A common stock) based on the fair market value of the Class A common stock on the redemption date.
For the year ended December 31, 2013, the Company declared and paid quarterly cash dividends in the first three quarters of $0.135, $0.02 and $0.02 per common share of Class A stock totaling $1,804.
The following table summarizes changes to the issuances of Restricted Stock Units under the Company’s 2007 Equity Plan for the periods indicated:
Shares of common stock issued to the Company’s independent directors in respect to their annual retainer fees have been issued under the 2007 Equity Plan and the 2013 Equity Plan. During the year ended December 31, 2013, the Company issued 10,834 immediately vested shares of Class A common stock with an aggregate fair value of $79 to the Company’s independent directors as part of their annual retainer. As of December 31, 2013, 131,190 shares of immediately vested Class A common stock with an aggregate fair market value of $963 were issued to employees and persons providing services to the Company as incentive compensation under the 2007 Equity Plan.
The Board adopted the Tiptree 2013 Omnibus Incentive Plan (2013 Equity Plan) on August 8, 2013. The general purpose of the 2013 Equity Plan is to attract, motivate and retain selected employees, consultants and directors for the Company, to provide them with incentives and rewards for superior performance and to better align their interests with the interests of the Company’s stockholders. As of December 31, 2013, 150,569 shares of immediately vested Class A common stock with an aggregate fair market value of $1,105 were issued to employees and persons providing services to the Company as incentive compensation under the 2013 Equity Plan. An additional amount of shares is expected to be issued as incentive compensation for 2013 once 2014 financial information is finalized. The number of shares of Tiptree’s Class A common stock available for award under the 2013 Equity Plan is 1,849,431 shares of Class A common stock. Unless otherwise extended by the Board, the 2013 Equity Plan terminates automatically on August 8, 2023, the tenth anniversary of its adoption by the Board. As of December 31, 2013, there was no restricted stock unit activity associated with the 2013 Equity Plan.
The following table summarizes changes to the issuances under the Company’s 2013 Equity Plan for activity in 2013:
In June 2007, the Company adopted the Care Investment Trust Inc. Manager Equity Plan, which will automatically expire on the 10th anniversary of the date it was adopted. There were 1,325,635 common shares reserved for future issuances under the Manager Equity Plan. As of December 31, 2013, 134,629 common shares remain available for future issuances. No shares have been issued since March 30, 2012 from this plan.
As of December 31, 2013, the total unrecognized compensation cost related to restricted units was $446, which is expected to be recognized as compensation expense over a weighted average period of 2.5 years.
The Company has determined that the measurement date for shares granted under the PFG Plan awarded to employees occurs when the PFG common stock vests. The fair value of the unvested common stock granted is initially estimated based on the fair value of the individual assets and liabilities of PFG on the date of grant, and subsequently re-measured on each reporting date throughout the vesting period with changes in fair value during the requisite service period recognized as compensation cost through that period. The per unit fair value of unvested PFG common stock was $2.03 and $4.05 as of December 31, 2013 and December 31, 2012, respectively.
Expense incurred for PFG stock issued under the plan for the years ended December 31, 2013 and 2012, respectively, was $65 and $42.
TFP and BackOffice Services Group, Inc. (BOSG) entered into an Administrative Services Agreement on June 12, 2007 (Administrative Services Agreement), which was assigned to the Operating Company on July 1, 2013 in connection with
the Contribution Transactions, under which BOSG provides the services of Patrick Huvane, our Chief Accounting Officer, and certain back office, administrative and accounting services to the Company. BOSG is an affiliate of Mariner Investment Group (Mariner). Under the Administrative Services Agreement, the Company pays BOSG a quarterly fee of 0.025% of the Company’s Net Assets, defined as the Company’s total assets less total liabilities, including accrued income and expense, calculated in accordance with GAAP. This fee totaled $379 and $321 in 2013 and 2012, respectively. The Administrative Services Agreement has successive one year terms but may be terminated by the Company or BOSG upon 60 days prior notice.
As of December 31, 2013, the CDS and CDX positions have a notional amount of $3,985 and $20,000 and a fair value of $4 and $594. The counterparty for the CDS and CDX positions are Bank of America, N.A. and Morgan Stanley.
As of December 31, 2013, the IRS positions have an aggregate notional amount of $43,988 and a fair value of $52. The counterparty for the IRS positions is First Niagara Bank.
PFG participates in reinsurance arrangements with third parties as a means of limiting mortality risks and providing capacity for growth. The reinsurance is accomplished primarily with yearly renewable term treaties, which account for ceded life insurance in force of $3,396,361 as of December 31, 2013. Reserves in the amount of $1,675 are ceded to these reinsurers at December 31, 2013. The remaining ceded life insurance in force of $87,296 at December 31, 2013 relates to coinsurance
Minimum rental obligations for Care, Siena and PFG office leases. For the twelve month periods ended December 31, 2013 and 2012, rent expense for the Company’s office leases were $1,530 and $935, respectively.
On July 25, 2013, TFI’s subsidiary Siena closed on a line of credit with Wells Fargo Bank. This revolving line is for $65,000 with an interest rate of LIBOR plus 250 basis points and a maturity date of January 25, 2017. As of December 31, 2013 there was $5,371 outstanding on this line (See Note 12-Debt).
The Company calculates basic net income per common share based on the Company’s common stock outstanding as well as its unvested restricted share units. The unvested restricted share units are included because they are eligible to receive dividends. Diluted net income for the period takes into account the effect of dilutive instruments, such as any options on common shares, but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of common shares outstanding. Diluted net income also includes the minimal dilutive impact of the 3,609,420 Operating Company warrants held by TFP as part of the Contribution Transactions as summarized in Note 1. Earnings per share data excludes Tiptree’s Class B common stock, as the Class B common stock evidences a voting right without any economic interest.
The following table presents a reconciliation of basic and diluted net income per common share for the years ended December 31, 2013 and 2012:
The above table excludes the anti-dilutive effect of the 2008 warrant convertible into 652,500 shares because the exercise price of $11.33 was greater than the average market price during such periods.