Asset Management Activity. Telos 3 and Telos 4 became effective on June 5, 2013 and September 23, 2013, respectively. In anticipation of issuing CLO notes for another CLO, Telos entered into a $100 million warehouse credit agreement on August 6, 2013, which was increased to $140 million on September 25, 2013.
Our results of operations are affected by a variety of factors, including general economic conditions and the resulting trends and market conditions specific to our businesses, some of which are discussed below.
Total revenues for insurance operations were $76.8 million for fiscal 2013, compared to $47.9 million for 2012, an increase of $28.9 million, or 60.3%. This increase was primarily the result of a full year of administrative service fees from the PFAS Transaction in July 2012.
Total expenses for specialty finance operations for fiscal 2013 were $11.3 million, compared to $7.7 million for 2012, an increase of $3.6 million, or 46.7%. The increase was primarily the result of the inclusion of Siena in results for 2013.
Total operating profit for specialty finance operations for fiscal 2013 was $16.2 million, compared to a profit of $23.3 million for 2012, a decrease of $7.1 million, or 30.5%. This decrease was driven primarily by the decline in the underlying value of our investments as well as the inclusion of Siena as a start-up entity in our results.
Adjustments to results from real estate operations includes the effects of straight lining lease revenue, expenses associated with depreciation and amortization, certain transaction expenses, non-cash equity compensation expenses, other non-cash charges, and incentive compensation adjustments for unconsolidated partnerships and joint ventures.
The table below summarizes Tiptree’s contractual obligations by period for payments that are due as of December 31, 2013 (in thousands):
We have audited the accompanying consolidated balance sheets of Tiptree Financial, Inc. and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
In February 2009, TFP acquired a controlling financial interest (approximately 57%) of the outstanding limited liability company interests of Muni Funding Company of America, LLC (MFCA), a specialty finance holding company that invests directly and indirectly in U.S. federally tax exempt bonds. As of December 31, 2009, TFP had increased its ownership to approximately 75% of the outstanding limited liability company interests of MFCA as a result of a tender and rights offering. In June 2011, TFP acquired 100% of the outstanding limited liability company interests of MFCA as a result of a tender offer and merger.
The accompanying consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles (GAAP). The consolidated financial statements are presented in U.S. dollars, the main operating currency of the Company. The consolidated financial statements prepared under GAAP for all periods presented include retroactive adjustments to comparative periods to reflect the combinations under common control described in Note 1 related to TAMCO and the Contribution Transactions.
Trading Investments: Trading investments consist primarily of privately held equity securities, exchange-traded equity securities, U.S. Treasury securities (USTs), CLOs, collateralized debt obligations (CDOs), loans, derivative assets and tax exempt securities. The fair value of privately held equity securities are either 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, the Company has classified them within 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, asset backed securities (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 estimated fair value 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.
Notes Payable: The fair value of notes payable is determined based on either dealer quotes or contractual cash flows discounted at market rates.
to consolidate when it acquired the management rights of the CLOs. The percentage ownerships of the CLOs as of December 31, 2013 are as follows: Telos 1 (7.11%), Telos 2 (95.45%), Telos 3 (15.57%) and Telos 4 (71.08%).
The following tables show the fair values and carrying values of the Company’s financial assets and liabilities measured on a recurring basis and the associated fair value hierarchy amounts as of December 31, 2013 and 2012. Included are balances associated with the consolidated CLOs:
On December 31, 2013, the Company sold its interest in one independent and assisted living facility located in Utah held by a joint venture with an affiliate of Senior Management Concepts, LLC (SMC), a privately held operator of senior housing facilities. For the year ended December 31, 2013 and 2012, the Company recognized approximately $333 and $324, respectively, in equity income from its interest in SMC.
Operating Company believes it was in compliance with all of the financial covenants contained in the Credit Agreement as of December 31, 2013.
On September 13, 2013, the Internal Revenue Service issued final Tangible Property Regulations (TPR) under Internal Revenue Code (IRC) Section 162 and IRC Section 263(a), which prescribe the capitalization treatment of certain repair costs, asset betterments and other costs which could affect temporary deferred taxes. Although the regulations are not effective until tax years beginning on or after January 1, 2014, certain portions may require an accounting method change on a retroactive basis, thus requiring an IRC Section 481(a) adjustment related to fixed and real asset deferred taxes. Pursuant to U.S. GAAP, as of the date of the issuance, the release of the regulations is treated as a change in tax law. Therefore, we are required to determine whether there will be an impact on our financial statements as of December 31, 2013. We have analyzed the expected impact of the new regulations on our financial position at October 31, 2013 and determined that such impact is not significant. We will continue to monitor any future changes in the TPR prospectively.
arrangements explained below. Reserves in the amount of $7,459 at December 31, 2013 were ceded under these coinsurance agreements.
Under the second reinsurance agreement PFLAC reinsured all of its remaining in-force ordinary life and annuity business to the reinsurer. The amount coinsured with the reinsurer is 100% of the policy obligations relating to the business. During December 31, 2013 and 2012, PFG ceded premiums of $11,068 and $10,537 respectively, to reinsurers and reported ceded death benefits of $542 and $2,385 for the twelve month period ended December 31, 2013 and 2012, respectively.
On January 31, 2014, the Company completed a strategic transaction with Luxury, a residential lender that originates conforming, FHA, prime jumbo and super jumbo mortgages for sale to institutional investors. The Company owns 67.5% of the equity of Luxury and will consolidate the operations of Luxury beginning in the first quarter of 2014.