We earn service and administrative fees for administering specialty insurance and asset protection programs on behalf of our clients. Service fee revenue is recognized as the services are performed and the administrative fees are recognized consistent with the earnings recognition pattern of the underlying policies. Our asset protection products are sold as complementary products to consumer retail and credit transactions and are thus subject to the volatility of the volume of consumer purchase and credit activities.
The following tables present the specialty insurance segment results for the fiscal year ended December 31, 2017, 2016 and 2015.
protection adjusted underwriting margin was $67.4 million, an increase from 2016 results by $2.6 million, or 4.0%. Credit protection products continue to provide opportunities for steady growth through a combination of expanded product offerings and new clients. Adjusted underwriting margin for warranty products was $25.9 million for 2017, up $2.1 million, or 8.8%, from 2016. The effects experienced in previous periods from our mobile protection products has slowed, and was more than offset by growth in furniture, appliances, and auto warranty business. Programs adjusted underwriting margin for 2017 was $9.8 million, down 8.2% from 2016, as certain non-standard auto programs were exited over the last year. We believe our warranty service contracts and light commercial programs provide opportunity for growth through expanded product offerings, new clients and geographic expansion. Services and other contributed $9.0 million in 2017, down $1.0 million from 2016 as certain business processing services are in run-off.
The combined ratio was 92.9% for the year ended December 31, 2017, compared to 87.9% for the prior year period. The increase was primarily driven by VOBA purchase accounting impacts which are outlined in the “Specialty Insurance - Adjusted Underwriting Margin - Non-GAAP” table below.
Adjusted EBITDA for our senior housing investments that are carried in discontinued operations were flat period-over-period. Several of the recent recent acquisitions included properties that were being renovated in an effort to grow revenue and to allow them to operate more efficiently. These upgrades were completed in the first quarter of 2017, but occupancy and rental income had not yet stabilized.
Total Tiptree Inc. stockholders’ equity was $300.1 million as of December 31, 2017 compared to $293.4 million as of December 31, 2016, primarily driven by 2017 net income and the net increase in equity outstanding as a result of the Tricadia Option, net of the share re-purchase. As of December 31, 2017 there were 29,805,453 shares of Tiptree Class A common stock outstanding, net of Treasury shares held at a subsidiary, as compared to 28,387,616 as of December 31, 2016.
Book value per share, as exchanged assumes full exchange of the limited partners units of TFP for Tiptree Class A common stock. Management believes the use of this financial measure provides supplemental information useful to investors as book value is frequently used by the financial community to analyze company growth on a relative per share basis. The following table provides a reconciliation between total stockholders’ equity and total shares outstanding, net of treasury shares.
Cash used in operating activities - VIEs was $8.6 million for the year ended December 31, 2016 driven primarily by increases in accrued interest receivable on loans.
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 the years ended December 31, 2017 and December 31, 2016, respectively. 2015 had an impairment charge.
Grants of subsidiary RSUs exchangeable into Class A common stock of the Company were initially accounted for as liabilities based upon their expected settlement method. Changes in fair value of the awards were recognized in earnings for the relative amount of cumulative compensation cost. The Company used the straight-line method to recognize compensation expense for the time vesting RSUs over the requisite service periods, beginning on the grant date. In June of 2017 when sufficient shares were made available, we accounted for these RSUs under the fair value method and ceased marking the shares to market. The Company uses the graded-vesting method to recognize compensation expense for the performance vesting RSUs. Changes in fair value of shares underlying liability awards are recognized in earnings to the extent of the accumulated amortization. Compensation expense will be recognized to the extent that it is probable that the performance condition will be achieved. The Company reassesses the probability of satisfaction of the performance condition for the performance vesting RSUs for each reporting period.
Equity securities, trading, at fair value are investments consisting of equity securities that are purchased principally for the purpose of selling them in the near term. Changes in fair value are recorded in net realized and unrealized gains (losses) on investments on the consolidated statements of operations in the period of change.
The Company evaluates whether deferred acquisition costs - non-insurance policy 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 ended December 31, 2017, 2016 and 2015, respectively.
The Company entered into a purchase agreement on November 16, 2017 to sell all of the issued and outstanding membership interests of Care. See (26) Subsequent Events for details from the completion of the sale. The Company classified Care, previously the senior living segment, as held for sale as of December 31, 2017. At the time of such classification, the pending sale of Care also met the requirements to be classified as a discontinued operation. As a result, the Company has reclassified the income and expenses attributable to Care to net income (loss) from discontinued operations for the years ended December 31, 2017, 2016 and 2015. Assets and liabilities attributable to Care have been reclassified to assets held for sale and liabilities held for sale, respectively, as of December 31, 2017 and 2016.
Except as noted below, Siena, Care, Luxury and PFG adhered to the Significant Accounting Policies as described in Note 2.
The tables below present the components of revenue, expense, pre-tax income (loss), and segment assets for each of the operating segments for the following period.
As summarized in the table below, the application of the measurement alternative results in the consolidated net income summarized above to be equivalent to the Company’s own economic interests in the CLOs which are eliminated upon consolidation:
As of December 31, 2017, the Company is in compliance with the representations and covenants for outstanding borrowings or has obtained waivers for any events of non-compliance.
The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs to the extent possible to measure a financial instrument’s fair value. Observable inputs reflect the assumptions market participants would use in pricing an asset or liability, and are affected by the type of product, whether the product is traded on an active exchange or in the secondary market, as well as 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. 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. Fair value is estimated by applying the hierarchy discussed in Note-(2) Summary of Significant Accounting Policies which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized within Level 3 of the fair value hierarchy.
Weighted based on value of underlying properties (excluding the value of underlying properties line item).
Accounts and Premiums Receivable, net, retrospective commissions receivable and other receivables: The carrying amounts approximate fair value since no interest rate is charged on these short duration assets. Categorized as Level 2 of the fair value hierarchy. See Note-(7) Notes and Accounts Receivable, net.
(1) Due to the approval of the 2017 Equity Plan, the Company changed the classification of the subsidiary RSU’s during the year ended December 31, 2017 from liability to equity awards because the Company expects to settle these awards in stock.
Option awards have been granted to the Executive Committee with an exercise price equal to the fair market value of our common stock on the date of grant. The option awards have a 10-year term and are subject the recipient’s continuous service, a market requirement, and vest one third on each of the third, fourth and fifth anniversary of the grant date. Options granted during the year ended December 31, 2016 contained a market requirement that, at any time during the option term, the 20-day volume weighted average stock price must exceed the December 31, 2015 book value per share. Options granted in 2017 contained a market requirement that, at any time during the option term, the 20-day volume weighted average stock price plus the sum of actual cash dividends paid must exceed the December 31, 2016 as exchanged book value per share. The market requirement may be met any time before the option expires and it only needs to be met once for the option to remain exercisable for the remainder of its term. If the service condition is met, the full amount of the compensation expense will be recognized over the appropriate vesting period whether the market requirement is met or not.
The Company also operates in several state jurisdictions that have an average combined statutory rate equal to approximately 6.0%. Both the U.S. federal rate and the state statutory rates are before the consideration of rate reconciling items. A reconciliation of the expected federal income tax expense on income from continuing operations using the 35% federal statutory income tax rate to the actual income tax expense and resulting effective income tax rate is as follows for the periods indicated below:
As of January 2016, Tiptree has established a U.S. federal consolidated income tax group and as such files on a consolidated basis, with certain exceptions such a Fortegra life insurance company and Luxury. Tiptree consolidated, and certain subsidiaries on a separate basis, file returns in various state jurisdictions, and as such may have state tax obligations. Additionally, as needed the Company will take all necessary steps to comply with any income tax withholding requirements.