The following tables present the insurance segment results for the year ended December 31, 2019 and 2018.
Total expenses include policy and contract benefits, commissions expense and operating expenses. For the year ended December 31, 2019, total expenses were $599.4 million, up $68.1 million, or 12.8%, primary driven by increases in policy and contract benefits and commission expense as written premiums and insurance revenues increased over the 2018 period.
Tiptree Capital earns revenues from the following: net interest income; mortgage gains and origination fees; asset management fees from CLOs under management (prior to the sale of our Telos asset management business which occurred on April 26, 2019); distributions and realized and unrealized gains on the Company’s investment holdings (primarily Invesque); and charter revenue from vessels within our maritime transportation operations.
The total income tax expense of $9.0 million for the year ended December 31, 2019 and total income tax expense of $7.8 million for the year ended December 31, 2018 are reflected as components of net income (loss). For the year ended December 31, 2019, the Company’s effective tax rate was equal to 31.0%. The effective rate for the year ended December 31, 2019 is higher than the U.S. federal statutory income tax rate of 21%, primarily from the impact of the non-recurring return-to-provision, as well as ongoing state and foreign taxes. For the year ended December 31, 2018, the Company’s effective tax rate was equal to 20.6%. The effective rate for the year ended December 31, 2018 is lower than the statutory rate of 21.0% primarily due to the dividends received deduction and other discrete items.
See Note (10) Debt, net, in the accompanying consolidated financial statements for additional information.
Goodwill (and indefinite-lived intangible assets) are 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 subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. 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 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.
Accounting policies specific to our dispositions, assets held for sale and discontinued operations are described in more detail in (3) Dispositions, Assets Held for Sale and Discontinued Operations.
As of December 31, 2019, the undiscounted future cash flows were higher than the carrying amount of each of the vessels in the Company’s fleet and, as such, no loss on impairment was recognized.
Service Fees. Service fee revenue is recognized as the services are performed. These services include fulfillment, software development, and claims handling for our customers. Collateral tracking fee income is recognized when the service is performed and billed. Management reviews the financial results under each significant contract on a monthly basis. Any losses that may occur due to a specific contract would be recognized in the period in which the loss is determined probable. During the years ended December 31, 2019, 2018 and 2017, respectively, the Company did not incur a loss with respect to a specific significant service fee contract.
A substantial majority of the Company’s non-investment related revenues are comprised of revenues from insurance contracts that are accounted for under Financial Services-Insurance (Topic 944) or certain financial services products (e.g. gains upon the origination of mortgages) that are not within the scope of the new standard. The Company’s remaining revenues that are within the scope of Topic 606 are primarily comprised of revenues from contracts with customers for monthly membership dues for motor clubs, monthly administration fees for services provided for premiums, claims and reinsurance processing revenues, vehicle service contracts and warranty coverage revenues for household goods and appliances (collectively, remaining contracts). Vessel related revenue is also under the scope of this standard. The Company has chosen the modified-retrospective method of adopting Topic 606, and has assessed these contracts and concluded that changes in accounting and revenue recognition upon adoption of Topic 606 was not material to the Company’s financial position as of January 1, 2018, and did not have a material impact on the Company’s consolidated financial statements. No cumulative effect adjustment was made due to the adoption of this standard. See Note (13) Revenue From Contracts with Customers for disclosures required under ASU 2014-09 and others related to Topic 606.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which makes targeted improvements to the recognition, measurement, presentation and disclosure of certain financial instruments. ASU 2016-01 focuses primarily on the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for certain financial
The following tables present the gross unrealized losses on AFS securities by length of time that individual AFS securities have been in a continuous unrealized loss position:
Other investment income represents other income from other Tiptree non-insurance activities as disclosed within other revenue on the consolidated statements of operations, see Note (15) Other Revenue, Other Expenses and Other Income. The following tables present the components of other investment income by type:
Includes a non-cash transaction, as part of a reinsurance contract that resulted in an increase of $57,815 in reinsurance receivables, offset by a decrease of $40,295 in deferred acquisition costs and increases of $15,491 in reinsurance payables and $2,029 in deferred revenue.
The Company conducts annual impairment tests of its goodwill as of October 1. The Company’s impairment testing for each
On August 5, 2019, a subsidiary in our insurance business entered into a $15,000 revolving line of credit agreement related to our warranty service contract finance business. The borrowing has a maturity date of April 28, 2021 and a rate of LIBOR plus 2.40%. On December 30, 2019, the maximum borrowing capacity of this borrowing was increased from $15,000 to $27,000. As of December 31, 2019, a total of $11,736 was outstanding under the borrowing.
Mortgage Loans Held for Sale: Mortgage loans held for sale are generally classified under Level 2 in the fair value hierarchy and fair value is based upon forward sales contracts with third party investors, including estimated loan costs, and reserves.
Debt: The carrying value, which approximates fair value of LIBOR based debt, represents the total debt balance at face value excluding the unamortized discount. The fair value of the Junior subordinated notes is determined based on dealer quotes. Categorized under Level 3 in the fair value hierarchy.
On February 15, 2019, the Company and Corvid Peak (formerly known as Tricadia) entered into a Strategic Combination Agreement (the Strategic Combination Agreement) and Amended and Restated Transition Services Agreement (the Transition Services Agreement). Corvid Peak is a related party of the Company because Corvid Peak is deemed to be controlled by Michael Barnes, the Company’s Executive Chairman. Tiptree agreed to invest $75 million to seed new investment funds to be managed by Corvid Peak. As of December 31, 2019, $25 million was funded with the remainder funded in the first quarter of 2020. The Company will pay Corvid Peak an annual management fee of 1.25% of the net asset value of invested capital, 1.25% of the $75 million commitment to the extent not invested, and an incentive fee equal to 20% of the net profits. The Company incurred $1,006 of management and incentive fees to Corvid Peak for the year ended December 31, 2019.