As of December 31, 2017, Crusader was licensed as an admitted insurance carrier in the states of Arizona, California, Nevada, Oregon, and Washington. From 2004 until June 2014, all of Crusader’s business was written in the state of California. Crusader’s business remains concentrated in California (99.7% and 99.5% of direct written premium (before reinsurance ceded) in 2017 and 2016, respectively). During the years ended December 31, 2017 and 2016, 99% and 98% of Crusader’s business was CMP policies, respectively. On December 14, 2017, A.M. Best Company reaffirmed Crusader’s Financial Strength Rating of A- (Excellent) and Long-Term Issuer Credit Rating of a- (Excellent), and revised the rating outlook to “negative” from “stable.” The negative outlook reflects A.M. Best’s concerns with Crusader’s recent declining underwriting performance as well as some of its recent underwriting and marketing leadership changes, as previously disclosed, and the execution risk that comes with such changes.
Written premium is a financial measure that is defined, under SAP, as the contractually determined amount charged by the insurance company to the policyholder for the effective period of the contract based on the expectation of risk, policy benefits, and expenses associated with the coverage provided by the terms of the policies. Written premium is a required statutory measure. Written premium is defined under GAAP in Accounting Standards Codification Topic 405, “Liabilities,” as “premiums on all policies an entity has issued in a period.” Earned premium, the most directly comparable GAAP measure, represents the portion of written premium that is recognized as income in the financial statements for the period presented and earned on a pro-rata basis over the terms of the policies.
The following is a reconciliation of net written premium to net earned premium:
For the year ended December 31, 2017, direct written premium as reported on Crusader’s statutory financial statement was $38,393,351 compared to $38,749,097, for the year ended December 31, 2016, a decrease of $355,746, or 0.9%. The decrease in direct written premium in 2017 compared to 2016 is not attributable to any material single event.
The insurance company operation underwriting profitability is defined by pre-tax underwriting (loss) profit which is calculated as net earned premium less losses and loss adjustment expenses and policy acquisition costs. Crusader’s underwriting (loss) profit (before income taxes) is as follows:
AAQHC’s fee income decreased $8,003 (10%) for the year ended December 31, 2017, as compared to the year ended December 31, 2016, as a result of a decrease in the number of association members enrolled in AAQHC.
The finance fees earned by AAC for the year ended December 31, 2017, increased $5,934 (9%) as compared to the year ended December 31, 2016. The increase in fees earned during the year presented compared to the prior year period is primarily a result of increase in late fees over comparable periods. AAC issued 2,914 and 3,087 loans in 2017 and 2016, respectively. Revenue earned in 2017 and 2016 consisted entirely of late fees and other miscellaneous fees charged. The average policy premium financed by AAC was $4,535 and $4,334 in 2017 and 2016, respectively.
The daily automobile rental insurance program was produced by Bedford. Bedford received commission income from non-affiliated insurance companies based on written premium. Bedford stopped selling and servicing daily automobile rental policies in 2015. Accordingly, since 2016, all Bedford’s commission income is comprised of commission on previous business written. As a result, the daily automobile rental insurance program commission income for the year ended December 31, 2017, decreased $4,444 (50%) compared to the year ended December 31, 2016.
Fluctuations in cash flows from operating activities relate to the timing of the collection and the payment of insurance-related receivables and payables. The variability of the Company’s losses and loss adjustment expenses is primarily due to its small population of claims which may result in greater fluctuations in claim frequency and/or severity. Although the Consolidated Statements of Cash Flows reflect net cash used by operating activities for the years ended December 31, 2017 and 2016, the Company does not anticipate future liquidity problems, and the Company believes that it continues to be well capitalized and adequately reserved.
Derivative mortgage-backed securities including interest only, principal only and inverse floating rate securities.
The Company’s old investment guidelines on equity securities limited investments in equity securities to an aggregate maximum of $2,000,000. The Company’s old investment guidelines on fixed maturities limited those investments to high-grade obligations with a maximum term of eight years. The maximum investment authorized in any one issuer was $2,000,000. This dollar limitation excluded bond premium paid in excess of par value and U.S. government or U.S. government guaranteed issues. Investments in municipal securities were primarily pre-refunded and secured by U.S. treasury securities. The short-term investments were either U.S. government obligations, Federal Deposit Insurance Corporation (“FDIC”) insured, or were in an institution with a Moody's rating of at least P2 and/or a Standard & Poor's rating of A1. All of the Company's fixed maturity investment securities were rated, readily marketable, and could be liquidated without any materially adverse financial impact.
Crusader's statutory capital and surplus as of December 31, 2017, was $50,446,888, a decrease of $8,673,555 (15%) from December 31, 2016. In the years ending December 31, 2017 and 2016, Crusader issued cash dividends of $3,000,000 and $2,000,000 to Unico, its parent and sole shareholder, respectively. These dividends were used primarily for general corporate purposes. Based on Crusader’s statutory surplus for the year ended December 31, 2017, the maximum dividend that could be made by Crusader to Unico without prior regulatory approval in 2018 is $5,044,689.
On December 19, 2008, the Board of Directors authorized a stock repurchase program to acquire from time to time up to an aggregate of 500,000 shares of the Company’s common stock. This program has no expiration date and may be terminated by the Board of Directors at any time. As of December 31, 2017 and 2016, the Company had remaining authority under the 2008 program to repurchase up to an aggregate of 188,655 shares of its common stock. The 2008 program is the only program under which there is authority to repurchase shares of the Company’s common stock. The Company did not repurchase any stock during the year ended December 31, 2017. The Company repurchased 8,812 shares of stock at an average price of $10.17 per share during the year ended December 31, 2016, in unsolicited transactions at a cost of $89,582 of which $4,331 was allocated to capital and $85,251 was allocated to retained earnings. The Company has retired and intends to retire all repurchased stock, as applicable.
One of the Company’s agents, which was appointed in 2008 to assist the Company in implementing its Trucking Program, failed to pay the net premium and policy fees due Unifax, the exclusive general agent for Crusader. The agent was initially late in paying its February 2009 production that was due to Unifax on April 15, 2009. In May 2009, as a result of the agent’s failure to timely pay its balance due to Unifax, the Company terminated its agency agreement and assumed ownership and control of that agent’s policy expirations written with the Company. The Company subsequently commenced legal proceedings against the agent corporation, its three principals (who personally guaranteed the agent’s obligations) and another individual for the recovery of the balance due and any related recovery costs incurred. All related recovery costs have been expensed as incurred. The agent corporation and two of its principals filed bankruptcy. The corporation was adjudicated bankrupt. The Company obtained judgments, non-dischargeable in bankruptcy, for the full amount due from the two principals who filed bankruptcy. The other principal stipulated to a judgment of $1,200,000. The claim against the fourth individual was resolved. The Company collected $0 during the years ended December 31, 2017 and 2016. As of December 31, 2017 and 2016, the agent’s balance due to Unifax was $1,181,272. As of December 31, 2017 and 2016, the Company’s bad debt reserve associated with this matter was $1,181,272 which represents approximately 100% of the balance due to Unifax. Although the receivable is fully reserved for financial reporting purposes at December 31, 2017, the Company continues to pursue collection of the judgments from the three principals. Bad debt expense was $16,222 and $5,833 for the years ended December 31, 2017 and 2016, respectively.
For the year ended December 31, 2017, the Company had a loss before taxes of $9,880,221 compared to a loss before taxes of $2,114,238 for the year ended December 31, 2016, an increase in the loss before taxes of $7,765,983 (367%). This increase in the loss before taxes was due primarily to increased losses and loss adjustment expenses partially offset by an increase in total revenues.
The effect of inflation on the Company’s net income during the years ended December 31, 2017 and 2016 was not significant.
Crusader’s primary line of business is CMP policies. This line of business represented approximately 99% and 98% of Crusader’s total written premium for the years ended December 31, 2017 and 2016, respectively.
For the year ended December 31, 2017, direct written premium, as reported on Crusader’s statutory financial statement, was $38,393,351 compared to $38,749,097 for the year ended December 31, 2016, a decrease of ($355,746) (0.9%). The decrease in direct written premium in 2017 compared to 2016 is not attributable to any material single event.
Crusader writes annual policies. Earned premium represents a portion of written premium that is recognized as income in the financial statements for the period presented and earned daily on a pro-rata basis over the terms of the policies, and, therefore, premiums earned in the current year are related to policies written during both the current year and immediately preceding year.
The ratio of ceded earned premium to direct earned premium for the year ended December 31, 2017, is relatively unchanged compared to the year ended December 31, 2016, as there were no major modifications to Crusader’s excess of loss treaties.
Reinsurance treaties are generally structured in layers, with different negotiated economic terms and retention of participation, or liability in each layer. In calendar years 2017 and 2016, Crusader retained a participation in its excess of loss reinsurance treaties of 10% in its 1st layer (reinsured losses between $500,000 and $1,000,000), 0% in its 2nd layer (reinsured losses between $1,000,000 and $3,000,000), and 0% in its property and casualty clash treaty.
The Company evaluates each of its ceded reinsurance contracts at its inception to determine if there is a sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting literature. As of December 31, 2017, all such ceded contracts are accounted for as risk transfer reinsurance.
Based on the loss and loss adjustment expense reserve estimates as of December 31, 2017, the estimated ultimate loss ratio is within five percentage points of the initial expected loss ratio in 10 of Crusader’s 33 years. Since Crusader’s net earned premium in 2017 was $32,343,319, a difference between the accident year 2017 actual and initial expected loss ratios of only five percentage points will or may ultimately impact losses and loss adjustment expenses by $1,617,166. The estimated ultimate loss ratio is within ten percentage points of the initial expected loss ratio in 12 of Crusader’s 33 years. A ten percentage point difference between the accident year 2017 actual and the initial expected loss ratios will or may ultimately impact losses and loss adjustment expenses by $3,234,332. The estimated ultimate loss ratio is within twenty percentage points of the initial expected loss ratio in 23 of Crusader’s 33 years. A twenty percentage point difference between the accident year 2017 actual and the initial expected loss ratios will or may ultimately impact losses and loss adjustment expenses by $6,468,664.
In 2017, approximately 42% and 45% of the commission income from health insurance sales was from Guardian Life Insurance Company of America dental and group life plan programs and the Blue Shield Care Trust health and life insurance programs, respectively. In 2016, approximately 40% and 41% of the commission income from health insurance sales was from Guardian Life Insurance Company of America dental and group life plan programs and the Blue Shield Care Trust health and life insurance programs, respectively.
Membership and fee income for the year ended December 31, 2017, decreased $8,003 (10%) compared to the year ended December 31, 2016. The decrease is a result of a decrease in the number of association members primarily due to increased competition.
Policy fee income for the year ended December 31, 2017, decreased $69,623 (4%) as compared to the year ended December 31, 2016. This decrease in policy fee income in 2017 compared to 2016 was primarily the result of a 571 (6%) decrease in the number of policies issued during 2017 compared to 2016.
Since 2016, all Bedford’s commission income was comprised of contingent commission on previous business written. The contingent commission Bedford received in 2017 and 2016 was based on profitability of premiums written in prior years for one of the non-affiliated insurance companies it represented.
AAC currently finances policies produced only through its sister company, Unifax. Consequently, AAC’s growth is primarily dependent on the growth of Crusader and Unifax business. Since July 2010, AAC has offered 0% financing on policies produced by Unifax for Crusader. Effective March 1, 2018, the annual percentage rate charged on AAC new loans increased to 4.99% from 0%. The Company believes the new interest rate is competitive and will not have a negative impact on its business. Income generated by AAC consists of late fees, returned check fees and payment processing fees.
(1) The average is based on the beginning and ending balances of the amortized cost of the invested assets for each respective year.
In the year ended December 31, 2017, investment income earned, excluding realized losses and investment income earned on cash deposits in lieu of appeal bonds, increased $408,921 (46%) compared to the year ended December 31, 2016. This increase in investment income was due primarily to increase in the yield on average invested assets as a result of a change in the investment guidelines during 2017 and an increase in interest rates. The weighted average maturity of the Company’s fixed maturity investments as of December 31, 2017, was 6.8 years compared to 1.0 years as of December 31, 2016.
As of December 31, 2017, all of the Company’s investments are in US. Treasury securities, FDIC insured certificates of deposit, other fixed maturity securities, and short-term investments. The investments in the certificates of deposit are classified as held-to-maturity investments, and all other fixed maturity investments are classified as available-for-sale. All of the Company’s investments, except for the certificates of deposit, are readily marketable. The following table sets forth the composition of the investment portfolio of the Company at the dates indicated:
The Company closely monitors its investments. If an unrealized loss is determined to be other-than-temporary, it is written off as a realized loss through the Condensed Consolidated Statements of Operations. The Company’s methodology of assessing other-than-temporary impairments is based on security-specific analysis as of the balance sheet date and considers various factors including the length of time to maturity and the extent to which the fair value has been less than the cost, the financial condition and the near-term prospects of the issuer, and whether the debtor is current on its contractually obligated interest and principal payments. The unrealized losses as of December 31, 2017, and December 31, 2016, were determined to be temporary.
Although the Company does not intend to sell its fixed maturity investments prior to maturity, the Company may sell investment securities from time to time in response to cash flow requirements, economic and/or market conditions. The Company sold two securities prior to their maturity during the year ended December 31, 2017. These securities had amortized cost of $1,141,338. The Company realized a net investment gain of $554 on these sales for the year ended December 31, 2017. Proceeds of the sales of these securities were used for general corporate purposes. The Company sold three securities prior to their maturity during the year ended December 31, 2016. These securities had amortized cost of $746,000. The Company realized a net investment loss of $1,278 on these sales for the year ended December 31, 2016. Proceeds of the sales of these securities were used for general corporate purposes.
Other income from insurance company operation and other insurance operations is comprised primarily of miscellaneous items not relevant to the primary income statement captions.
Total salaries and employee benefits incurred for the year ended December 31, 2017, increased $917,326 (12%) compared to the year ended December 31, 2016, due primarily to costs associated with a termination of an employment agreement with an employee; there are no such agreements for any other employees other than those agreements disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Commissions to agents/brokers (not including commissions on Crusader policies that are reflected in policy acquisition costs) are generally related to gross commission income from the health insurance program and the daily automobile rental insurance program. Commissions to agents and brokers increased $5,091 (3%) for the year ended December 31, 2017, as compared to the year ended December 31, 2016, due primarily to increase in written premium in the health insurance program.
Other operating expenses increased $1,135,427 (44%) for the year ended December 31, 2017, compared to the year ended December 31, 2016, due primarily to fees associated with the California Department of Insurance financial examination of Crusader and consulting expenses, which together accounted for approximately 51% of the increase. Other insignificant individual expenses contributed to the remainder of the increase.
When there is clear evidence that the actual emerged claims costs that have are different than the claims costs that were expected for any prior accident year, the claims cost estimates for that year are revised accordingly. If the claims costs that emerge are less favorable than initially anticipated, generally, the Company increases its loss and loss adjustment expense reserves immediately. However, if the claims costs that emerge are more favorable than initially anticipated, generally, the Company reduces its loss and loss adjustment expense reserves over time while it continues to assess the validity of the observed trends based on the subsequent emerged claims costs.
Some lines of insurance are commonly referred to as "long-tail" lines because of the extended time required before claims are ultimately settled. Lines of insurance in which claims are settled relatively quicker are called "short-tail" lines. It is generally more difficult to estimate loss reserves for long-tail lines because of the long period of time that elapses between the occurrence of a claim and its final disposition and the difficulty of estimating the settlement value of the claim. Crusader’s short-tail lines consist of its property coverages, and its long-tail lines consist of its liability coverages. However, compared to other long-tail liability lines that are not underwritten by Crusader, such as workers’ compensation, professional liability, umbrella liability, and medical malpractice, Crusader’s liability claims tend to be settled relatively quicker. Since trends develop over longer periods of time on long-tail lines of business, the Company generally gives credibility to those trends more slowly than for short-tail or less volatile lines of business.
The Company also segregates most of its business into smaller homogeneous categories primarily for management’s internal detailed reserve review and analysis. These homogeneous categories used by the Company include various combinations and special groupings of its lines of business, programs types, states and coverages. Some categories exclude certain items and/or others include certain items. Not all categories are defined in the same way. This analysis includes the tracking of historical claims costs and development patterns separately for each of these uniquely defined categories. Generally, neither the liability development patterns nor the property development patterns vary significantly by category.
The Company must estimate its ultimate losses and loss adjustment expenses using a very small claim population size. At the beginning of 2017, Crusader had 587 open claim files. During 2017, 825 new claim files were opened and 820 claim files were closed, leaving 592 open claim files at the end of 2017. Due to the small size of Crusader and the related small population of claims, Crusader’s losses and loss adjustment expenses for any accident year can vary significantly from the initial expectations. Due to the small number of claims, changes in claim frequency and/or severity can materially affect Crusader’s reserve estimate. The potential variability from management’s best estimate cannot be measured from any meaningful statistical basis due to the numerous uncertainties in the claims reserving process and the small population of claims.
There were no catastrophe losses incurred during the years ended December 31, 2017 and 2016.
The Company’s fixed maturity investments are classified either as held-to-maturity or available-for-sale and are stated at fair value. Although part of the Company's investments is classified as available-for-sale and the Company may sell investment securities from time to time in response to economic and market conditions, its investment guidelines place primary emphasis on buying and holding high-quality investments to maturity. Short-term investments are carried at cost, which approximates fair value. The unrealized gains or losses from fixed maturities are reported as “Accumulated other comprehensive income (loss),” which is a separate component of stockholders’ equity, net of any deferred tax effect. When a decline in the value of a fixed maturity is considered other-than-temporary, a loss is recognized in the Consolidated Statements of Operations. Realized gains and losses are included in the Consolidated Statements of Operations based on the specific identification method.
The Company does not have any off-balance sheet arrangements that are currently material or reasonably likely to be material to its consolidated financial position or results of operations.
We have audited the accompanying consolidated balance sheets of Unico American Corporation and Subsidiaries (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows, for each of the years in the two year period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
All of the Company’s fixed maturity investments are classified either as held-to-maturity or available-for-sale. The held-to-maturity investments are recorded at amortized cost, reflecting the ability and intent to hold these investments to maturity. The available-for-sale investments are stated at fair value, with unrealized gains or losses, net of applicable deferred income taxes, excluded from earnings and credited or charged to a separate component of equity. Although part of the Company's investments is classified as available-for-sale and the Company may sell investment securities from time to time in response to economic and market conditions, its investment guidelines place primary emphasis on buying and holding high-quality investments to maturity. Interest income on fixed maturity investments and short-term investments is recognized on an accrual basis at each measurement date and is included in net investment income in the Company’s Consolidated Statements of Operations.
The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income security whose carrying value may be other-than-temporarily impaired. For each fixed income security in an unrealized loss position, the Company assesses whether it is more likely than not that the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes, or the credit quality of the underlying security. If a security meets this criteria, the security's decline in fair value is considered other than temporary and is recorded as a net realized investment loss in the Consolidated Statements of Operations and in the Consolidated Statements of Comprehensive Income (Loss) based on the specific identification method. There were no realized investments gains (losses) from other than temporary impairments for any of the periods presented in the accompanying Consolidated Statements of Operations. For each fixed income security that the Company does not intend to sell or for which it is more likely than not that the Company would not be required to sell before an anticipated recovery in value, the Company separates the credit loss component of the impairment, if any, from the amount related to all other factors and reports the credit loss component in net realized investment gains (losses). There was no credit loss component for any of the periods presented in the accompanying Consolidated Statements of Operations. The unrealized gains from fixed maturities are reported as “Accumulated other comprehensive income (loss),” which is a separate component of stockholders’ equity, net of any deferred tax effect.
Depreciation on a Crusader Insurance Company (“Crusader”), the Company’s subsidiary, owned building, located at 26050 Mureau Road, Calabasas, California, is computed using the straight line method over 39 years. Improvements to the building structure are amortized over the useful life of the improvements. Depreciation on furniture, fixtures and equipment in the Calabasas building is computed using the straight line method over 3 to 15 years. Amortization of tenant improvements in the Calabasas building is being computed using the shorter of the useful life of the tenant improvements or the remaining years of the lease.
The Company and its subsidiaries file consolidated federal and state income tax returns. Pursuant to the tax allocation agreement, Crusader and American Acceptance Corporation (“AAC”), a subsidiary of Unico, are allocated taxes or tax credits in the case of losses, at current corporate rates based on their own taxable income or loss. The Company files income tax returns under U.S. federal and various state jurisdictions. The Company is subject to examination by U.S. federal income tax authorities for tax returns filed starting at taxable year 2014 and California state income tax authorities for tax returns filed starting at taxable year 2013. There are no ongoing examinations of income tax returns by federal or state tax authorities.
(1) As required by law, the Company segregates from its operating accounts the premium collected from insureds that are payable to insurance companies into separate trust accounts. These amounts are included in cash and short-term investments. Trust restrictions on cash and short-term investments were $0 at December 31, 2017 and 2016.
Crusader evaluates and monitors the financial condition of its reinsurers and factors such as collection periods, disputes, applicable coverage defenses and other factors to assess the need for any allowance against anticipated reinsurance recoveries. No such allowance was considered necessary at December 31, 2017 or 2016.
99.7%, and 99.5% of Crusader’s direct written premium was derived from California during the years ended December 31, 2017 and 2016, respectively. In 2017, approximately 42% and 45% of the $1,047,593 commission income from the Company’s health insurance program was from Guardian Life Insurance Company of America dental and group life plan programs and the Blue Shield Care Trust health and life insurance programs, respectively. In 2016, approximately 40% and 41% of the $959,810 commission income from the Company’s health insurance program was from Guardian Life Insurance Company of America dental and group life plan programs and the Blue Shield Care Trust health and life insurance programs, respectively.
In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 was issued as a result of the enactment of the Tax Cuts and Jobs Act of 2017 (“TCJA”) on December 22, 2017. Accounting guidance required deferred tax items to be revalued based on the new tax laws (the most significant of which reduced the corporate tax rate to 21% percent from 34% percent) and to include the change in income from continuing operations. ASU 2018-02 is effective for annual and interim reporting periods beginning after December 15, 2018. As early adoption is permitted, the Company has elected to adopt ASU 2018-02 for the year ended December 31, 2017. With the adoption of ASU 2018-02, there is no impact to the consolidated statement of operations and the consolidated balance sheet effect is limited to a reclassification within the equity section, which is an immaterial impact to the consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718), Scope of Modification Accounting." ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 will be effective for the Company beginning January 1, 2018, with early adoption permitted. The Company does not anticipate that ASU 2017-09 will have a material impact on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02 “Leases.” ASU 2016-02 requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by all leases, including those historically accounted for as operating leases. The Company is currently evaluating the effect ASU 2016-02 will have on the Company's consolidated financial statements. The guidance is effective for interim and annual periods beginning after December 31, 2018, and will be applied under a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the consolidated financial statements.
The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheets to the amounts shown in the consolidated statements of cash flows:
The Company’s investment in certificates of deposit included $27,698,000 and $60,780,000 of brokered certificates of deposit as of December 31, 2017 and 2016, respectively. Brokered certificates of deposit provide the safety and security of a certificate of deposit combined with the convenience gained by one-stop shopping for rates at various institutions. This allows the Company to spread its investments across multiple institutions so that all of its certificates of deposit are insured by the Federal Deposit Insurance Corporation (“FDIC”). Brokered certificates of deposit are purchased through UnionBanc Investment Services, LLC, a registered broker-dealer, investment advisor, member of FINRA/SIPC, and a subsidiary of MUFG Union Bank, N.A. Brokered certificates of deposit are a direct obligation of the issuing depository institution, are bank products of the issuing depository institution, are held by Union Bank Global Custody Services for the benefit of the Company, and are FDIC insured within permissible limits.
The following table presents information about the Company’s financial instruments and their estimated fair values, which are measured on a recurring basis, allocated among the three levels within the fair value hierarchy as of December 31, 2017 and 2016:
One of the Company’s agents, which was appointed in 2008 to assist the Company in implementing its Trucking Program, failed to pay the net premium and policy fees due Unifax, the exclusive general agent for Crusader. The agent was initially late in paying its February 2009 production that was due to Unifax on April 15, 2009. In May 2009, as a result of the agent’s failure to timely pay its balance due to Unifax, the Company terminated its agency agreement and assumed ownership and control of that agent’s policy expirations written with the Company. The Company subsequently commenced legal proceedings against the agent corporation, its three principals (who personally guaranteed the agent’s obligations) and another individual for the recovery of the balance due and any related recovery costs incurred. All related recovery costs have been expensed as incurred. The agent corporation and two of its principals filed bankruptcy. The corporation was adjudicated bankrupt. The Company obtained judgments, non-dischargeable in bankruptcy, for the full amount due from the two principals who filed bankruptcy. The other principal stipulated to a judgment of $1,200,000. The claim against the fourth individual was resolved. The Company collected $0 and $0 during the years ended December 31, 2017 and 2016, respectively. As of December 31, 2017 and 2016, the agent’s balance due to Unifax was $1,181,272. As of December 31, 2017 and 2016, the Company’s bad debt reserve associated with this matter was $1,181,272, which represents 100% of the balance due to Unifax. Although the receivable is fully reserved for financial reporting purposes at December 31, 2017, the Company continues to pursue collection of the judgments from the three principals. Bad debt expense was $16,222 and $5,833 for the years ended December 31, 2017 and 2016, respectively.
The Company, by virtue of the nature of the business conducted by it, becomes involved in numerous legal proceedings as either plaintiff or defendant. The Company is also required to resort to legal proceedings from time to time in order to enforce collection of premium, commissions, or fees for the services rendered to customers or to their agents. These routine items of litigation do not materially affect the Company and are handled on a routine basis by the Company through its counsel.
Crusader’s primary excess of loss reinsurance agreements during the years ended December 31, 2017 and 2016 are as follows:
Ceded earned premium as a percentage of direct earned premium was 17% in 2017 and 16% in 2016. Crusader did not assume any premium or losses during the years ended December 31, 2017 and 2016.
The California Department of Insurance (CA DOI) conducts periodic financial examinations of Crusader. During 2017, the CA DOI completed a financial examination of Crusader’s December 31, 2015, statutory financial statements. On June 23, 2017, a report of examination was officially filed and became part of the records of the CA DOI. The Company has complied with all comments and recommendations identified in the report of examination, and none of the issues in that report of examination had any material effect on Crusader.
Insurance Regulatory Information System (“IRIS”) was developed by a committee of state insurance regulators primarily to assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies. IRIS helps those companies that merit highest priority in the allocation of the regulators’ resources on the basis of 13 financial ratios that are calculated annually. The analytical phase is a review of annual statements and the financial ratios. The ratios and trends are valuable in pointing to companies likely to experience financial difficulties but the ratios are not themselves indicative of adverse financial condition. The ratio and benchmark comparisons are mechanically produced and are not intended to replace the state insurance department’s own in-depth financial analysis or on-site examinations.
An unusual range of ratio results has been established from studies of the ratios of companies that have become insolvent or have experienced financial difficulties. In the analytical phase, companies that receive four or more financial ratio values outside the usual range are analyzed in order to identify those companies that appear to require immediate regulatory action. Subsequently, a more comprehensive review of the ratio results and an insurer’s annual statement is performed to confirm that an insurer’s situation calls for increased or close regulatory attention.
In 2017, Crusader was outside the usual value range on the following four of the 13 IRIS ratio tests:
Crusader was outside IRIS ratios 5, 7, and 8 due primarily to Crusader’s $6,207,351 net loss for the year ended December 31, 2017. Crusader was outside IRIS ratio 6 due primarily to Crusader’s relatively conservative investments.
The Unico American Corporation 2011 Incentive Stock Plan (“2011 Plan”) covers 200,000 shares of the Company’s common stock (subject to adjustment in the case of stock splits, reverse stock splits, stock dividends, etc.) and was approved by shareholders on May 26, 2011. Options to purchase 8,760 and 91,240 shares of common stock were granted under the 2011 Plan to one non-executive employee during the years ended December 31, 2012 and 2011, respectively. Due to termination of the employee during 2017, all options granted under the 2011 Plan became null and void. As of December 31, 2017, there are no outstanding options under the 2011 Plan.
No options were granted to employees or non-employees during the years ended December 31, 2017 and 2016.
The following table summarizes stock option activity for year ended December 31, 2017:
The Company recognizes tax benefits related to positions taken, or expected to be taken, on a tax return only if it is more-likely-than-not that the positions are sustainable. Once this threshold has been met, the Company’s measurement of its expected tax benefits is recognized in its consolidated financial statements. If the Company determines after a review of its anticipated future taxable income and all other available evidence, both positive and negative, that it is more-likely-than-not that any of its deferred tax assets will not result in future tax benefits, a valuation allowance is established for the portion of these assets that are not expected to be realized.
As of December 31, 2017, the Company has $13,080,606 of federal net operating loss carryforwards that will begin to expire in 2035. As of December 31, 2017, the Company had deferred tax assets of $1,258,753 generated from state net operating loss carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. For the years ended December 31, 2017 and December 31, 2016, a valuation allowance was established in the amount of $1,258,753 and $1,264,627, respectively, as the Company does not expect to realize a tax benefit from its state net operating losses in future years. For the years ended December 31, 2017 and December 31, 2016 the amount of state net operating losses that expired were $1,209,784 and $802,062, respectively. The remaining $1,258,753 of state tax carryforwards, expire between 2028 and 2037. The current federal effected state tax rate is 6.98%.
Summarized unaudited quarterly financial data for each of the calendar years 2017 and 2016 is as follows:
NOTE 20 - SUPPLEMENTARY INFORMATION ON LOSS AND ALAE DEVELOPMENT (UNAUDITED)