On September 7, 2014, a lease from a single tenant occupying approximately 32,403 square feet of the building ended and the tenant has vacated the premises. The Company intends to occupy most of this recently vacated space as its new home office and is currently in the process of planning and implementing the steps necessary to modify the space to fit its operational needs with a targeted move in date in mid-2015. The Company’s current home office located in Woodland Hills, California, will be vacated, and the month-to-month lease for this office will be terminated upon the completion of the move to the Calabasas building.
As of December 31, 2014, 8,442 square feet at the Calabasas building was leased to non-affiliated entities and 6,039 square feet is available for to be leased to non-affiliated entities.
As of December 31, 2014, Crusader was licensed as an admitted insurance carrier in the states of Arizona, California, Nevada, Oregon and Washington. Since 2004, all of Crusader’s business was written in the state of California until June 2014 when the Company also began writing business in the state of Arizona. During the year ended December 31, 2014, 98% of Crusader’s business was commercial multi-peril policies. In November of 2014, A.M. Best Company reaffirmed Crusader’s financial strength rating of A- (Excellent) and a rating outlook of “stable.” In addition, Crusader was assigned an Issuer Credit Rating of a- (Excellent).
The property and casualty insurance business is cyclical in nature, and the previous years have been characterized as a “soft market.” The conditions of a soft market include premium rates that are stable or falling and insurance is readily available. Contrarily, “hard market” conditions occur during periods in which premium rates rise, coverage may be more difficult to find, and there is a potential for insurers’ profits to increase. The Company believes that the California property and casualty insurance market has begun to transition but remains soft and intensely competitive.
For the year ended December 31, 2014, direct written premium as reported on Crusader’s statutory statement was $32,810,088 compared to $31,214,091, for the year ended December 31, 2013, an increase of $1,595,997 (5%). For the year ended December 31, 2013, direct written premium as reported on Crusader’s statutory statement was $31,214,091 compared to $32,572,047, for the year ended December 31, 2012, a decrease of $1,357,956 (4%). The property casualty insurance marketplace continues to be intensely competitive. While Crusader attempts to meet such competition with competitive prices, its emphasis is on service, promotion, and distribution. Crusader believes that rate adequacy is more important than premium growth and that underwriting profit (net earned premium less losses and loss adjustment expenses and policy acquisition costs) is its primary goal. Nonetheless, Crusader believes that it can grow its sales and profitability by continuing to focus upon four areas of its operations: (1) product development, (2) improved service to retail brokers, (3) appointment of captive and independent retail agents, and (4) geographical expansion. In order to enhance service, the Company is currently customizing and configuring a new policy administration system that is primarily focused on transacting business through the internet, as well as providing more options to make the brokers’ and agents’ time more efficient. Crusader does not intend to substantially increase its number of appointed retail agents until the Company implements its new policy administration system.
For the year ended December 31, 2014, 99.8% and 0.2% of direct written premium was produced in California and Arizona, respectively. For the year ended December 31, 2013, 100% of direct written premium was produced in California.
Losses and loss adjustment expenses as percentage of net earned premium were 55%, 60% and 56% for the years ended December 31, 2014, 2013 and 2012, respectively.
AIB’s commissions decreased $150,912 (12%) for the year ended December 31, 2014, as compared to 2013 as a result of decreases in the number of group accounts it underwrites and decreases in commission rates on individual and group policies. AAQHC, a membership association and third party administrator, saw its fee income decrease $14,469 (13%) for the year ended December 31, 2014, as compared to 2013 as a result of a decrease in membership. AAQHC membership is primarily comprised of individuals included in group accounts.
The Company generates revenue from its total invested assets of approximately $107.4 million (at amortized cost) as of December 31, 2014 and $105.8 million (at amortized cost) as of December 31, 2013. Investment income for the year ended December 31, 2014, decreased $171,259 (51%) as compared to the year ended December 31, 2013. The decrease in investment income was primarily due to a decrease in the Company’s annualized yield on average invested assets to 0.15% in 2014 from 0.30% in 2013. The decrease in the annualized yield on average invested assets is a result of lower yields in the marketplace on both new and reinvested assets. Due to the current interest rate and financial market environment, management believes it is prudent to purchase fixed maturity investments with maturities of 5 years or less and with minimal credit risk.
Primary reasons for the increase in cash provided by operations for the year ended December 31, 2014, are an increase in written premium and a decrease in loss and loss adjustment expense payments during this year compared to the years ended December 31, 2013 and 2012. The increase in the written premium for the year ended December 31, 2014, is relatively small and is not attributable to any material single event compared to decreases in the written premium for the years ended December 31, 2013 and 2012. The Company believes that the California property and casualty insurance market remains intensely competitive. The cash flows associated with loss and loss adjustment expense payments can change from period to period depending largely on the amount and the timing of claims payments. 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.
Primary reasons for cash being used by operating activities for the years ended December 31, 2013 and 2012 were declining investment income and declining commission and fee income for each of the years then ended along with declining written premium in the year ended December 31, 2013.
Crusader generates a significant amount of cash as a result of its holdings of unearned premium reserves, its reserves for loss payments and its capital and surplus. Crusader's loss and loss adjustment expense payments are the most significant cash flow requirement of the Company. These payments are continually monitored and projected to ensure that the Company has the liquidity to cover these payments without the need to liquidate its investments. Cash and investments (at amortized cost) of the Company at December 31, 2014, were $107,721,681 compared to $106,128,268 at December 31, 2013. Crusader's cash and investments were 99% and 98% of the total cash and investments held by the Company as of December 31, 2014 and 2013, respectively.
As of December 31, 2014, all of the Company’s investments are in U.S. treasury securities, FDIC insured certificates of deposit and money market funds. The Company’s investments in U.S treasury securities and money market funds are readily marketable. The weighted average maturity of the Company’s investments is approximately 1.8 years.
The investment marketplace in general, and in certain asset classes specifically, has been impacted by volatility as a result of uncertainty in the credit markets that began in 2007 and continued throughout 2014. The Company’s fixed maturity (amortized cost) investment portfolio as of December 31, 2014, consisted of 57% U.S. treasury securities and 43% FDIC insured certificates of deposit.
Crusader's statutory capital and surplus as of December 31, 2014, was $63,492,369, an increase of $2,081,203 (3%) from December 31, 2013. Crusader's statutory capital and surplus as of December 31, 2013, was $61,411,166, an increase of $2,348,996 (4%) from December 31, 2012. In the year ending December 31, 2012, Crusader issued a cash dividend of $11,750,000 to Unico, its parent and sole shareholder. In 2012, the dividends were used primarily to fund the cash dividends paid by Unico to its shareholders and for general corporate purposes. Based on Crusader’s statutory surplus for the year ended December 31, 2014, the maximum dividend that could be made by Crusader to Unico without prior regulatory approval in 2015 is $6,349,237.
During the years ended December 31, 2014 and 2013, no cash dividends were declared or issued to shareholders. During the year ended December 31, 2012, the Company paid cash dividends of $0.20 and $1.00 per share to its shareholders. Declaration of future cash dividends will be subject to the Company’s profitability and its cash requirements.
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. During the years ended December 31, 2014 and 2013, the Company did not repurchase shares of the Company’s common stock. During the year ended December 31, 2012, the Company repurchased 23,563 shares of the Company’s common stock in unsolicited transactions at a cost of $243,469, of which $11,579 was allocated to capital and $231,890 was allocated to retained earnings. As of December 31, 2014, the Company had remaining authority under the 2008 program to repurchase up to an aggregate of 222,669 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 has or will retire all stock repurchased.
For the year ended December 31, 2014, the Company had income before taxes of $1,296,505 compared to income before taxes of $1,240,775 for the year ended December 31, 2013, an increase of $55,730 (4%).
For the year ended December 31, 2013, the Company had income before taxes of $1,240,775 compared to income before taxes of $2,855,036 for the year ended December 31, 2012, a decrease of $1,614,261 (57%). The decrease in income before taxes was primarily due to a decrease of $1,195,977 in investment income and a decrease of $455,853 in net earned premium.
The effect of inflation on the Company’s net income during the years ended December 31, 2014, 2013 and 2012 was not significant.
Crusader’s primary line of business is commercial multi-peril policies. This line of business represented approximately 98% of Crusader’s total written premium for the years ended December 31, 2014, 2013 and 2012.
For the year ended December 31, 2014, direct written premium, as reported on Crusader’s statutory statement, was $32,810,088 compared to $31,214,091 for the year ended December 31, 2013, an increase of $1,595,997 (5%). The rise in written premium in 2014 of 5% compared to 2013 is not attributable to any material single event.
In the year ended December 31, 2014, earned premium before reinsurance decreased $519,849 (2%) to $31,463,691 compared to $31,983,540 for the year ended December 31, 2013. In the year ended December 31, 2013, earned premium before reinsurance decreased $470,549 (1%) to $31,983,540 compared to $32,454,089 for the year ended December 31, 2012. The fluctuation in earned premium before reinsurance is directly related to the fluctuation in written premium.
The amount of favorable development recognized during the year ended December 31, 2014, decreased $1,250,695 (27%) to $3,308,764 from $4,559,459 in 2013. The amount of favorable development recognized during the year ended December 31, 2013, increased $196,549 (5%) to $4,559,459 from $4,362,910 in 2012. The favorable development in the above table is not necessarily indicative of the results that may be expected in future periods The variability of Crusader’s losses and loss adjustment expenses for the periods presented is due primarily to the small population of Crusader’s claims, which may result in greater fluctuations in claim frequency and/or severity. The favorable (adverse) development by accident year is as follows:
Crusader's liability for unpaid loss and loss adjustment expense reserves consists of case reserves and reserves for incurred but not reported (IBNR) claims. Case reserves are established by claims personnel based on a review of the facts known at the time the claim is reported and are subsequently revised as more information about a claim becomes known. IBNR is estimated using various actuarial methods and techniques and includes (1) reserves for losses and loss adjustment expenses on claims that have occurred but for which claims have not yet been reported to Crusader, and (2) a provision for expected future development on case reserves for information not currently known.
If future development ultimately ends up being five percent different than Crusader’s 2014 net reserve, approximately $2.0 million would be reflected in future periods as an increase or decrease in the provision for events of prior years and would be recognized in the Company’s Consolidated Statements of Operations in future periods. If future development ultimately ends up being ten percent different than Crusader’s 2014 net reserve, approximately $3.9 million would be reflected in future periods as an increase or decrease in the provision for events of prior years and would be recognized in the Company’s Consolidated Statements of Operations in future periods.
Membership and fee income for the year ended December 31, 2014, decreased $14,469 (13%) compared to the year ended December 31, 2013. Membership and fee income for the year ended December 31, 2013, decreased $19,808 (15%) compared to the year ended December 31, 2012. The decrease for each of the years presented 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, 2014, decreased 3% as compared to the year ended December 31, 2013. Policy fee income for the year ended December 31, 2013, decreased $106,132 (6%) as compared to the year ended December 31, 2012. The 6% decrease in policy fee income is primarily a result of a 595 (6%) decrease in the number of policies issued during 2013 as compared to 2012.
The daily automobile rental insurance program commission income for the year ended December 31, 2014, decreased $108,020 (48%) compared to the year ended December 31, 2013. For the year ended December 31, 2013, commission income decreased $49,350 (18%) compared to the year ended December 31, 2012. Bedford receives a commission from a non-affiliated insurance company based on written premium. Bedford no longer writes new business for the non-affiliated insurance company it previously represented as a general agent. Bedford entered into a new Producer Agreement effective June 1, 2013, with a non-affiliated group of insurance companies. Under this agreement, Bedford has the authority to solicit and refer to these companies its daily automobile rental insurance policy submissions. Bedford does not have the authority to bind any risk or commit to any course of action without first requesting prior written permission. For its services, Bedford receives a commission. Commission in the daily automobile rental insurance program decreased 48% in 2014 as compared to 2013. The decrease in commission income is primarily due to a continued decline in written premium in this program from the non-affiliated insurance companies that it previously represented as a general agent. The Company no longer actively markets this program.
In the year ended December 31, 2014, the Company’s average invested assets (at amortized value) decreased $6,143,970 (5%) compared to the year ended December 31, 2013. In the year ended December 31, 2014, investment income earned, excluding realized gains, decreased $171,259 (51%) compared to the year ended December 31, 2013. The yield on average invested assets decreased to 0.15% in 2014 from 0.30% in 2013. The decrease in the yield on average invested assets is primarily the result of a decrease in the average return on new and reinvested assets in the Company’s investment portfolio. Due to the current interest rate environment, management believes it is prudent to purchase fixed maturity investments with maturities of 5 years or less and with minimal credit risk. Thus, the weighted average maturity of the Company’s fixed maturity investments as of December 31, 2014, was 1.8 years compared to 1.6 years as of December 31, 2013. The Company’s invested assets (at amortized value) as of December 31, 2014, were $107,412,519 as compared to $105,751,880 as of December 31, 2013.
The par value, amortized cost, estimated market value and weighted average yield of fixed maturity investments at December 31, 2014, by contractual maturity are as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
No securities were sold at a loss during 2014 or 2013.
The increase of $118,987 (24%) in other income from insurance company revenues and other insurance operations for the year ended December 31, 2013, when compared to year ended December 31, 2012, is primarily the result of $263,919 received by Crusader as rental income for the Calabasas property that was acquired on September 26, 2013, offset by the decrease of $142,595 (32%) in the contingent commission the Company recognized on the Company’s 2003, 2004 and 2006 excess of loss reinsurance treaties.
Total salaries and employee benefits incurred for the year ended December 31, 2014, increased $16,862 (less than 1%) compared to the year ended December 31, 2013. Total salaries and employee benefits incurred for the year ended December 31, 2013, decreased $168,810 (3%) compared to the year ended December 31, 2012.
Other operating expenses increased $17,725 (1%) for the year ended December 31, 2013, compared to the year ended December 31, 2012. This increase is primarily related to the $299,420 in operating expenses, acquisition transaction costs and depreciation incurred through December 31, 2013, related to the Calabasas property that was acquired on September 26, 2013, and an increase in depreciation and amortization expense on other property and equipment of approximately $75,120. These were offset by a decrease of $267,087 in fees to the CA DOI, which were primarily related to the required tri-annual financial examination of Crusader that was ongoing in 2012 along with a decrease of $217,349 in the Company’s rent expense.
Income tax expense for the year ended December 31, 2014, decreased $186,963 to $450,144 compared to income tax expense of $637,107 for the year ended December 31, 2013. The effective income tax rates for 2014 and 2013 were 35% and 51%, respectively. The decrease in income tax expense is primarily related to approximately $198,000 in lower state income tax that resulted from a decrease in the recognition of additional valuation allowances related to state net operating loss carryforwards in 2014 compared to 2013 (net of the federal tax benefit).
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 quickly 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 quickly. 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.
Each year, management compares the actual claim costs that emerge to the claim costs that were expected to emerge and evaluates whether any observed significant differences are due to normal variances in the development process that occur from time to time, particularly in an insurer the size of Crusader, or if they are an indication that changes in the key reserve assumptions or methodologies are appropriate. Management concluded that no changes in Crusader’s key reserve assumptions or methodologies are appropriate.
Crusader’s recoverable from reinsurers represents an estimate of the amount of future loss and loss adjustment expense payments that will be recoverable from Crusader’s reinsurers. These estimates are based upon estimates of the ultimate losses and loss adjustment expenses that Crusader expects to incur and the portion of those losses that are expected to be allocable to reinsurers based upon the terms of the reinsurance agreements. Given the uncertainty of the ultimate amounts of losses and loss adjustment expenses, the estimates may vary significantly from the eventual outcome. Crusader’s estimate of the amounts recoverable from reinsurers is regularly reviewed and updated by management as new data becomes available. Crusader’s assessment of the collectability of the recorded amounts recoverable from reinsurers is based primarily upon public financial statements and rating agency data. Any adjustments necessary are reflected in the current operations. Crusader evaluates each of its ceded reinsurance contracts at its inception to determine if there is sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting literature. At December 31, 2014, all such ceded contracts are accounted for as risk transfer reinsurance.
There were no catastrophe losses incurred during the years ended December 31, 2014, 2013 and 2012.
The Company presently occupies approximately 23,000 square feet of an office building located at 23251 Mulholland Drive, Woodland Hills, California, under a master lease which expired on March 31, 2013. Erwin Cheldin, the Company's former president and a current director and principal stockholder, is the owner of the building. The lease provided for an annual gross rent of $486,000 and was effective from April 1, 2012, through March 31, 2013. The lease provided for extension options at the same terms and conditions. The Company exercised its right to extend the lease through June 30, 2014, and the lease continues thereafter on a month-to-month basis. The Company believes that at the inception of the lease agreement, and at each subsequent extension, the terms of the lease were at least as favorable to the Company as could have been obtained from non-affiliated third parties. The Company utilizes for its own operations 100% of the space it leases. The Company also leases storage space from Erwin Cheldin. Depending on usage, storage space rental is estimated to be approximately $15,000 annually. The total rent was $501,258, $500,770 and $712,248 for the years ended December 31, 2014, 2013 and 2012, respectively.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014,
We have audited the accompanying consolidated balance sheets of Unico American Corporation and subsidiaries (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014. 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.
The accompanying consolidated financial statements include the accounts of Unico American Corporation and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Short-term investments include U.S. treasury bills, a U.S. treasury money market fund and bank money market and savings accounts that are all highly rated and redeemable within one year.
Cash and short-term investments - The carrying amounts reported at cost in the Consolidated Balance Sheets approximate their fair values given the short-term nature of these instruments.
Accrued expenses and other liabilities - The carrying amounts reported at cost in the Consolidated Balance sheets approximate the fair values given the short-term nature of these instruments.
As of December 31, 2014, the Company had no unrecognized tax benefits or liabilities. In addition, the Company had not accrued interest and penalties related to unrecognized tax benefits or liabilities. However, if interest and penalties would need to be accrued related to unrecognized tax benefits or liabilities, such amounts would be recognized as a component of federal income tax expense.
Basic earnings per share exclude the impact of common share equivalents and are based upon the weighted average common shares outstanding. Diluted earnings per share utilize the average market price per share when applying the treasury stock method in determining common share dilution. When outstanding stock options are dilutive, they are treated as common share equivalents for purposes of computing diluted earnings per share and represent the difference between basic and diluted weighted average shares outstanding. In loss periods, the options are excluded from the calculation of diluted earnings per share, as the inclusion of such options would have an anti-dilutive effect.
There is a high level of uncertainty inherent in the evaluation of the required loss and loss adjustment expense reserves for Crusader. The long-tailed nature of liability claims and the volatility of jury awards exacerbate that uncertainty. Crusader records loss and loss adjustment expense reserves at each balance sheet date based upon management’s best estimate of the ultimate payments that it anticipates will be made to settle all losses incurred and related expenses incurred as of that date for both reported and unreported losses. The ultimate cost of claims is dependent upon future events, the outcomes of which are affected by many factors. Crusader claim reserving procedures and settlement philosophy, current and perceived social and economic inflation, current and future court rulings and jury attitudes, improvements in medical technology, and many other economic, scientific, legal, political, and social factors all can have significant effects on the ultimate costs of claims. Changes in Company operations and management philosophy also may cause actual developments to vary from the past. Since the emergence and disposition of claims are subject to uncertainties, the net amounts that will ultimately be paid to settle claims may vary significantly from the estimated amounts provided for in the accompanying consolidated financial statements. Any adjustments to reserves are reflected in the operating results of the periods in which they are made. Management believes that the aggregate reserves for losses and loss adjustment expenses are reasonable and adequate to cover the cost of claims, both reported and unreported.
(1) As required by law, the Company segregates from its operating accounts the premium collected from insured’s 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 $112,008 at December 31, 2014. In the year ended December 31, 2013, the Company’s receivables from insurance policies exceeded its premium payable to insurance companies; therefore, there were no trust restrictions on cash and short-term investments.
Crusader employs reinsurance to provide greater diversification of business allowing management to control exposure to potential losses arising from large risks by reinsuring certain levels of risk in various areas of exposure, to reduce the loss that may arise from catastrophes, and to provide additional capacity for growth. Prepaid reinsurance premium and reinsurance receivables are reported as assets and represent ceded unearned premium and reinsurance recoverable on both paid and unpaid losses and loss adjustment expenses, respectively. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. Crusader evaluates each of its ceded reinsurance contracts at its inception to determine if there is sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting literature. As of December 31, 2014, all such ceded contracts are accounted for as risk transfer reinsurance.
ASC Topic 280, “Segment Reporting,” establishes standards for the way information about operating segments are reported in financial statements. The Company has identified its insurance company operation as its primary reporting segment. Revenues from this segment comprised 90% of consolidated revenues for the year ended December 31, 2014, 89% of consolidated revenues for the year ended December 31, 2013 and 90% of consolidated revenues for the year ended December 31, 2012. The Company’s remaining operations constitute a variety of specialty insurance services, each with unique characteristics and individually insignificant to consolidated revenues.
The insurance company operation is conducted through Crusader, which as of December 31, 2014, was licensed as an admitted insurance carrier in the states of Arizona, California, Nevada, Oregon, and Washington. Crusader is a multi-line property and casualty insurance company, which began transacting business on January 1, 1985. For the year ended December 31, 2014, 98% of Crusader’s business was commercial multi-peril (CMP) insurance policies. CMP policies provide a combination of property and liability coverage for businesses. Commercial property coverage insures against loss or damage to buildings, inventory and equipment from natural disasters, including hurricanes, windstorms, hail, water, explosions, severe winter weather, and other events such as theft and vandalism, fires and storms and financial loss due to business interruption resulting from covered property damage. However, Crusader does not write earthquake coverage. Commercial liability coverage insures against third party liability from accidents occurring on the insured’s premises or arising out of its operations, such as injuries sustained from products sold or the operation of the insured’s premises. In addition to CMP policies, Crusader also writes separate policies to insure commercial property and commercial liability risks on a mono-line basis.
(1) Intersegment revenue eliminations reflect commissions paid by Crusader to Unifax Insurance Systems, Inc. (Unifax), a wholly owned subsidiary of Unico.
In 2014 and 2013, 99.8% and 100%, respectively, of Crusader’s direct written premium was derived from California. In 2014, approximately 38% of the $1,082,412 commission income from the Company’s health insurance program was from Guardian Life Insurance Company of America dental and group life plan programs. In 2013, approximately 36% of the $1,233,324 commission income from the Company’s health insurance program was from Guardian Life Insurance Company of America dental and group life plan programs.
Share-based compensation expense for all share-based payment awards granted or modified on or after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of ASC 718, “Compensation - Stock Compensation” using the modified prospective transition method.
The Company does not have the intent to sell its fixed maturity investments, and it is not likely that the Company would be required to sell any of its fixed maturity investments prior to recovery of its amortized costs. The Company did not sell any fixed maturity investments; and, therefore, there were no realized investment gains or losses in the years ended December 31, 2014, 2013 and 2012.
Level 1 - Financial assets and financial liabilities whose values are based on unadjusted quoted prices in active markets for identical assets or liabilities as of the reporting date.
On September 26, 2013, Crusader closed escrow on the purchase of land and a building located in Calabasas, California. There is no relationship between the seller and the Company. The real estate consists of a two-story office building located on commercial land about four miles from the Company’s current location. The office building has approximately 46,884 rentable square feet. The purchase price of the land and building was $9,500,000. Acquisition costs of $106,505 were expensed as period costs during the three months ended September 30, 2013. The Company determined that the purchase price represented the fair value of the assets acquired. No liabilities were assumed. The consideration for the land and building was cash. The purchase price included $500,000 to reimburse the seller for rents on existing tenants in excess of current market through June 30, 2014, which was recorded as a deferred asset and was amortized monthly through June 30, 2014. The deferred asset was reflected in Other Assets on the Consolidated Balance Sheets as of December 31, 2013, and was fully amortized as of June 30, 2014.
For the years ended December 31, 2014 and 2013, the property has generated rental revenue in the amount of $815,601 and $263,919 and incurred operating expenses in the amount of $781,988 and $299,420 which included depreciation, respectively. These amounts are included in other income from insurance company revenues and other operating expenses, respectively, in the Company’s Consolidated Statements of Operations.
As of December 31, 2014, 8,442 square feet at the Calabasas building was leased to non-affiliated entities.
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 other individual was resolved. The Company collected $75,000 and $137,750 during the years ended December 31, 2014, and 2013, respectively. As of December 31, 2014 and 2013, the agent’s balance due to Unifax was $1,181,272 and $1,256,272, respectively. As of December 31, 2014 and 2013, the Company’s bad debt reserve associated with this matter was $1,181,272 and $931,272, which represents approximately 100% and 74% of the balance due to Unifax, respectively. Although the receivable is fully reserved for financial reporting purposes at December 31, 2014, the Company continues to pursue collection of the judgments from the three principals. Bad debt expense was $255,299 and $(50,792) and $(98,798) for the years ended December 31, 2014, 2013 and 2012, respectively.
Deferred policy acquisition costs consist of commissions (net of ceding commission), premium taxes, inspection fees and certain other underwriting costs, which are related to and vary with the production of Crusader policies. Policy acquisition costs are deferred and amortized as the related premium is earned. Deferred acquisition costs are reviewed to determine if they are recoverable from future income on insurance policies generated from these costs, including investment income.
Likewise, the Company is sometimes named as a cross-defendant in litigation, which is principally directed against an insured who was issued a policy of insurance directly or indirectly through the Company. Incidental actions related to disputes concerning the issuance or non-issuance of individual policies are sometimes brought by customers or others. These items are also handled on a routine basis by the counsel, and they do not generally affect the operations of the Company. Management is confident that the ultimate outcome of pending litigation should not have an adverse effect on the Company's consolidated results of operations or financial position. The Company vigorously defends itself unless a reasonable settlement appears appropriate.
Crusader also has catastrophe reinsurance treaties from various highly rated California authorized and California unauthorized reinsurance companies. These reinsurance treaties help protect Crusader against losses in excess of certain retentions, from catastrophic events that may occur on property risks which Crusader insures. In calendar year 2014, Crusader retained a participation in its Catastrophe excess of loss reinsurance treaties of 5% in its 1st layer ($9,000,000 in excess of $1,000,000) and 0% in its 2nd layer ($31,000,000 in excess of $10,000,000). In calendar years 2013 and 2012, Crusader retained a participation in its Catastrophe excess of loss reinsurance treaties of 10% in its 1st layer ($9,000,000 in excess of $1,000,000) and 0% in its 2nd layer ($31,000,000 in excess of $10,000,000).
Ceded earned premium as a percentage of direct earned premium was 16% in 2014, 2013 and 2012. Crusader did not assume any premium or losses during the years ended December 31, 2014, 2013 and 2012.
In December 1993, the NAIC adopted a Risk-Based Capital (RBC) Model Law for property and casualty companies. The RBC Model Law is intended to provide standards for calculating a variable regulatory capital requirement related to a company's current operations and its risk exposures (asset risk, underwriting risk, credit risk and off-balance sheet risk). These standards are intended to serve as a diagnostic solvency tool for regulators that establishes uniform capital levels and specific authority levels for regulatory intervention when an insurer falls below minimum capital levels. The RBC Model Law specifies four distinct action levels at which a regulator can intervene with increasing degrees of authority over a domestic insurer if its RBC is equal to or less than 200% of its computed authorized control level RBC. A company's RBC is required to be disclosed in its statutory annual statement. The RBC is not intended to be used as a rating or ranking tool nor is it to be used in premium rate making or approval. Crusader’s adjusted capital at December 31, 2014, was 1,080% of authorized control level RBC.
In 2014, Crusader was outside the usual value on one of the thirteen IRIS ratio tests. IRIS Ratio Test Number 6 considers Crusader’s 2014 investment yield. An unusual value for that ratio is an investment yield equal to or greater than 6.5% or equal to or less than 3%. Crusader’s 2014 investment yield was 0.15%.
The Unico American Corporation 2011 Incentive Stock 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. As of December 31, 2014, 36,496 of these shares are currently vested and exercisable.
The exercise price, term and other conditions applicable to each stock option granted under the 2011 Plan are determined by the Company’s compensation committee of the Board of Directors. The exercise price of the stock options is set on the grant date and may not be less than the fair market value per share of the Company’s stock on that date (at market close). Options granted under the 2011 Plan in 2011 vest 10% as of the grant date and 10% annually thereafter on the anniversary date, and expire ten years after the date of the grant. Options granted under the 2011 Plan in 2012 vest 100% on March 1, 2021 and expire ten years after the date of the grant.
The average assumptions used to value each option award granted during the years ended December 31, 2012 and 2011 are as follows:
The following table summarizes stock option activity for year ended December 31, 2014:
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price and the exercise price, multiplied by the number of in the money options) that would have been received by the option holders had all options been exercised on December 31, 2014. The aggregate intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 was $0, $0 and $225,854, respectively. During the years ended December 31, 2014, 2013 and 2012, the amount of cash received from the exercise of stock options was $0, $0 and $46,360, respectively.
As of December 31, 2014, the Company has deferred tax assets of $1,133,946 generated from state net loss carryforwards. Of these state tax carryforwards, $177,847 expires between 2016 and 2017 and the remaining $956,099 expires between 2028 and 2034. The current state tax rate is 8.84%. As of December 31, 2014, the Company has a deferred tax asset valuation allowance related to state net operating losses in the amount of $853,334.
The Company and its wholly owned subsidiaries file consolidated federal and state income tax returns. Pursuant to the tax allocation agreement, Crusader and AAC 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 2011 and California state income tax authorities for tax returns filed starting at taxable year 2010. There are no ongoing examinations of income tax returns by federal or state tax authorities.
As of December 31, 2014, the Company had no unrecognized tax benefits and no unrecognized additional liabilities or reduction in deferred tax asset. In addition, the Company had not accrued interest and penalties related to unrecognized tax benefits. However, if interest and penalties would need to be accrued related to unrecognized tax benefits, such amounts would be recognized as a component of federal income tax expense.
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. During the years ended December 31, 2014 and 2013, the Company did not repurchase shares of the Company’s common stock. As of December 31, 2014, the Company had remaining authority under the 2008 program to repurchase up to an aggregate of 222,669 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 has or will retire all stock repurchased.
Summarized unaudited quarterly financial data for each of the calendar years 2014 and 2013 is as follows: