Certain statements contained herein, including the sections entitled “Business,” “Legal Proceedings” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are not historical facts are forward looking. These statements, which may be identified by forward looking words or phrases such as “anticipate,” “appear,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “should,” and “would” involve risks and uncertainties, many of which are beyond the control of the Company. Such risks and uncertainties could cause actual results to differ materially from these forward looking statements. Factors which could cause actual results to differ materially include: underwriting or marketing actions not being effective; rate increases for coverages not being sufficient; premium rate adequacy relating to competition or regulation; actual versus estimated claim experience; the outcome of rate change filings with regulatory authorities; acceptance by insureds of rate changes; adequacy of rate changes; changes in Crusader’s A.M. Best rating; regulatory changes or developments; the outcome of regulatory proceedings; unforeseen calamities; general market conditions; and the Company’s ability to introduce new profitable products.
The Company’s net income (loss) was $(1,404,277), $(1,182,870), and $846,361 for the years ended December 31, 2016, 2015, and 2014, respectively.
The Company receives its revenue primarily from earned premium derived from the insurance company operation, commission and fee income generated from the insurance agency operations, finance fee income from the premium finance operations, and investment income from cash generated primarily from the insurance company operation. The insurance company operation generated approximately 92%, 91%, and 90% of the Company’s total revenue for the years ended December 31, 2016, 2015, and 2014, respectively. The Company’s remaining operations constitute a variety of specialty insurance services, each with unique characteristics and individually not material to consolidated revenues.
As of December 31, 2016, 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. In June 2014, Crusader began writing business in the state of Arizona. During the years ended December 31, 2016, 2015, and 2014, 98% of Crusader’s business was commercial multi-peril policies. On October 28, 2016, A.M. Best Company reaffirmed Crusader’s financial strength rating of A- (Excellent) and a rating outlook of “stable.” In addition, A.M. Best Company assigned Crusader 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 and coverage may be more difficult to find. The Company believes that the California property and casualty insurance market is intensely competitive but relatively stable.
The following table shows the direct written premium production by state:
The insurance company operation underwriting profitability is defined by pre-tax underwriting profit which is calculated as net earned premium less losses and loss adjustment expenses and policy acquisition costs. Crusader’s underwriting profit (before income taxes) is as follows:
Unifax sells and services insurance policies for Crusader. The commissions paid by Crusader to Unifax are eliminated as intercompany transactions and are not reflected as income in the Company’s consolidated financial statements. Policy fee income for the year ended December 31, 2016, decreased $14,479 (1%) as compared to the year ended December 31, 2015. Policy fee income for the year ended December 31, 2015, increased $87,074 (5%) as compared to the year ended December 31, 2014. The policy fee income is earned ratably over the life of related insurance policies.
The health insurance market is uncertain due to changes in healthcare insurance mandated by recent federal legislation. AIB is contracted with non-affiliated insurance carriers to provide a variety of health and life insurance products to individuals and groups. These same products are offered by most of our competitors; thus, service, reliability and stability are important to obtain and retain customers. AAQHC, as a membership association and third party administrator, has negotiated group dental, vision, and life insurance premiums for its members with several carriers and receives fees and dues from its members for access to these benefits. AIB underwrites these risks and receives a commission from the insurance carriers.
AIB’s commissions decreased $860 (less than 1%) for the year ended December 31, 2016, as compared to the year ended December 31, 2015. AIB’s commissions decreased $121,742 (11%) for the year ended December 31, 2015, as compared to the year ended December 31, 2014, as a result of decreases in the number of group accounts it underwrites and decreases in commission rates on individual and group policies.
AAQHC’s fee income decreased $10,511 (12%) for the year ended December 31, 2016, as compared to the year ended December 31, 2015, as a result of a decrease in the number of association members enrolled in AAQHC. AAQHC’s fee income decreased $11,802 (12%) for the year ended December 31, 2015, as compared to the year ended December 31, 2014, as a result of a decrease in the number of association members enrolled in AAQHC. AAQHC membership is primarily comprised of individuals included in group accounts.
The insurance premium financing operation currently finances policies written only through its sister company, Unifax. Since July 2010, AAC has offered 0% financing on policies written by Unifax for Crusader as a promotion to increase the sale of Crusader policies. The Company monitors the cost of providing this incentive, and, depending on the cost/benefit determination, the Company can continue to offer 0% financing or withdraw it at any time. AAC issued 3,087, 3,314, and 3,278 loans in 2016, 2015, and 2014, respectively. Revenue earned in 2016, 2015, and 2014 consisted entirely of late fees and other miscellaneous fees charged. The average policy premium financed by AAC was $4,334, $3,733, and $3,492 in 2016, 2015, and 2014, respectively.
The daily automobile rental insurance program was produced by Bedford. Bedford received commission income from non-affiliated insurance companies based on written premium and continues to receive contingent commission on previous business written. The Company no longer actively markets this program. As a result, the daily automobile rental insurance program commission income and contingent commission for the year ended December 31, 2016, decreased $9,589 (52%) compared to the year ended December 31, 2015. For the year ended December 31, 2015, rental insurance program commission income and contingent commission decreased $97,752 (84%) compared to the year ended December 31, 2014.
The Company generates investment income from its total invested assets of $90,576,445 and $97,843,530 (at amortized cost) as of December 31, 2016 and 2015, respectively, and from two cash deposits placed with the Los Angeles Superior Court by Crusader in lieu of appeal bonds. These deposits, totaling $13,373,793, were made on December 28, 2015, for $7,924,178 and on March 21, 2016, for $5,449,615, and their respective balances were included in “Cash and restricted cash” on the Consolidated Balance Sheet and were not a part of the total invested assets as of December 31, 2016, and December 31, 2015, respectively.
Investment income included in insurance company operation and other insurance operations, excluding realized investment losses, for the year ended December 31, 2016, increased $401,782 (84%) as compared to the year ended December 31, 2015. The increase in the investment income was due partially to $113,394 interest earned on the cash deposits in lieu of appeal bonds during the year ended December 31, 2016, and no such interest earned for the years ended December 31, 2015 and 2014. The increase in the investment income was also due to an increase in the Company’s annualized yield on average invested assets to 0.81% in 2016 from 0.47% in 2015 (the interest on the two cash deposits in lieu of appeal bonds is excluded from the yield computation). The increase in the annualized yield on average invested assets is primarily a result of a decrease in short-term investments and an increase in fixed maturity investments that provide a higher yield. Investment income, excluding realized investment losses, for the year ended December 31, 2015, increased $317,626 (196%) as compared to the year ended December 31, 2014. The increase in investment income was due primarily to an increase in the Company’s annualized yield on average invested assets to 0.47% in 2015 from 0.15% in 2014. The increase in the annualized yield on average invested assets is primarily a result of a decrease in short-term investments and an increase in fixed maturity investments that provide a higher yield. 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.
The weighted average maturity of the Company’s fixed maturity investments was 1.0 year, 1.5 years, and 1.8 years as of December 31, 2016, 2015, and 2014, respectively.
The Company reported net cash used by operating activities for each of the years ended December 31, 2016 and 2015, and net cash provided by operating activities for the year ended December 31, 2014. Cash used by operating activities in 2016 was $1,409,242 compared to $49,533 in 2015. Cash used by operating activities in 2015 was $49,533 compared to cash provided by operating activities in 2014 of $2,468,186.
Crusader generates a significant amount of cash as a result of its holdings of unearned premium reserves, its reserves for loss and loss adjustment expense 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, restricted cash, and investments (at amortized cost) of the Company at December 31, 2016, were $104,072,824 compared to $106,102,203 at December 31, 2015. Crusader's cash, restricted cash, and investments were 99% of the total cash and investments held by the Company as of December 31, 2016 and 2015.
As of December 31, 2016, 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 1.0 year.
The Company is required to classify its investment securities into one of three categories: held-to-maturity, available-for-sale, or trading securities. Although all of the Company's investments in fixed maturity securities are classified as available-for-sale and, while 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.
Any security that would not be in compliance with the regulations of Crusader’s state of domicile.
During the year ended December 31, 2015, the Company concluded that a charge for impairment of the Company’s capitalized computer software costs, related to a PAS contract entered into on November 1, 2012, was required under GAAP. The decision to impair the asset was based on the Company’s beliefs that the software had not achieved and would not be able to achieve the Company’s expected implementation targets and that the Company was unable to renegotiate the terms of its agreement with the software vendor. This impairment amounted to $1,287,460. There were no comparable charges in 2016 or 2014.
From 2004 until June 2014, all of Crusader’s business was written in the state of California. In June 2014, Crusader began writing business in the state of Arizona. As of December 31, 2016, Crusader was licensed as an admitted insurance company in the states of Arizona, California, Nevada, Oregon, and Washington and is approved as a non-admitted surplus lines writer in other states.
For the year ended December 31, 2016, direct written premium, as reported on Crusader’s statutory financial statement, was $38,749,097 compared to $36,374,509 for the year ended December 31, 2015, an increase of $2,374,588 (7%). The rise in direct written premium in 2016 of 7% compared to 2015 is not attributable to any material single event.
For the year ended December 31, 2015, direct written premium, as reported on Crusader’s statutory financial statement, was $36,374,509 compared to $32,810,088 for the year ended December 31, 2014, an increase of $3,564,421 (11%). The rise in direct written premium in 2015 of 11% compared to 2014 is not attributable to any material single event.
In the year ended December 31, 2016, direct earned premium increased $2,551,184 (7%) to $37,453,619 compared to $34,902,435 for the year ended December 31, 2015. In the year ended December 31, 2015, direct earned premium increased $3,438,744 (11%) to $34,902,435 compared to $31,463,691 for the year ended December 31, 2014. The fluctuation in direct earned premium is directly related to the fluctuation in direct written premium.
Ceded earned premium as a percentage of direct earned premium was 16% in 2016, 15% in 2015, and 16% in 2014. The ceded earned premium as a percentage of direct earned premium is relatively unchanged as there were no major modifications to Crusader’s excess of loss treaties.
Crusader’s emerging loss ratios for each accident year are reviewed in detail at the end of each quarter as part of the reserve review process. Losses and loss adjustment expenses for the calendar years ended December 31, 2016, 2015, and 2014 were $22,826,878, $19,163,316, and $14,617,118, respectively.
Based on the loss and loss adjustment expense reserve estimates as of December 31, 2016, the estimated ultimate loss ratio is within five percentage points of the initial expected loss ratio in 9 of Crusader’s 32 years. Since Crusader’s net earned premium in 2016 was $31,356,371, a difference between the accident year 2016 actual and initial expected loss ratios of only five percentage points will or may ultimately impact losses and loss adjustment expenses by $1,567,819. The estimated ultimate loss ratio is within ten percentage points of the initial expected loss ratio in 14 of Crusader’s 32 years. A ten percentage point difference between the accident year 2016 actual and the initial expected loss ratios will or may ultimately impact losses and loss adjustment expenses by $3,135,637. The estimated ultimate loss ratio is within twenty percentage points of the initial expected loss ratio in 25 of Crusader’s 32 years. A twenty percentage point difference between the accident year 2016 actual and the initial expected loss ratios will or may ultimately impact losses and loss adjustment expenses by $6,271,274.
Crusader’s net loss and loss adjustment expense reserve was $37,534,817 as of December 31, 2016. Since underwriting profit is a significant part of income, a small percentage change in reserve estimates may result in a substantial effect on future reported earnings. Such changes might result from a variety of factors, including claims costs emerging in a different pattern than the average historical development patterns.
If future development ultimately results in being five percent different than Crusader’s 2016 net reserve, $1,876,741 would be reflected in future periods as an increase or decrease in the development of insured events of prior years and would be recognized in the Company’s Consolidated Statements of Operations in future periods. If future development ultimately results in being ten percent different than Crusader’s 2016 net reserve, $3,753,482 would be reflected in future periods as an increase or decrease in the development of insured events of prior years and would be recognized in the Company’s Consolidated Statements of Operations in future periods.
AIB markets health insurance in California through non-affiliated insurance companies for individuals and groups. For these services, AIB receives commission based on the premium that it writes. Commission income for the year ended December 31, 2016, decreased $860 (less than 1%) compared to the year ended December 31, 2015.
Unifax sells and services insurance policies for Crusader. The commissions paid by Crusader to Unifax are eliminated as intercompany transactions and are not reflected as income in the Company’s consolidated financial statements. Unifax also receives non-refundable policy fee income that is directly related to the Crusader policies it sells. For financial statement reporting purposes, policy fees are earned ratably over the life of the related insurance policy and are proportionate to premium earned. The unearned portion of the policy fee is recorded as a liability on the Consolidated Balance Sheet under “Accrued expenses and other liabilities.” The earned portion of the policy fee charged to the policyholder by Unifax is recognized as income in the Company’s consolidated financial statements. Unifax’s policy fee income is as follows:
The daily automobile rental insurance program was produced by Bedford. Bedford received commission income from non-affiliated insurance companies based on written premium and continues to receive contingent commission on previous business written.
The finance fees earned for the year ended December 31, 2016, increased $3,170 (5%) to $68,900 compared to the year ended December 31, 2015. For the year ended December 31, 2015, decreased $1,282 (2%) to $65,730 compared to the year ended December 31, 2014. The decrease in fees earned during the years presented compared to the prior year period is primarily a result of fewer late fees earned during the periods.
The number of loans issued decreased by 227 (7%) during 2016 when compared to 2015 and increased by 36 (1%) during 2015 when compared to 2014. The average premium financed by AAC was $4,334, $3,733, and $3,492 in 2016, 2015, and 2014, respectively. During 2016, 39% of all Unifax policies were financed and 82% of those policies were financed by AAC. During 2015, 41% of all Unifax policies were financed and 82% of those policies were financed by AAC. During 2014, 42% of all Unifax policies were financed and 83% of those policies were financed by AAC.
(2) Investment income from insurance company operation included $113,394, $0, and $0 of interest on the cash deposits in lieu of appeal bonds for the years ended December 31, 2016, 2015, and 2014, respectively.
(3) Yield on average invested assets did not include the interest on the cash deposits in lieu of appeal bonds.
In the year ended December 31, 2016, the Company’s average invested assets (at amortized cost) decreased $8,418,037 (8%) compared to the year ended December 31, 2015. In the year ended December 31, 2015, the Company’s average invested assets (at amortized cost) decreased $3,954,175 (4%) compared to the year ended December 31, 2014.
The decrease in average invested assets is attributable primarily to the two cash deposits placed by Crusader with the Los Angeles Superior Court in lieu of appeal bonds to appeal judgments on a Crusader liability claim.
In the year ended December 31, 2015, the Company’s average invested assets (at amortized cost) decreased $3,954,175 (4%) compared to the year ended December 31, 2014. In the year ended December 31, 2015, investment income earned, excluding realized losses, increased $317,626 (196%) compared to the year ended December 31, 2014. The yield on average invested assets increased to 0.47% in 2015 from 0.15% in 2014. The increase in the annualized yield on average invested assets is primarily a result of a decrease in short-term investments and an increase in fixed maturity investments that provide a higher yield. 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, 2015, was 1.5 years compared to 1.8 years as of December 31, 2014. The Company’s invested assets (at amortized cost) as of December 31, 2015, were $97,843,530 as compared to $107,412,519 as of December 31, 2014.
The par value, amortized cost, fair value and weighted average yield of fixed maturity investments at December 31, 2016, by contractual maturity are as follows:
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. During the year ended December 31, 2016, the Company sold three certificates of deposit prior to their maturity. These securities had an amortized cost of $746,000. The Company realized an investment loss of $1,278 on the sale. Proceeds of the sales of these securities were used for general corporate purposes.
During the year ended December 31, 2015, the Company sold 22 certificates of deposit with an amortized cost of $5,478,000. The Company realized an investment loss of $7,251 on the sale. Proceeds of the sale of these securities were used to fund the $7,924,178 cash deposit placed by Crusader with the Los Angeles Superior Court in lieu of an appeal bond on December 28, 2015. This cash deposit was required to appeal a judgment which was finalized in December 2015 on a Crusader policy liability claim. In March 2016, an additional judgment for plaintiff’s attorney fees and costs on this Crusader policy liability claim was finalized. The Company is also appealing this additional judgment. That additional appeal required an additional cash deposit of $5,449,615 in lieu of an appeal bond. The additional cash deposit was made on March 21, 2016. These cash deposits for the appeals represent 150% of the judgments. Management believes the ultimate outcome of this litigation will be covered by Crusader’s reinsurance.
Other income from insurance company operation and other insurance operations decreased of $154,976 (41%) in the year ended December 31, 2016, when compared to the year ended December 31, 2015. The decrease in the year ended December 31, 2016 from the year ended December 31, 2015, is due primarily to $0 contingent commission recognized on Crusader’s excess of loss reinsurance treaties for accident years 2006, 2004, and 2003 in 2016, compared to $91,686 contingent commission recognized in the year ended December 31, 2015.
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 decreased $5,096 (3%) for the year ended December 31, 2016, as compared to the year ended December 31, 2015. Commissions to agents and brokers decreased $26,043 (14%) for the year ended December 31, 2015, as compared to the year ended December 31, 2014. The fluctuations in commissions to agents/brokers when compared to prior periods are due primarily to the fluctuations in written premium in the health insurance program and daily automobile rental insurance program and the related commission income from those programs.
Other operating expenses decreased $1,779,509 (41%) for the year ended December 31, 2016, compared to the year ended December 31, 2015. The decrease in operating expenses for the year ended December 31, 2016, is due primarily to $1,287,460 charge made in 2015 to recognize the impairment of the Company’s capitalized computer software costs. There was no comparable charge in 2016. Another contribution to the decrease in operating expenses was a decrease in rent expense of $405,578 in the year ended December 31, 2016, compared to the year ended December 31, 2015, as the Company’s month-to-month lease of the home office in Woodland Hills, California, ended effective October 15, 2015. Other operating expenses include costs incurred to review strategic alternatives and potential opportunities. These costs amounted to $382,391 and $144,076 for the years ended December 31, 2016 and 2015, respectively.
Other operating expenses increased $965,553 (29%) for the year ended December 31, 2015, compared to the year ended December 31, 2014, due primarily to impairment of the Company’s capitalized computer software costs of $1,287,460. The increase was partially offset by a decrease of $256,760 in bad debt expense.
The following tables provide the effect of reinsurance on the Company’s consolidated financial statements:
The effect of reinsurance on cash flow is the sum of the effect of reinsurance on the results of operations reflected above and the following changes in reinsurance recoverable:
Consolidated Statements of Operations for the years ended December 31, 2016, 2015, and 2014
We have audited the accompanying consolidated balance sheets of Unico American Corporation and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for the years then ended. Unico American Corporation’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We have audited the accompanying consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for the year 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 audit.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations of Unico American Corporation and subsidiaries and their cash flows for the year ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
All of the Company’s fixed maturity investments are classified as available-for-sale and 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 all of the Company's investments are 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.
Cash, restricted 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.
Depreciation on property and equipment located in Woodland Hills, California, was computed using straight line methods over 3 to 7 years. Amortization of leasehold improvements on property located in Woodland Hills, California, was computed using the shorter of the useful life of the leasehold 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 2013 and California state income tax authorities for tax returns filed starting at taxable year 2012. There are no ongoing examinations of income tax returns by federal or state tax authorities.
Premium is earned on a pro-rata basis over the terms of the policies. Premium applicable to the unexpired terms of policies in force are recorded as unearned premium. The Company receives a commission on policies that are ceded to its reinsurers. This commission is considered earned on a pro-rata basis over the terms of the policies.
(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 $0 and $44,181 at December 31, 2016 and 2015, respectively.
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, 2016, all such ceded contracts are accounted for as risk transfer reinsurance.
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, 2016 or 2015.
99.5%, 99.5%, and 99.8% of Crusader’s direct written premium was derived from California during the years ended December 31, 2016, 2015, and 2014, 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 2015, approximately 39% and 40% of the $960,670 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 2014, approximately 38% and 39% 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 and the Blue Shield Care Trust health and life insurance programs, respectively.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13 “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 replaces the current incurred loss methodology for recognizing credit losses with a current expected credit loss model, which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 also requires enhanced disclosures for better understanding of significant estimates and judgments used in estimating credit losses. The Company is currently evaluating the effect ASU 2016-13 will have on the Company's consolidated financial statements, but expects the primary changes to be (i) the use of the expected credit loss model for its premium receivables and reinsurance recoverables and (ii) the presentation of credit losses within the available-for-sale fixed maturities portfolio through an allowance method rather than as a direct write-down. ASU 2016-13 will become effective for fiscal years beginning after December 31, 2019, but provides for an early adoption for fiscal years beginning after December 31, 2018. The Company has not determined when it will adopt ASU 2016-13.
In November 2016, the FASB issued ASU 2016-18 “Statement of Cash Flows: Restricted Cash.” The ASU requires that a statement of cash flows explain the change during the period of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. The Company early adopted this ASU as of December 31, 2016, and the ASU was applied using a retrospective approach for each period presented. Upon adoption of this ASU, the Company's consolidated statements of cash flows included restricted cash in the beginning-of-period and end-of-period total amounts for cash and restricted cash. The ASU did not have a material impact on the Company’s consolidated financial statements, but the ASU required additional disclosures in “Note 2 - Cash and Restricted Cash” to these consolidated financial statements and will require additional disclosure to interim reporting periods in 2017.
In May 2015, the FASB issued ASU 2015-09 “Disclosures About Short-Duration Contracts.” The objective of this ASU is to increase transparency about significant estimates in unpaid losses and loss adjustment expenses and provide additional information about amount, timing and uncertainty of cash flows related to unpaid losses and loss adjustment expenses. ASU 2015-09 also requires entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for loss and loss expense reserves, including reasons for the change and the effects on the financial statements. ASU 2015-09 also requires entities to disclose a roll forward of the liability of loss and loss expense reserves for annual and interim reporting periods. The effective date of ASU 2015-09 is for annual reporting periods beginning after December 15, 2015, and interim reporting periods beginning after December 15, 2016. The Company adopted this ASU as of December 31, 2016. The ASU did not have a material impact on the Company’s consolidated financial statements, but the ASU required additional disclosures in “Note 8 - Unpaid Losses and Loss Adjustment Expenses” and in “Note 21 - Supplementary Information on Loss and ALAE Development (Unaudited),” to these consolidated financial statements and will require additional disclosure to interim reporting periods in 2017.
The restricted cash is represented by two cash deposits placed by Crusader with the Los Angeles Superior Court in lieu of appeal bonds. In December 2015, a judgment was finalized on a Crusader policy liability claim. Crusader is appealing the judgment. As a part of the appeal, Crusader deposited $7,924,178 in cash with the Los Angeles Superior Court on December 28, 2015, in lieu of an appeal bond. This cash deposit was required to appeal the judgment. In March 2016, an additional judgment for plaintiff’s attorney fees and costs on this Crusader policy liability claim was finalized. The Company is also appealing this additional judgment. That additional appeal required an additional $5,449,615 cash deposit which was made on March 21, 2016, in lieu of an appeal bond.
A summary of total investment income and net realized losses is as follows:
The amortized cost and estimated fair value of fixed maturity investments at December 31, 2016, by contractual maturity are as follows:
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 three certificates of deposit prior to their maturity during the year ended December 31, 2016. These securities had amortized cost of $746,000. The Company realized an investment loss of $1,278 on the sale. Proceeds of the sales of these securities were used for general corporate purposes. The Company sold 22 certificates of deposit prior to their maturity during the year ended December 31, 2015. These securities had amortized cost of $5,478,000. The Company realized an investment loss of $7,251 on the sale. Proceeds of the sale of these securities were used to fund the $7,924,178 cash deposit placed by Crusader with the Los Angeles Superior Court on December 28, 2015, in lieu of an appeal bond. The Company did not sell any fixed maturity investments, and there were no realized investment gains or losses during the year ended December 31, 2014.
All the Company’s brokered and non-brokered certificates of deposit are within the FDIC insured permissible limits. Due to nature of the Company’s business, certain bank accounts may exceed FDIC insured permissible limits.
Fair value measurements are not adjusted for transaction costs. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer. The Company did not have any transfers between Levels 1, 2 and 3 of the fair value hierarchy during the years ended December 31, 2016 and 2015.
For the years ended December 31, 2016, 2015, and 2014, the Calabasas building has generated rental revenue in the amount of $990,013, $364,674, and $815,601, and incurred operating expenses in the amount of $722,442, $644,250, and $781,988 which included depreciation, respectively. These amounts are included in “Other income” from insurance company operation and other operating expenses, respectively, in the Company’s Consolidated Statements of Operations.
On October 9, 2015, the Company moved its home office into the Calabasas building. The Company’s month-to-month lease of its home office in Woodland Hills, California, ended effective October 15, 2015. At the time the Company relocated to its Calabasas building, certain furniture, fixtures, equipment and all leasehold improvements located in Woodland Hills were abandoned. These assets had a cost of $775,204 and were fully amortized or depreciated, and therefore, had a zero basis. Fixed assets with a cost basis of $1,846,608 and accumulated depreciation of $1,553,110 were relocated from Woodland Hills to Calabasas.
On October 9, 2015, the Company concluded that a charge for impairment of the Company’s capitalized computer software costs, related to a contract entered into on November 1, 2012, was required under GAAP. The capitalized costs included $1,287,460 of paid and $223,442 of accrued unpaid invoices from the software vendor, Insurance Systems, Inc. (“ISI”). The impact of this impairment to the Company’s Consolidated Statements of Operations was a charge of $1,287,460 before income taxes. The charge is included in “Other operating expenses” in the Consolidated Statements of Operations for year ended December 31, 2015. The decision to impair the asset was based on the Company’s beliefs that the ISI software had not achieved and would not be able to achieve the Company’s expected implementation targets and that the Company was unable to renegotiate the terms of its agreement with ISI. The Company believes that it will need to make future cash expenditures to replace or upgrade its policy administration system but it is unable to estimate the amount at this time. While the Company’s policy administration system continues to support the Company’s existing operations, the Company believes it would realize more competitive parity with respect to product and service by switching or upgrading to a more contemporary platform. The Company engaged outside IT advisors to assist it in evaluating its alternatives.
The Unico American Corporation Profit Sharing Plan (“Plan”) covers Company’s employees who are at least 21 years of age and have met certain service and eligibility requirements. Unico American Corporation is the Plan sponsor and the Plan administrator. Fidelity Management Trust Company is the Plan trustee. The Plan is intended to be a qualified retirement plan under the Internal Revenue Code. As required by the Plan, on an annual basis, the Company must contribute 3% of participants’ eligible compensation to the account of each participant. In addition, pursuant to the terms of the Plan, the Company may contribute to participants an amount determined by the Board of Directors. Under the Plan, participants have the option to elect to make 401(k) and Roth 401(k) deferral contributions which are not matched by the Company. Participants must be employed by the Company on the last day of the Plan year to be eligible for a contribution. Participants are eligible to request a distribution of their vested account balance upon death, retirement, minimum required distributions and termination of employment. Effective November 1, 2015, the Company’s Money Purchase Plan was merged into the Plan.
The Unico American Corporation Money Purchase Plan covered executive officers of the Company and an officer of a subsidiary of the Company. Pursuant to the terms of this plan, the Company annually contributed to the account of each participant an amount equal to a percentage of the participant's eligible compensation as determined by the Board of Directors. However, amounts contributed to the Plan were considered first in determining the actual amount available under the Internal Revenue Service maximum contribution limits. Participants were required to be employed by the Company on the last day of the plan year to be eligible for contribution. Participants were entitled to receive distribution of benefits under this plan upon retirement, termination of employment, death, or disability. Effective November 1, 2015, the Company’s Money Purchase Plan was merged into the Plan.
The California Department of Insurance (CA DOI) conducts periodic financial examinations of Crusader. During 2012, the CA DOI conducted a financial examination of Crusader’s December 31, 2011, statutory financial statements. On June 6, 2013, Crusader was notified that the report of examination was officially filed and became part of the records of the CA DOI. No comments or recommendations were identified in the report of examination dated June 6, 2013. The CA DOI has commenced a periodic financial examination of Crusader’s December 31, 2015, statutory financial statements in the fourth quarter of 2016; the Company does not have an expected date for completion of this examination.
Crusader is restricted in the amount of dividends it may pay to its parent in any 12-month period without prior approval of the CA DOI. Presently, without prior regulatory approval, Crusader may pay a dividend in any 12-month period to Unico up to the greater of (a) 10% of its statutory surplus or (b) its statutory net income for the preceding calendar year. Based on Crusader’s statutory surplus for the year ended December 31, 2016, the maximum dividend that could be made by Crusader to Unico without prior regulatory approval in 2017 is $5,912,044. In the years ended December 31, 2016, 2015, and 2014, Crusader paid to Unico cash dividends in the amount of $2,000,000, $3,000,000, and $0, respectively.
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, 2016, was 964% of authorized control level RBC.
No options were granted to employees or non-employees during the years ended December 31, 2016, 2015, and 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, 2016. The aggregate intrinsic value of options exercised during the years ended December 31, 2016, 2015, and 2014 was $0. During the years ended December 31, 2016, 2015, and 2014, the amount of cash received from the exercise of stock options was $0.
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.
NOTE 18 - REPURCHASE OF COMMON STOCK - EFFECT ON STOCKHOLDERS’ EQUITY
As of December 31, 2016 and 2015, the Company had 574 and 2,761 common share equivalents that were excluded in the diluted (loss) per share calculation for years ended December 31, 2016 and 2015, respectively.