In light of the challenges that the Company has faced and the consequent effect on its results of operations, the Company has taken several steps to improve its operating and financial performance. To improve Crusader's loss ratios, beginning in January 2017, the Company made significant changes in its staffing and in its pricing and risk selection practices. To improve revenues, the Company is working to improve its sales in the markets that it has historically served, to gain access to markets that it has not previously served, and to generate new sources of revenue on a fee-for-service basis. For example, Unifax is seeking opportunities to transact admitted and non-admitted business with non-affiliated insurers, where Crusader will not be underwriting the risk, providing Unifax with a wider range of possible customers for Unifax products and services. The Company also re-activated its U.S. Risk Managers, Inc. subsidiary so that it can provide claims adjustment services to non-affiliated insurers and to self-insurers on a fee-for-service basis (i.e., where Crusader will not be underwriting the risk), providing the potential for an alternative revenue source to the Company. In addition, the Company plans to execute a "fronting" agreement with a non-admitted, non-affiliated insurer that is rated "A-" or better by A.M. Best Company thereby providing Unifax with a wider range of products and services to offer to customers.
In 2018, the Company determined that the cost to replace its legacy IT system would be between $4,000,000 and $8,000,000, and the installation of such a system would take between two to four years. After weighing the time and expense involved against the anticipated benefit from such an investment, the Company opted for what it then perceived to be a less expensive upgrade to its legacy system, an upgrade that then seemed to offer more incremental benefits in a shorter timeframe. While initially expected to be completed by the end of 2019, at a cost of approximately $300,000, excluding costs of Unico's employees involved in the upgrade, the system upgrade is now expected to be completed by the end of 2020, at a cost of approximately $1,200,000, excluding costs of Unico's employees involved in the upgrade, due to unexpected technical challenges. In light of the significant delays and increases in cost associated with its legacy upgrade project, the Company has deployed additional resources toward the management of this project and has renegotiated the relationship that it has with the non-affiliated vendor working on this project.
The Company receives its revenues 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% of the Company’s total revenue for the years ended December 31, 2019 and 2018. None of the Company’s other operations is individually material to consolidated revenues.
Crusader’s total direct written premium, as reported on Crusader’s statutory financial statements, was produced geographically as follows:
Crusader believes that it can grow its sales and profitability through improved specialization and sales incentives. Crusader currently focuses in four underwriting verticals: (1) Transportation, (2) Food, Beverage & Entertainment, (3) Garage & Mercantile, and (4) Apartments & Commercial Buildings. Crusader also is evaluating the possibility of expanding its operations geographically, on an admitted or non-admitted basis, so as to offer similar products in other states, but the timing of any such expansion is not yet determined.
Written premium is a non-GAAP financial measure that is defined, under SAP, as the contractually determined amount charged by the insurance company to the policyholder for the effective period of the contract based on the expectation of risk, policy benefits, and expenses associated with the coverage provided by the terms of the policies. Written premium is a required statutory measure. Written premium is defined under GAAP in Accounting Standards Codification Topic 405, “Liabilities,” as “premiums on all policies an entity has issued in a period.” Earned premium, the most directly comparable GAAP measure to written premium, represents the portion of written premium that is recognized as income in the financial statements for the period presented and earned on a pro-rata basis over the terms of the policies. Written premium is intended to reflect production levels and is meant as supplemental information and not intended to replace earned premium. Such information should be read in connection with the Company’s GAAP financial results
The following is a reconciliation of direct written premium to net earned premium (after premium ceded to reinsurers):
The January 30, 2020, ratings reflect Crusader’s balance sheet strength, which A.M. Best categorizes as very strong, as well as its marginal operating performance, limited business profile and marginal enterprise risk management. The downgrade of the Long-Term ICR reflects a revision in A.M. Best’s assessment of Crusader‘s operating performance to marginal from adequate. According to A.M. Best, (i) the downgrades consider a material decline in Crusader’s operating performance, resulting from sub-par underwriting results in a relatively compact time frame, (ii) Crusader’s adverse performance has been amplified by increased frequency and severity of apartment building insurance related claims, (iii) multiple operating metrics of Crusader trail the commercial casualty composite on a five-year and 10-year basis, and (iv) the consequential business changes being implemented to address these conditions lead to significant execution risk in returning Crusader’s operational results to historical levels.
The Company’s revenues from other insurance operations consist of commissions, fees, investment and other income. Excluding investment and other income, these operations accounted for approximately 8% of total revenues for the years ended December 31, 2019 and 2018.
Net investment income (net of investment expenses) included in insurance company operation and other insurance operations revenues, increased $190,183 (10%) for the year ended December 31, 2019, as compared to the year ended December 31, 2018. This increase in net investment income was due primarily to increase in the yield on average invested assets.
While material capital expenditures may be funded through borrowings, the Company believes that its cash, cash equivalents, and short-term investments at December 31, 2019, net of statutory deposits of $710,000 and California insurance company statutory dividend restrictions applicable to Crusader plus the cash to be generated from operations, should be sufficient to meet its operating requirements during the next 12 months without the necessity of borrowing funds.
Crusader's statutory capital and surplus as of December 31, 2019, was $46,498,960, a decrease of $3,649,298 (7%) from December 31, 2018. During the year ended December 31, 2019, Crusader issued cash dividends of $2,000,000 to Unico, its parent and sole shareholder. These dividends were used primarily for general corporate purposes. No cash dividends were declared or issued by Crusader to Unico during the year ended December 31, 2018. Based on Crusader’s statutory surplus for the year ended December 31, 2019, the maximum dividend that could be made by Crusader to Unico without prior regulatory approval in 2020 is $4,649,896.
Total revenues for the year ended December 31, 2019, were $31,372,814, a decrease of $2,239,982 (7%) compared to $33,612,796 for the year ended December 31, 2018. For the year ended December 31, 2019, the Company had loss before taxes of $3,249,890 compared to loss before taxes of $3,926,792 for the year ended December 31, 2018. For the year ended December 31, 2019, the Company had net loss of $3,115,703 compared to net loss of $3,169,559 for the year ended December 31, 2018.
The variance in income before tax for the year ended December 31, 2019, compared to the year ended December 31, 2018, was due primarily to decreases in losses and loss adjustment expenses of $981,616 (4%), policy acquisition costs of $947,985 (16%), salaries and employee benefits of $524,989 (11%), and other operating expenses of $459,389 (8%), partially offset by the decrease in net earned premium.
The effect of inflation on the Company’s net loss during the years ended December 31, 2019 and 2018 was not significant.
Crusader’s primary line of business is CMP policies. This line of business represented approximately 98% of Crusader’s total written premium for the years ended December 31, 2019 and 2018.
Direct earned premium (earned premium before reinsurance) decreased $1,275,208 (4%) to $33,958,202 for the year ended December 31, 2019, compared to $35,233,410 for the year ended December 31, 2018. Crusader writes annual policies. Earned premium represents a portion of written premium that is recognized as income in the financial statements for the period presented and earned daily on a pro-rata basis over the terms of the policies, and, therefore, premiums earned in the current year are related to policies written during both the current year and immediately preceding year. The decrease in the direct earned premium was due primarily to decrease in the direct written premium during the year ended December 31, 2018.
Reinsurance treaties are generally structured in layers, with different negotiated economic terms and retention of participation, or liability, in each layer. In calendar year 2019, Crusader retained a participation in its excess of loss reinsurance treaties of 0% in its 1st layer (reinsured losses between $500,000 and $1,000,000), 0% in its 2nd layer (reinsured losses between $1,000,000 and $4,000,000), and 0% in its property and casualty clash treaty. In calendar year 2018, Crusader retained a participation in its excess of loss reinsurance treaties of 5% in its 1st layer (reinsured losses between $500,000 and $1,000,000), 0% in its 2nd layer (reinsured losses between $1,000,000 and $4,000,000), and 0% in its property and casualty clash treaty.
A tabular presentation of Crusader’s direct, ceded and net earned premium is as follows:
Net investment income, excluding net realized investment losses/gains, and yields on Company’s average invested assets are as follows:
(3) Yield on average invested assets did not include the investment income from cash equivalents.
The par value, amortized cost, fair value and weighted average yield of fixed maturity investments at December 31, 2019, by contractual maturity are as follows:
As of December 31, 2019, all of the Company’s investments are in U.S. Treasury securities, FDIC insured certificates of deposit, other fixed maturity securities, and short-term investments. The investments in the certificates of deposit are classified as held-to-maturity investments, and all other fixed maturity investments are classified as available-for-sale. All of the Company’s investments, except for the certificates of deposit, are readily marketable. The following table sets forth the composition of the investment portfolio of the Company at the dates indicated:
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 or investment securities may be called by their issuers prior to the securities’ maturity. The Company sold three securities with amortized cost of $2,997,098, and had one call of an investment security with amortized cost of $999,982 during the year ended December 31, 2019. The Company realized net investment losses of $12,661 on these sales and call for the year ended December 31, 2019. Two securities were called prior to their maturity during the year ended December 31, 2018. These securities had amortized cost of $1,269,852. The Company realized a net investment gain of $148 on these calls for the year ended December 31, 2018. The unrealized gains or losses from fixed maturities are reported as “Accumulated other comprehensive income or loss,” which is a separate component of stockholders’ equity, net of any deferred tax effect.
Other income included in insurance company operation and other insurance operations decreased $241,789 (64%) to $133,869 for year ended December 31, 2019, compared to $375,658 for the year ended December 31, 2018. The decrease during the year ended December 31, 2019, is due primarily to decreases in rental income of $169,496 and Crusader’s share of California FAIR Plan Equity of $107,729.
The comparison of gross commission and fees for the year ended December 31, 2019, to the year ended December 31, 2018, 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. 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. Policy fee income for the year ended December 31, 2019, decreased $262,172 (19%) as compared to the year ended December 31, 2018. This decrease in policy fee income in 2019 compared to 2018 was primarily the result of a 994 (14%) decrease in the number of policies issued of 6,227 during 2019 compared to 7,221 policies issued during 2018.
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, 2019, decreased $5,066 (1%) compared to the year ended December 31, 2018. The decrease in commission income is primarily a result of the timing of commission receipts.
In 2019, approximately 39% and 49% of the commission income from health insurance sales was from Guardian Life Insurance Company of America dental and group life plan programs and the Blue Shield Care Trust health and life insurance programs, respectively. In 2018, approximately 37% and 46% of the commission income from health insurance sales was from Guardian Life Insurance Company of America dental and group life plan programs and the Blue Shield Care Trust health and life insurance programs, respectively.
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, 2019 and 2018 were $22,576,127 and $23,557,743, respectively. Loss ratio, which is calculated by dividing losses and loss adjustment expenses by net earned premium, was 85% for the year ended December 31, 2019, compared to 82% for the year ended December 31, 2018.
The $3,191,185 adverse development of insured events of prior years for the year ended December 31, 2019, was $269,228 higher than the $2,921,957 adverse development for the year ended December 31, 2018, due primarily to higher claims costs related to Crusader’s underwriting activities in the Company’s Apartments & Commercial Buildings vertical, associated with higher claims severity in that vertical, partially offset by lower claims costs related to Crusader’s underwriting activities in the Company’s Transportation vertical, associated with lower claims frequency in that vertical.
Crusader attributes much of its adverse loss development to “Social inflation.” Used here, social inflation is a term that encompasses a new adverse trend related to society’s application of the law when it comes to insurance. In this context, social inflation is generally described by the rising costs of insurance claims due to societal trends which resulted in increased litigation, broader definitions of liability and contract interpretations, plaintiff friendly legal decisions, larger compensatory jury awards, and larger awards for non-economic damages Crusader has experienced increased costs due to social inflation in all three of its largest market sector niches, Long-haul Transportation, Residential Apartment Buildings, and Bars/Taverns, resulting in higher-than-expected frequency and severity of third-party liability claims which contributed to adverse loss development of 2007, 2012, 2013, 2015, and 2016 accident years.
Crusader sets loss reserves based on its expected loss ratio and its expected loss and loss adjustment expense development patterns. Crusader’s initial expected loss ratios are based on its historical average loss ratios, and its expected loss and loss adjustment expense development patterns are based on its historical loss and loss adjustment expense development patterns. Actuarial methods utilizing expected loss ratios tend to be relied on more heavily earlier in the life of an accident year, while actuarial methods that apply development patterns to emerged losses and loss adjustment expenses tend to be relied on more heavily as an accident year develops. For prior accident years, emerging differences between actual and expected losses and loss adjustment expenses are recognized quarterly in the Consolidated Statements of Operations.
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.
Policy acquisition costs decreased $947,985 (16%) to $4,960,846 for the year ended December 31, 2019, compared to $5,908,831 for the year ended December 31, 2018. Policy acquisition costs consist of commissions, premium taxes, inspection fees, and certain other underwriting costs that are directly related to and vary with the successful production of Crusader insurance policies. These costs include both Crusader expenses and the allocated expenses of other Unico subsidiaries. Crusader's reinsurers pay Crusader a ceding commission, which is primarily a reimbursement of the acquisition cost related to the ceded premium. No ceding commission is received on ceded premium associated with property facultative excess of loss or catastrophe excess of loss reinsurance treaties. Policy acquisition costs, net of ceding commission, are deferred and amortized as the related premiums are earned. The Company annually reevaluates its acquisition costs to determine that costs related to successful policy acquisition are capitalized and deferred.
Policy acquisition costs and the ratio to net earned premium are as follows:
Total salaries and employee benefits incurred decreased $59,517 (1%) to $7,723,742 for the year ended December 31, 2019, compared to $7,783,259 for the year ended December 31, 2018.
Salaries and employee benefits incurred and charged to operating expenses are as follows:
The decrease in the total salaries and employee benefits incurred for the year ended December 31, 2019, compared to the year ended December 31, 2018, was due primarily to a decrease in the headcount and several managerial vacancies for the year ended December 31, 2019 compared to the year ended December 31, 2018.
Other operating expenses decreased $459,389 (14%) to $2,844,083 for the year ended December 31, 2019, compared to $3,303,472 for the year ended December 31, 2018. The decrease in other operating expenses for the year ended December 31, 2019, compared to the year ended December 31, 2018, was due primarily to due to lower costs of temporary help, timing of expenses, and a number of various insignificant fluctuations.
Income tax benefit was for $134,187 (4% of pre-tax loss) the year ended December 31, 2019 and income tax benefit was $757,233 (19% of pre-tax loss) for the year ended December 31, 2018. The fluctuation in the income tax rate as a percentage of pre-tax loss for the year ended December 31, 2019, when compared to the year ended December 31, 2018, is primarily due to an increase in the valuation allowance related to deferred tax assets on federal net operating losses.
Each year, management compares the actual claims costs that emerge to the claims 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. As of December 31, 2019, management concluded that no changes in Crusader’s key reserve assumptions or methodologies are appropriate.
The Company applies judgment in determining estimates for reserves associated with anticipated recoveries of salvage and subrogation on paid losses and loss adjustment expenses. During the year ended December 31, 2019, the Company changed that estimate to be in-line with its historic salvage and subrogation recovery success pattern. The impact of that change was a $968,400 reduction in losses and loss adjustment expenses for the year ended December 31, 2019, and in unpaid losses and loss adjustment expenses. The change was accounted for as a change in accounting estimate.
There were no losses subject to catastrophe reinsurance treaties coverage incurred during the years ended December 31, 2019 and 2018.
We have audited the accompanying consolidated balance sheets of Unico American Corporation and Subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows, for each of the years in the two-year period ended December 31, 2019, and the related notes and Schedules II and III (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). As described in Note 14, the Company's insurance subsidiary also files financial statements with regulatory agencies prepared on a statutory basis of accounting that differs from GAAP. Certain reclassifications have been made to prior period amounts to conform to the current year’s presentation.
The short-term investments include U.S. Treasury bills, certificates of deposit, and commercial paper that are all highly rated and have initial maturity between three and twelve months.
The Company has used the following methods and assumptions for estimating fair value for other financial instruments not carried at fair value:
Long-term certificates of deposit - The carrying amounts reported in the Consolidated Balance Sheets for these instruments are at amortized cost which approximates their fair value
Accrued expenses and other liabilities - The carrying amounts reported in the Consolidated Balance Sheets approximate the fair values given the short-term nature of these instruments.
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 2016 and California state income tax authorities for tax returns filed starting at taxable year 2015. There are no ongoing examinations of income tax returns by federal or state tax authorities.
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, 2019 or 2018.
99.9%, and 99.8% of Crusader’s direct written premium was derived from California during the years ended December 31, 2019 and 2018, respectively. In 2019, approximately 39% and 49% of the $939,689 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 2018, approximately 37% and 46% of the $944,755 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.
The Company monitors its investments closely. If an unrealized loss is determined to be other-than-temporary, it is written off as a realized loss through the Consolidated Statements of Operations. The Company’s methodology of assessing other-than-temporary impairments is based on security-specific analysis as of the balance sheet date and considers various factors including the length of time to maturity and the extent to which the fair value has been less than the cost, the financial condition and the near-term prospects of the issuer, and whether the debtor is current on its contractually obligated interest and principal payments. The unrealized losses as of December 31, 2019, and December 31, 2018, were determined to be temporary.
The Company’s investment in certificates of deposit included $598,000 and $6,726,000 of brokered certificates of deposit as of December 31, 2019 and 2018, respectively. All of the Company’s certificates of deposit are within the FDIC insured permissible limits. Due to the nature of the Company’s business, certain bank accounts may exceed FDIC insured permissible limits.
Level 3 - Financial assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the financial assets and financial liabilities as of the reporting date.
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, 2019 and 2018.
For the years ended December 31, 2019 and 2018, the Calabasas building has generated rental revenue from non-affiliated tenants in the amount of $177,596 and $347,091, and incurred operating expenses in the amount of $669,359 and $774,663, 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.
Bad debt expense was $7,881 and $23,903 for the years ended December 31, 2019 and 2018, respectively.
Crusader’s liability for unpaid loss and loss adjustment expense reserves consists of case reserves and reserves for 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.
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. For the years ended December 31, 2019 and 2018, the Company did not recognize a premium deficiency reserve.
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 years 2019 and 2018, Crusader retained a participation in its catastrophe excess of loss reinsurance treaties of 5% in its 1st layer (reinsured losses between $1,000,000 and $10,000,000) and 0% in its 2nd layer (reinsured losses between $10,000,000 and $46,000,000).
Crusader is required to file statutory financial statements with insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities. Statutory accounting practices differ in certain respects from GAAP. The more significant of the differences for statutory accounting practices are (a) policy acquisition and commission costs are expensed when incurred rather than over the periods covered by the policies; (b) fixed maturity securities are reported at amortized cost, or the lower of amortized cost or fair value, depending on the quality of the security as specified by the National Association of Insurance Commissioners (NAIC); (c) non-admitted assets are charged directly against surplus; (d) loss and loss adjustment expense reserves and unearned premium reserves are stated net of reinsurance; (e) federal income taxes are recorded when payable and deferred taxes, subject to limitations, are recognized but only to the extent that they do not exceed a specified percentage of statutory surplus; and (f) changes in deferred taxes are recorded directly to surplus as regards policyholders. Additionally, the cash flow presentation is not consistent with GAAP and reconciliation from net income to cash provided by operations is not presented. Comprehensive income is not presented under statutory accounting practices.
The NAIC uses 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, 2019, was 641% of authorized control level RBC.
The Unico American Corporation 2011 Incentive Stock Plan (“2011 Plan”) covers 200,000 shares of the Company’s common stock (subject to adjustment in the case of stock splits, reverse stock splits, stock dividends, etc.) and was approved by shareholders on May 26, 2011. The 2011 Plan terminates on May 13, 2021. Options to purchase 8,760 and 91,240 shares of common stock were granted under the 2011 Plan to one non-executive employee during the years ended December 31, 2012 and 2011, respectively. Due to termination of the employee during 2017, all options granted under the 2011 Plan became null and void.
No options were granted to employees or non-employees during the years ended December 31, 2019 and 2018. As of December 31, 2019 and 2018, there was no unrecognized compensation cost. There were no stock options outstanding at December 31, 2019 and 2018. As of December 31, 2019, 100,000 share of the Company’s common stock were available under the 2011 Plan.
The Company recognizes deferred income tax assets and liabilities for the expected future tax effects attributable to temporary differences between the financial statement and tax return bases of assets and liabilities, and expected benefits of utilizing net operating loss carryforwards, based on enacted tax rates and other provisions of the tax law. The effect of a change in tax laws or rates on deferred tax assets and liabilities is recognized in income in the period in which such change is enacted. Deferred tax assets are reduced by a valuation allowance if it is more-likely-than-not that any portion of the deferred tax assets may not be realized. The ultimate realization of deferred tax assets is dependent upon generating sufficient taxable income of the appropriate character within the carryback and carryforward periods available under the tax law. Management considers the reversal of deferred tax liabilities, projected future taxable income of an appropriate nature, and tax planning strategies in making this assessment. The Company increased its valuation allowance related to deferred tax assets on federal and state net operating losses. Although realization is not assured, management believes that it is more likely-than-not that the Company’s remaining net deferred tax assets will be realized.
As of December 31, 2019, the Company has $19,741,828 of federal net operating loss carryforwards that will begin to expire in 2035. For the years ended December 31, 2019 and December 31, 2018, a valuation allowance on deferred tax assets generated from federal net operating losses was established in the amount of $600,000 and $0, respectively as the Company does not expect to realize that portion of the tax benefit from its federal net operating losses in the future.
As of December 31, 2019, the Company had deferred tax assets of $1,931,665 generated from state net operating loss carryforwards. The state tax carryforwards expire between 2028 and 2039. For the years ended December 31, 2019 and December 31, 2018, a valuation allowance on deferred tax assets generated from state net operating loss carryforwards was established in the amount of $1,931,665 and $1,850,934, respectively as the Company does not expect to realize a tax benefit from its state net operating losses in the future.
As a result of the Company’s analysis at December 31, 2019, the Company believes it is more likely than not that it will be able to utilize the net operating loss carryforwards, net of the valuation allowance, before they expire. Additionally, $4,106,936 of the net operating losses generated in 2019 and 2018 is subject to an indefinite carryforward period.
The Company and its 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 2016 and California state income tax authorities for tax returns filed starting at taxable year 2015. There are no ongoing examinations of income tax returns by federal or state tax authorities.
On December 19, 2008, the Board of Directors authorized a stock repurchase program to acquire from time to time up to an aggregate of 500,000 shares of the Company’s common stock. This program has no expiration date and may be terminated by the Board of Directors at any time. As of December 31, 2019, and December 31, 2018, the Company had remaining authority under the 2008 program to repurchase up to an aggregate of 188,242 and 188,625 shares of its common stock, respectively. The 2008 program is the only program under which there is authority to repurchase shares of the Company’s common stock. The Company repurchased 383 shares of stock during the year ended December 31, 2019, in unsolicited transactions at a cost of $2,296 of which $188 was allocated to capital and $2,108 was allocated to retained earnings. The Company repurchased 30 shares of stock during the year ended December 31, 2018, in unsolicited transactions at a cost of $216 of which $15 was allocated to capital and $201 was allocated to retained earnings. The Company has retired or will retire all stock repurchased.
As of December 31, 2019 and 2018, the Company had 0 common share equivalents that were excluded in the diluted loss per share calculation for years ended December 31, 2019 and 2018.
(1) The information for the years 2010 through 2016 is presented as unaudited required supplementary information.