On September 26, 2013, Crusader closed escrow on the purchase of land and a building located in Calabasas, California. The real estate consists of a two-story office building located on commercial land. The office building has approximately 46,884 rentable square feet.
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 charges and 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 91% of the Company’s total revenue for the year ended December 31, 2015. 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, 2015, 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 October of 2015, 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).
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%). For the year ended December 31, 2014, direct written premium as reported on Crusader’s statutory financial 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 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. 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 is currently evaluating its alternatives. Crusader does not intend to substantially increase its number of appointed retail agents until the Company replaces its policy administration system.
For the year ended December 31, 2015, 99.5% and 0.5% of direct written premium was produced in California and Arizona, respectively. For the year ended December 31, 2014, 99.8% and 0.2% of direct written premium was produced in California and Arizona, respectively.
The combined ratio is the sum of (1) the net ratio of losses and loss adjustment expenses incurred (including a provision for IBNR to net earned premium (loss ratio) and (2) the ratio of policy acquisition costs to net earned premium (expense ratio). If the combined ratio is below 100%, an insurance company has an underwriting profit; if it is above 100%, the company has an underwriting loss.
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 health 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 $121,742 (11%) for the year ended December 31, 2015, as compared to 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, a membership association and third party administrator, saw its fee income decrease $11,802 (12%) for the year ended December 31, 2015, as compared to 2014 as a result of a decrease in membership. 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 3,314, 3,278 and 3,281 loans in 2015, 2014 and 2013, respectively. Revenue earned in 2015 and 2014 consisted entirely of late fees and other miscellaneous fees charged. The average policy premium financed by AAC was $3,733, $3,492 and $3,276 in 2015, 2014 and 2013, respectively.
The change in cash flows from operating activities is primarily attributable to the increase in loss and loss adjustment expense payments. Contributing to the use of cash for the year ended December 31, 2015, was a $7,924,178 cash deposit by Crusader in lieu of an appeal bond placed with the Los Angeles Superior Court 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 on the same case for plaintiff’s attorney fees and costs was finalized, which the Company is also appealing. That additional appeal required an additional cash deposit in lieu of an appeal bond of $5,449,615. 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.
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 and investments (at amortized cost) of the Company at December 31, 2015, were $98,178,025 compared to $107,721,681 at December 31, 2014. Crusader's cash and investments were 99% of the total cash and investments held by the Company as of December 31, 2015 and 2014.
As of December 31, 2015, 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 1.5 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 2015. The Company’s fixed maturity (amortized cost) investment portfolio as of December 31, 2015, consisted of 29% U.S. treasury securities and 71% FDIC insured certificates of deposit.
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, 2015, and December 31, 2014, the Company had remaining authority under the 2008 program to repurchase up to an aggregate of 197,467 and 222,669 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 25,202 shares of stock during the twelve months ended December 31, 2015, in unsolicited transactions at a cost of $242,314 of which $12,385 was allocated to capital and $229,929 was allocated to retained earnings. The Company did not repurchase any stock during the twelve months ended December 31, 2014. The Company has or will retire all stock repurchased.
Although material capital expenditures may also be funded through borrowings, the Company believes that its cash and short-term investments at year end, net of statutory deposits of $700,000, 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. Trust restrictions on cash and short-term investments were $0 and $112,008 at December 31, 2015 and December 31, 2014, respectively.
For the year ended December 31, 2015, the Company had loss before taxes of $1,734,958 compared to income before taxes of $1,296,505 for the year ended December 31, 2014, a decrease of $3,031,463 (234%). This decrease in income before taxes was primarily due to increased losses and loss adjustment expenses and the impairment of the Company’s capitalized computer software costs, partially offset by the increase in revenues.
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 written premium in 2015 of 11% compared to 2014 is not attributable to any material single event.
For the year ended December 31, 2014, direct written premium, as reported on Crusader’s statutory financial 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.
Ceded earned premium as a percentage of direct earned premium was 15% in 2015, 16% in 2014 and 2013. 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.
In calendar year 2013, Crusader retained a participation in its excess of loss reinsurance treaties of 10% in its 1st layer ($500,000 in excess of $500,000), 5% in its 2nd layer ($1,000,000 in excess of $1,000,000) and 0% in its property and casualty clash treaty.
The Company evaluates each of its ceded reinsurance contracts at its inception to determine if there is a sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting literature. As of December 31, 2015, all such ceded contracts are accounted for as risk transfer reinsurance.
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. Net losses and loss adjustment expenses for the calendar years ended December 31, 2015, 2014 and 2013 were $19,163,316, $14,617,118 and $16,089,175, respectively.
The amount of favorable development recognized during the year ended December 31, 2015, decreased $864,452 (26%) to $2,444,312 from $3,308,764 in 2014. 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 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 net loss and loss adjustment expense reserve was $39,456,610 as of December 31, 2015. 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.
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 commission income for the year ended December 31, 2015, decreased $97,752 (84%) compared to the year ended December 31, 2014. For the year ended December 31, 2014, commission income decreased $108,020 (48%) compared to the year ended December 31, 2013. 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. Bedford entered into a new producer agreement effective June 1, 2013, with a non-affiliated group of insurance companies. Under that agreement, Bedford had the authority to solicit and refer to these companies its daily automobile rental insurance policy submissions. Bedford did not have the authority to bind any risk or commit to any course of action without first obtaining prior written permission from the non-affiliated group of insurance companies. For its services, Bedford received a commission. 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. The Company no longer actively markets this program.
The insurance premium financing operation currently finances policies produced only through its sister company, Unifax. Consequently, AAC’s growth is primarily dependent on the growth of Crusader and Unifax business. Effective July 20, 2010, AAC reduced the interest rate charged on premium financed to 0% in an effort to increase the sales of existing renewal and new business written by Unifax for Crusader. Due to the low interest rate environment, the cost of money to provide this incentive is not material. The Company monitors the cost of providing this incentive, and depending on the cost/benefit determination, can continue to offer it or withdraw it at any time. Income generated by AAC consists of late fees, returned check fees and payment processing fees.
The finance fees earned for the year ended December 31, 2015, decreased $1,282 (2%) to $65,730 compared to the year ended December 31, 2014. For the year ended December 31, 2014, finance fees earned decreased $9,833 (13%) compared to the year ended December 31, 2013. 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 average is based on the beginning and ending balances of the amortized cost of the invested assets for each respective year.
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 Company does not have the intent to sell its fixed maturity investments. The unrealized gains or losses from fixed maturities are reported as “Accumulated other comprehensive income (loss),” which is a separate component of stockholders’ equity, net of any deferred tax effect.
Other income from insurance company operation and other insurance operations decreased of $570,845 (60%) in the year ended December 31, 2015, when compared to year ended December 31, 2014. The decrease was primarily the result of a decrease of $620,357 (76%) in rental income received by Crusader from the office building located in Calabasas, California, due to a major tenant vacating the building on September 7, 2014; the tenant occupied approximately 32,403 square feet. This vacated space was subsequently occupied by the Company on October 9, 2015. This decrease was partially offset by $108,778 (636%) increase in the contingent commission the Company recognized on the Company’s 2003, 2004 and 2006 excess of loss reinsurance treaties.
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 $26,043 (14%) for the year ended December 31, 2015, as compared to the year ended December 31, 2014. Commissions to agents and brokers decreased $39,417 (17%) for the year ended December 31, 2014, as compared to the year ended December 31, 2013. The fluctuations in commissions to agents/brokers when compared to prior periods are primarily due 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.
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, 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 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 charge is included in “Other operating expenses” in the Consolidated Statements of Operations for year ended December 31, 2015.
Income tax expense for the year ended December 31, 2014, was $450,144 compared to income tax expense of $637,107 for the year ended December 31, 2013, a change of $186,963. The effective income tax rates for the years ended December 31, 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 the years ended December 31, 2014 compared to 2013 (net of the federal tax benefit).
The preparation of the Company’s consolidated financial statements requires estimation of certain liabilities, most significantly the liability for unpaid loss and loss adjustment expense (reserves). Management makes its best estimate of the liability for these unpaid claims costs as of the end of each fiscal quarter. Due to the inherent uncertainties in estimating the Company’s unpaid claims costs, actual loss and loss adjustment expense payments are expected to vary, perhaps significantly, from any estimate made prior to the settling of all claims. Variability is inherent in establishing loss and loss adjustment expense reserves, especially for a small insurer like Crusader. For any given line of insurance, accident year, or other group of claims, there is a continuum of possible reserve estimates, each having its own unique degree of propriety or reasonableness. Due to the complexity and nature of the insurance claims process, there are potentially an infinite number of reasonably likely scenarios. The Company does not specifically identify reasonably likely scenarios; rather, management draws on its collective experience to judgmentally determine its best estimate. In addition to applying a variety of standard actuarial methods to the data, an extensive series of diagnostic tests are applied to the resultant reserve estimates to determine management’s best estimate of the unpaid claims liability. Among the statistics reviewed for each accident year are loss and loss adjustment expense development patterns, frequencies, severities, loss ratios to premium, and loss adjustment expense ratios to loss.
The Company must estimate its ultimate losses and loss adjustment expenses using a very small claim population size. At the beginning of 2015, Crusader had 597 open claim files. During 2015, 735 new claim files were opened and 713 claim files were closed, leaving 619 open claim files at the end of 2015. Due to the small size of Crusader and the related small population of claims, Crusader’s losses and loss adjustment expenses for any accident year can vary significantly from the initial expectations. Due to the small number of claims, changes in claim frequency and/or severity can materially affect Crusader’s reserve estimate. The potential variability from management’s best estimate cannot be measured from any meaningful statistical basis due to the numerous uncertainties in the claims reserving process and the small population of claims.
At each quarterly review, actual claims costs that emerge are compared with the claims costs that were expected to emerge during that development period. Sometimes the previous claims costs estimates prove to have been too high; sometimes they prove to have been too low. The favorable development in the 2013 through 2015 calendar years underscores the inherent uncertainty in insurance claims costs, especially for a very small insurer. While additional redundancies on losses and loss adjustment expenses may emerge, the Company believes that this trend may not be indicative of future results.
The effect of reinsurance on the results of operations is as follows:
There were no catastrophe losses incurred during the years ended December 31, 2015, 2014 and 2013.
The Company’s fixed maturity investments are classified as available-for-sale and are stated at fair value. 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. Short-term investments are carried at cost, which approximates fair value. The unrealized gains or losses from fixed maturities are reported as “Accumulated other comprehensive income (loss),” which is a separate component of stockholders’ equity, net of any deferred tax effect. When a decline in the value of a fixed maturity is considered other-than-temporary, a loss is recognized in the Consolidated Statements of Operations. Realized gains and losses are included in the Consolidated Statements of Operations based on the specific identification method.
Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013
We have audited the accompanying consolidated balance sheet of Unico American Corporation and subsidiaries as of December 31, 2015, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for the year 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 audit.
We have audited the accompanying Consolidated Balance Sheet of Unico American Corporation and subsidiaries as of December 31, 2014, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the two-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.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Unico American Corporation and subsidiaries as of December 31, 2014, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
Unico American Corporation is an insurance holding company that underwrites property and casualty insurance through its insurance company subsidiary; provides property, casualty and health insurance through its agency subsidiaries; and provides insurance premium financing and membership association services through its other subsidiaries. Unico American Corporation is referred to herein as the "Company" or "Unico," and such references include both the corporation and its subsidiaries, all of which are wholly owned. Unico was incorporated under the laws of Nevada in 1969.
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.
The Company acquired an office building located at 26050 Mureau Road, Calabasas, California, in September 2013. Leasehold improvements to the structure are amortized over the shorter of the useful life of the leasehold improvements or the remaining years of the lease. Improvements to the structure are amortized over the useful life of the improvements.
Depreciation on the Calabasas building is computed using the straight line method over 39 years. Depreciation on furniture, fixtures and equipment in the Calabasas building is computed using the straight line method over 3 to 15 years. Amortization of leasehold improvements in the Calabasas building is being computed using the shorter of the useful life of the leasehold improvements or the remaining years of the lease.
Depreciation on property and equipment located in Woodland Hills, California, is computed using straight line methods over 3 to 7 years. Amortization of leasehold improvements on property located in Woodland Hills, California, is computed using the shorter of the useful life of the leasehold improvements or the remaining years of the lease.
The Company and its wholly owned subsidiaries file consolidated federal and state income tax returns. Pursuant to the tax allocation agreement, the Company’s wholly owned subsidiaries, Crusader Insurance Company (Crusader) and American Acceptance Corporation (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 2012 and California state income tax authorities for tax returns filed starting at taxable year 2011. There are no ongoing examinations of income tax returns by federal or state tax authorities.
Premium finance interest may be charged to policyholders who choose to finance insurance premium. Interest may be charged at rates that vary with the amount of premium financed. Premium finance interest, if any, is recognized using a method that approximates the interest (actuarial) method. Other charges and fees earned include late fees, returned check fees and payment processing fees that are earned when recorded.
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’s 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.
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 91% of consolidated revenues for the year ended December 31, 2015, 90% of consolidated revenues for the year ended December 31, 2014, and 89% of consolidated revenues for the year ended December 31, 2013. 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, 2015, 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, 2015, 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.
In May 2015, the Financial Accounting Standards Board issued Accounting Standards Update (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 is not expected to have any impact on the Company’s consolidated financial statements. The disclosure mandated by ASU 2015-09 will become effective for annual and quarterly reporting periods ended on and after December 31, 2016.
A summary of net investment income and net realized losses is as follows:
The amortized cost and estimated fair value of fixed maturity investments at December 31, 2015, 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.
A summary of the unrealized appreciation (depreciation) on investments carried at fair value and the applicable deferred federal income taxes is shown below:
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 on the U.S. treasury securities in unrealized loss positions as of December 31, 2015, and December 31, 2014, were determined to be temporary.
The Company’s investment in Certificates of Deposit (CDs) included $57,527,000 and $14,489,000 of brokered CDs as of December 31, 2015, and December 31, 2014, respectively. Brokered CDs provide the safety and security of a CD combined with the convenience gained by one-stop shopping for rates at various institutions. This allows the Company to spread its investments across multiple institutions so that all of its CD investments are insured by the Federal Deposit Insurance Corporation (FDIC). Brokered CDs are purchased through UnionBanc Investment Services, LLC, a registered broker-dealer, investment advisor, member of FINRA/SIPC, and a subsidiary of Union Bank, N.A. Brokered CDs are a direct obligation of the issuing depository institution, are bank products of the issuing depository institution, are held in the name of Union Bank as Custodian for the benefit of the Company, and are FDIC insured within permissible limits. All the Company’s brokered CDs are within the FDIC insured permissible limits. As of December 31, 2015 and 2014, the Company’s remaining CDs totaling $600,000 were from four different banks and represent statutory deposits that are assigned to and held by the California State Treasurer and the Insurance Commissioner of the State of Nevada. These deposits are required for writing certain lines of business in California and for admission in the state of Nevada. All the Company’s brokered and non-brokered CDs are within the FDIC insured permissible limits. Due to nature of the Company’s business, certain bank accounts may exceed FDIC insured permissible limits.
In determining the fair value of its financial instruments, the Company employs a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Financial assets and financial liabilities recorded on the Consolidated Balance Sheets at fair value are categorized based on the reliability of inputs to the valuation techniques as follows:
Depreciation on furniture, fixtures and equipment located in Woodland Hills is computed using the straight line method over 3 to 7 years. Amortization of leasehold improvements on property located in Woodland Hills is computed using the shorter of the useful life of the leasehold improvements or the remaining years of the lease.
Depreciation and amortization expense on all property and equipment for the years ended December 31, 2015, 2014 and 2013, were $341,264, $539,608 and $307,237, respectively.
For the years ended December 31, 2015 and 2014, the Calabasas building has generated rental revenue in the amount of $364,674 and $815,601 and incurred operating expenses in the amount of $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 September 7, 2014, a lease from a single tenant occupying approximately 32,403 square feet of the Calabasas building ended, and the tenant has vacated the premises. On October 9, 2015, the Company moved its home office into this vacated space. 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.
The total square footage of the Calabasas building is 46,884, including common areas. As of December 31, 2015, 10,292 square feet of the Calabasas building was leased to non-affiliated entities, and 4,189 square feet was vacant and available to be leased to non-affiliated entities.
Receivables, net, include premium, commissions and notes receivable and are as follows:
As of December 31, 2015, one of the vendors that the Company engaged to install workspace furniture at the Calabasas building had not completed its obligations under a contract it executed with the Company in June 2015. Of the total amount billed by the vendor, approximately $274,000 was not paid by the Company because the vendor had not fulfilled its obligations under the contract; therefore, the unpaid amount was not included in the Consolidated Balance Sheet. Subsequently, the work was substantially completed and the Company paid the vendor $208,099 and will pay the remaining balance upon confirmation that the contract has been fulfilled.
Crusader’s excess of loss reinsurance treaties provided for a contingent commission for accident years 2006, 2004 and 2003. Crusader’s 2006 1st layer primary excess of loss reinsurance treaty provided for a contingent commission equal to 20% of the net profit, if any, accruing to the reinsurer. Crusader’s 2004 and 2003 1st layer primary excess of loss reinsurance treaties provided for a contingent commission to the Company equal to 45% of the net profit, if any, accruing to the reinsurer. Any contingent commission received was subject to return based on future development of ceded losses and loss adjustment expenses. The contingent commission income (loss) recognized was $91,686, $(17,092) and $301,102 for the years ended December 31, 2015, 2014 and 2013, respectively. As of December 31, 2015, the contingent commission agreements had expired, and all contingent commission income due on these agreements had been recognized. As of December 31, 2015 and 2014, the unearned contingent commission balance included in “Accrued expenses and other liabilities” in the Consolidated Balance Sheets was $0 and $77,839, respectively.
The effect of reinsurance on written premium, earned premium and incurred losses and loss adjustment expenses is as follows:
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; and (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; 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 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 current report of examination or in the previous report of examination. The CA DOI has scheduled a periodic financial examination of Crusader’s December 31, 2015, statutory financial statements to commence in the second quarter of 2016; the Company does not have an expected date for completion of this examination.
The Company believes that Crusader's statutory capital and surplus are sufficient to support the insurance written premium written guidelines established by the NAIC.
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, 2015, the maximum dividend that could be made by Crusader to Unico without prior regulatory approval in 2016 is $6,136,773. In the years ended December 31, 2015, 2014 and 2013, Crusader paid to Unico cash dividends in the amount of $3,000,000, $0 and $0, respectively.
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, 2015, 45,620 of these shares are currently vested and exercisable.
The Company recognized stock-based compensation expense in the amount of $23,104 for all awards issued under the Company’s 2011 Stock Option plan in the “Salaries and employee benefits” line item in the Consolidated Statements of Operations in each year ended December 31, 2015, 2014 and 2013. As of December 31, 2015, there was $136,018 of total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock-based payments which are expected to be recognized over a weighted average remaining period of 5.72 years.
The valuation allowance is related to expected utilization of state tax net operating loss carryforwards to be realized prior to their expiration dates. The allowance increased $305,756 during the year ended December 31, 2015, compared to an increase of $204,042 during the year ended December 31, 2014.
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 2012 and California state income tax authorities for tax returns filed starting at taxable year 2011. There are no ongoing examinations of income tax returns by federal or state tax authorities.
NOTE 17 - REPURCHASE OF COMMON STOCK - EFFECT ON STOCKHOLDERS’ EQUITY
As of December 31, 2015, the Company had 2,761 common share equivalents that were excluded in the diluted (loss) per share calculation for year ended December 31, 2015.
Summarized unaudited quarterly financial data for each of the calendar years 2015 and 2014 is as follows: