This overview discusses some of the relevant factors that management considers in evaluating the Company's performance, prospects and risks. It is not all inclusive and is meant to be read in conjunction with the entirety of the management discussion and analysis, the Company's consolidated financial statements and notes thereto, and all other items contained within this Annual Report on Form 10-K.
For the year ended December 31, 2015, the Company had a loss before taxes of $1,734,958 compared to an income before taxes of $1,296,505 for the year ended December 31, 2014, a decrease in the income before taxes of $3,031,463 (234%). This decrease in income before taxes was due primarily to increased losses and loss adjustment expenses and the impairment of the Company’s capitalized computer software costs, partially offset by an increase in total revenues.
Commission income for the year ended December 31, 2015, decreased $121,742 (11%) compared to the year ended December 31, 2014. The decrease in commission income is a result of decreases in the number of group accounts AIB underwrites and commission income on individual and group policies due primarily to the Patient Protection and Affordable Care Act.
Policy acquisition costs consist of commissions, premium taxes, inspection fees, and certain other underwriting costs that are directly related to and vary with the 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 facultative or catastrophe ceded premium. Policy acquisition costs, net of ceding commission, are deferred and amortized as the related premium is earned. Policy acquisition costs increased $429,917 (7%) in the year ended December 31, 2016, compared to the year ended December 31, 2015, due primarily to an increase in premium volume. Policy acquisition costs increased $479,124 (8%) in the year ended December 31, 2015, compared to the year ended December 31, 2014, due primarily to an increase in premium volume.
Crusader’s recoverable from reinsurers represents an estimate of the amount of future loss and loss adjustment expense payments that will be recoverable from Crusader’s reinsurers. These estimates are based upon estimates of the ultimate losses and loss adjustment expenses that Crusader expects to incur and the portion of those losses that are expected to be allocable to reinsurers based upon the terms of the reinsurance agreements. Given the uncertainty of the ultimate amounts of losses and loss adjustment expenses, the estimates may vary significantly from the eventual outcome. Crusader’s estimate of the amounts recoverable from reinsurers is regularly reviewed and updated by management as new data becomes available. Crusader’s assessment of the collectability of the recorded amounts recoverable from reinsurers is based primarily upon public financial statements and rating agency data. Any adjustments necessary are reflected in the current operations. Crusader evaluates each of its ceded reinsurance contracts at its inception to determine if there is sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting literature. At December 31, 2016, all such ceded contracts are accounted for as risk transfer reinsurance.
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). As described in Note 15, 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 Company had no fixed maturity investments with gross unrealized losses for a continuous period of less than 12 months and three U.S. treasury securities with gross unrealized losses for a continuous period of more than 12 months as of December 31, 2016. The Company had three U.S. treasury securities with gross unrealized losses for a continuous period of less than 12 months and two U.S. treasury securities with gross unrealized losses for a continuous period of more than 12 months as of December 31, 2015.
Depreciation on furniture, fixtures and equipment located in Woodland Hills office building previously leased by the Company was computed using the straight line method over 3 to 7 years. Amortization of leasehold improvements on property located in Woodland Hills was 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, 2016, 2015, and 2014, were $483,580, $341,264, and $539,608, respectively.
The following table reconciles the above cumulative incurred and paid data to Crusader’s loss and loss adjustment expense reserves as of December 31, 2016:
Crusader also has catastrophe reinsurance treaties from various highly rated California authorized and California unauthorized reinsurance companies. These reinsurance treaties help protect Crusader against losses in excess of certain retentions from catastrophic events that may occur on property risks which Crusader insures. In calendar year 2016, Crusader retained a participation in its catastrophe excess of loss reinsurance treaties of 5% in its 1st layer ($9,000,000 in excess of $1,000,000) and 0% in its 2nd layer ($36,000,000 in excess of $10,000,000). In calendar years 2015 and 2014, Crusader retained a participation in its catastrophe excess of loss reinsurance treaties of 5% in its 1st layer ($9,000,000 in excess of $1,000,000) and 0% in its 2nd layer ($31,000,000 in excess of $10,000,000).
Ceded earned premium as a percentage of direct earned premium was 16% in 2016, 15% in 2015, and 16% in 2014, respectively. Crusader did not assume any premium or losses during the years ended December 31, 2016, 2015, and 2014.
As of December 31, 2016, the Company has deferred tax assets of $1,463,188 generated from state net operating loss carryforwards. The increase in the current year in the deferred tax assets from net operating loss carry forwards of $79,017 is the result of current year net operating losses of $149,919, reduced by the expiration of 2006 tax year net operating loss carry forward of $70,902. The expiring net operating loss carry forward was applied to the valuation allowance. Of $1,463,188 state tax carryforwards current balance, $274,066 expire between 2017 and 2018 and the remaining $1,189,122 expire between 2028 and 2036. The current state tax rate is 8.84%. As of December 31, 2016, the Company has a deferred tax asset valuation allowance related to state net operating losses in the amount of $1,264,627.
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 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.
NOTE 21 - SUPPLEMENTARY INFORMATION ON LOSS AND ALAE DEVELOPMENT (UNAUDITED)