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 financial statements and notes thereto, and all other items contained within the report on this Annual Report on Form 10-K.
The property and casualty insurance industry is highly competitive and includes many insurers, ranging from large companies offering a wide variety of products worldwide to smaller, specialized companies in a single state or region offering only a single product. Many of the Company's existing or potential competitors have considerably greater financial and other resources, have a higher rating assigned by independent rating organizations such as A.M. Best Company, have greater experience in the insurance industry and offer a broader line of insurance products than the Company. As of December 31, 2010, 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. During the year ended December 31, 2010, 98% of Crusader’s business was commercial multi peril policies. In December of 2010, A.M. Best Company reaffirmed Crusader’s financial strength rating of A- (Excellent) and a rating outlook of “stable.” In addition, Crusader was assigned an Issuer Credit Rating of a- (Excellent).
The termination of the marketing and administrative agreement with CIGNA has resulted in a decrease in AIB commission income and AAQHC fee income. Commission income decreased approximately 24% for the year ended December 31, 2010, as compared to 2009.
AAQHC provides various consumer benefits to its members, including participation in group health care insurance policies. For these services, AAQHC receives membership and fee income from its members. Membership and fee income decreased 19% in the year ended December 31, 2010, compared to 2009. The decrease is primarily a result of the termination of the administrative agreement with CIGNA as discussed above.
The daily automobile rental insurance program is produced by Bedford Insurance Services, Inc. Bedford receives a commission from a non-affiliated insurance company based on premium written. Commission in the daily automobile rental insurance program decreased 9% as compared to 2009. The decrease in commission income is a result of a decrease in the number of policies issued and in-force during the 12 months ended December 31, 2010, as compared to 2009.
The Company generates revenue from its investment portfolio, which consisted of approximately $129.8 million (at amortized cost) as of December 31, 2010, and $137.6 million (at amortized cost) as of December 31, 2009. Investment income for the 12 months ended December 31, 2010, decreased $833,543 (19%) as compared to the 12 months ended December 31, 2009. The decrease in investment income was primarily due to a decrease in the Company’s annualized yield on average invested assets to 2.6% in 2010 from 3.1% in 2009. The decrease in the annualized yield on average invested assets is a result of lower yields in the marketplace on both new and reinvested assets. Due to the current interest rate and financial market environment, management believes it is prudent to purchase fixed maturity investments with maturities of 5 years or less and with minimal credit risk.
The increase in net cash used by operating activities for each of the years ended December 31, 2010, 2009 and 2008 was primarily due to declining written premium and declining commission and fee income. The decrease in written premium is primarily due to the competitive insurance marketplace. The Company believes that rate adequacy is more important than premium growth and that underwriting profit is its primary goal. The increase in net cash used from operating activities was also attributable to decreased investment income resulting from the lower yields in the marketplace on both new and reinvested assets. In addition, cash flows can change from period to period depending largely on the amount and the timing of claims payments. The variability of the Company’s losses and loss adjustment expenses is primarily due to its small population of claims which may result in greater fluctuations in claim frequency and/or severity. As of December 31, 2010, the Company had only 584 open claims. Although the consolidated statements of cash flows continue to reflect net cash used by operating activities, the Company continues to be profitable, well capitalized, and adequately reserved; and it does not anticipate future liquidity problems. As of December 31, 2010, all of the Company’s investments are in U.S. treasury securities, FDIC insured certificates of deposit and money market funds which are readily marketable. The weighted average maturity of the Company’s investments is approximately 1.3 years.
Crusader generates a significant amount of cash as a result of its holdings of unearned premium reserves, its reserves for loss payments, and its capital and surplus. Crusader's loss and loss adjustment expense payments are the most significant cash flow requirement of the Company. These payments are continually monitored and projected to ensure that the Company has the liquidity to cover these payments without the need to liquidate its investments. Cash and investments (at amortized cost) of the Company at December 31, 2010, were $129,812,139 compared to $137,717,039 at December 31, 2009. Crusader's cash and investments at December 31, 2010, and December 31, 2009, were 98% of the total cash and investments held by the Company.
On December 7, 2010, the Board of Directors declared a cash dividend of $0.36 per common share payable on December 29, 2010, to shareholders of record on December 21, 2010. Declaration of future cash dividends will be subject to the Company’s profitability and its cash requirements.
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. There were no trust restrictions on cash and short-term investments at December 31, 2010.
Total revenue for the year ended December 31, 2010, was $37,120,751, $41,617,106 for the year ended December 31, 2009, and $46,769,444 for the year ended December 31, 2008. This represents a decrease of $4,496,355 (11%) for the 2010 year compared to the 2009 year and $5,152,338 (11%) for the 2009 year compared to the 2008 year. The Company had net income of $2,329,152 for the year ended December 31, 2010, $2,927,375, for the year ended December 31, 2009, and $5,283,016 for the year ended December 31, 2008. This represents a decrease of $598,223 (20%) for the 2010 year compared to the 2009 year, and a decrease of $2,355,641 (45%) for the 2009 year compared to the 2008 year.
For the year ended December 31, 2009, the Company had income before taxes of $4,163,978 compared to income before taxes of $7,984,466 for the year ended December 31, 2008, a decrease of $3,820,488 (48%) in income before taxes. The decrease in income before taxes was primarily due to a decrease of $1,479,647 in the underwriting profit, and a decrease of $1,564,265 in investment income.
The effect of inflation on the net income of the Company during the years ended December 31, 2010, 2009, and 2008 was not significant.
In the year ended December 31, 2010, premium earned before reinsurance decreased $4,471,440 (11%) to $35,579,438 compared to $40,050,878 for the year ended December 31, 2009. In the year ended December 31, 2009, premium earned before reinsurance decreased $2,669,886 (6%) to $40,050,878 compared to $42,720,764 for the year ended December 31, 2008. The decrease in earned premium before reinsurance in both 2010 and 2009 is a direct result of the decrease in written premium in 2010 and 2009, respectively.
Expected losses and loss adjustment expenses are determined based on earned premiums. The portion of the premium dollar expected to pay claims costs is referred to as the expected loss and loss adjustment expense ratio. The Company’s emerging loss and loss adjustment expense ratios for each accident year are reviewed in detail at the end of each quarter as part of the reserve diagnostics testing.
As indicated in the above table, the loss ratio for the year ended December 31, 2010, increased to 65.6% from 63.5% in 2009 and 60.7% in 2008. The increase in the 2010 loss ratio was primarily due to an increase in the provision for insured events of the current year as a percent of net earned premium. The increase in current accident year losses was primarily a result of problems with one of the Company’s new programs. The Company’s sales in that program, which include both property and liability coverages, began in July 2008. The Company took immediate corrective action on that program which included non renewal of a substantial number of policies written in that program and is reflected in the reduction of written premium in 2010. The Company took further action in the third quarter of 2010 by reducing the number of brokers authorized to write that particular program from 85 to 15. The Company will non-renew the annual polices written by the brokers that are no longer authorized to write that program. These actions are expected to ultimately improve the Company’s loss ratio for that program. For the year ended December 31, 2010, the provision for insured events of the current year as a percent of net earned premium was 82% as compared to 76% for the year ended December 31, 2009, and 71% for the year ended December 31, 2008, respectively. The Company’s net losses and loss adjustment expenses for the calendar years ended December 31, 2010, December 31, 2009 and December 31, 2008, were $18,470,115, $19,545,761 and $20,592,730, respectively. Generally, if the combined ratio is below 100%, an insurance company has an underwriting profit; if it is above 100%, a company has an underwriting loss.
Membership and fee income for the year ended December 31, 2010, decreased $49,764 (19%) compared to the year ended December 31, 2009. Membership and fee income for the year ended December 31, 2009, decreased $38,234 (13%) compared to the year ended December 31, 2008. The decrease for each of the years is a result of a decrease in the number of members primarily as a result from the decrease in sales of CIGNA medical and dental plans previously discussed. The decrease in 2010 is also due to the termination of the administrative agreement with CIGNA also discussed above.
In the year ended December 31, 2010, the Company’s average invested assets (at amortized value) decreased $7,637,729 (5%) compared to the year ended December 31, 2009. In the year ended December 31, 2010, investment income earned, excluding realized gains, decreased $833,543 (19%) compared to the year ended December 31, 2009. The yield on average invested assets decreased to 2.61% in 2010 from 3.06% in 2009. The decrease in the yield on average invested assets is primarily the result of a decrease in the average return on new and reinvested assets in the Company’s investment portfolio. Due to the current interest rate environment, management believes it is prudent to purchase fixed maturity investments with maturities of 5 years or less and with minimal credit risk. Thus, the weighted average maturity of the Company’s fixed maturity investments as of December 31, 2010, was 1.3 years compared to 1.7 years as of December 31, 2009. The Company’s invested assets (at amortized value) as of December 31, 2010, were $129,766,929 as compared to $137,598,527 as of December 31, 2009.
The par value, amortized cost, estimated market value and weighted average yield of fixed maturity investments at December 31, 2010, 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.
Total salaries and employee benefits incurred for the year ended December 31, 2009, decreased $491,642 (5%) compared to the year ended December 31, 2008. The decrease in total salaries and employee benefits incurred is primarily a result of a decrease in the number of employees as compared to the prior period, the retirement of the former chief executive of the Company on April 1, 2009, and was offset by increases in general salaries and employee benefits costs.
Other operating expenses generally do not change significantly with changes in production. This is true for both increases and decreases in production. Other operating expenses decreased $812,153 (20%) for the year ended December 31, 2010, compared to the year ended December 31, 2009. The decrease in other operating expenses is primarily due to a decrease in the Company’s bad debt expense, general corporate legal expenses and costs related to the California Department of Insurance required tri-annual examination of the Company’s insurance subsidiary that was ongoing in 2009.
Income tax expense for the year ended December 31, 2010, was $891,429 compared to income tax expense of $1,236,603 for the year ended December 31, 2009. The effective combined income tax rates for 2010 and 2009 were 28% and 30%, respectively. This decrease in income tax expense was primarily due to a decrease in pre-tax income to $3,220,581 in the year ended December 31, 2010, compared to pre-tax income of $4,163,978 in the year ended December 31, 2009, and to the recognition of a decrease in the percentage of undistributed dividends subject to California franchise tax that reduced the Company’s deferred tax liability by approximately $143,000. Excluding the adjustment to the deferred tax expense, the effective tax rate would have been 32% and 30% for the years ended December 31, 2010 and 2009, respectively.
In January 2010, the FASB issued a new standard related to fair value measurements and disclosures, which amends the earlier FASB standard to add new requirements for disclosures about transfers into and out of Levels 1 and 2 fair value measurements and requires separate disclosures about purchases, sales, issuances, and settlements related to Level 3 fair value measurements. The new standard also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure the fair value. The Company adopted the new accounting standard which became effective for the interim reporting period ended March 31, 2010, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of the new standard did not have a material impact on the Company’s consolidated financial statements.
The accurate establishment of loss and loss adjustment expense reserves is a difficult process as there are many factors that can ultimately affect the final settlement of a claim and, therefore, the reserve that is needed. Estimates are based on a variety of industry data and on the Company’s current and historical accident year claims data, including but not limited to reported claim counts, open claim counts, closed claim counts, closed claim counts with payments, paid losses, paid loss adjustment expenses, case loss reserves, case loss adjustment expense reserves, earned premiums and policy exposures, salvage and subrogation, and unallocated loss adjustment expenses paid. Many other factors, including changes in reinsurance, changes in pricing, changes in policy forms and coverage, changes in underwriting and risk selection, legislative changes, results of litigation and inflation are also taken into account.
The Company must estimate its ultimate losses and loss adjustment expenses using a very small claim population size. At the beginning of 2010, the Company had 622 open claim files. During 2010, 1,062 new claim files were opened and 1,100 claim files were closed, leaving 584 open claim files at the end of 2010. Due to the small size of the Company and the related small population of claims, the Company’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 the Company’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.
The Company’s recoverable from reinsurers represents an estimate of the amount of future loss and loss adjustment expense payments that will be recoverable from the Company’s reinsurers. These estimates are based upon estimates of the ultimate losses and loss adjustment expenses that the Company 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. The Company’s estimate of the amounts recoverable from reinsurers is regularly reviewed and updated by management as new data becomes available. The Company’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. The Company 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, 2010, all such ceded contracts are accounted for as risk transfer reinsurance.
There were no catastrophe losses incurred during the period covered by this table.
There have been no changes in key assumptions of estimating future ceded losses and loss adjustment expenses. The changes in estimates of prior accident year ceded incurred losses and loss adjustment expenses are attributed to the passage of time and greater amount of actual loss data available for each accident year.
Certain statements contained herein, including the sections entitled “Business,” “Legal Proceedings” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” that are not historical facts are forward looking. These statements, which may be identified by forward looking words or phrases such as “anticipate,” “appear,” “believe,” “estimate,” “expect,” “intend,” “may,” plan,” “should,” and “would” involve risks and uncertainties, many of which are beyond the control of the Company. Such risks and uncertainties could cause actual results to differ materially from these forward looking statements. Factors which could cause actual results to differ materially include those described under Item 1 - “Business - Competition” and Item 1A - “Risk Factors”; premium rate adequacy relating to competition or regulation; actual versus estimated claim experience; the outcome of rate change filings with regulatory authorities; acceptance by insureds of rate changes; adequacy of rate changes; changes in Crusader’s A.M. Best rating; regulatory changes or developments; the outcome of regulatory proceedings; unforeseen calamities; general market conditions; and the Company’s ability to introduce new profitable products.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, 2009, and 2008
We have audited the accompanying consolidated balance sheets of Unico American Corporation and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2010. 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, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
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.
All of 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. Interest income on fixed maturity investments and short term investments are recognized on an accrual basis at each measurement date and our included in net investment income in the Company’s consolidated statements of operations.
The unrealized gains or losses from fixed maturities are reported as “accumulated other comprehensive income,” which is a separate component of stockholders’ equity, net of any deferred tax effect. For fixed maturity investments that the Company does not intend to sell or for which it is more likely than not that the Company would not be required to sell before an anticipated recovery in value, the Company separates the credit loss component of the impairment, if any, from the amount related to all other factors and reports the credit loss component in net realized investment gains (losses). There was no credit loss component for any of the periods presented in the accompanying Consolidated Statements of Operations. The impairment related to all other factors is reported in “accumulated other comprehensive income.” Realized gains and losses, if any, are included in the Consolidated Statements of Operations based on the specific identification method.
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. (See Note 4)
Investment securities, excluding long-term certificates of deposit - Fair values are obtained from a national quotation service.
Premiums and notes receivable - The carrying amounts reported at cost in the balance sheet approximate their fair values given the short term nature of these instruments.
Basic earnings per share exclude the impact of common share equivalents and are based upon the weighted average common shares outstanding. Diluted earnings per share utilize the average market price per share when applying the treasury stock method in determining common share dilution. When dilutive, outstanding stock options are treated as common share equivalents for purposes of computing diluted earnings per share and represent the difference between basic and diluted weighted average shares outstanding. In loss periods, options are excluded from the calculation of diluted earnings per share, as the inclusion of such options would have an anti-dilutive effect.
The Company cedes reinsurance to provide greater diversification of business allowing management to control exposure to potential losses arising from large risks by reinsuring certain levels of risk in various areas of exposure, to reduce the loss that may arise from catastrophes, and to provide additional capacity for growth. Prepaid reinsurance premiums and reinsurance receivables are reported as assets and represent ceded unearned premiums and reinsurance recoverable on both paid and unpaid losses, respectively. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. The Company evaluates each of its ceded reinsurance contracts at its inception to determine if there is sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting literature. As of December 31, 2010, all such ceded contracts are accounted for as risk transfer reinsurance.
The Company 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, 2010 or 2009.
In October 2010, the FASB issued a new standard to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. Costs that meet the definition defined in the new standard are recognized as assets and referred to as deferred acquisition costs. Deferred acquisition costs are amortized over time using amortization methods dependent upon the nature of the underlying insurance product. Other costs that do not vary with and are not primarily related to the acquisition of new and renewal insurance contracts are charged to expense as incurred. The new standard will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The Company is in the process of evaluating the impact of adoption of the new standard on the Company’s consolidated financial statements.
Some of the Company’s health and life programs require payments of premium prior to the effective date of coverage; and, accordingly, invoices are sent out as early as two months prior to the coverage effective date. Insurance premiums received for coverage months effective after the balance sheet date are recorded as advance premiums. The Company received deposits to guarantee the payment of premiums for past coverage months on its daily automobile rental program. These deposits are required when information such as gross receipts or number of rental cars is required to compute the actual premium due but is not available until after the coverage month.
The amortized cost and estimated fair value of fixed maturity investments at December 31, 2010, 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.
At December 31, 2010 and 2009, the Company had no fixed maturity investments with a gross unrealized loss.
No securities were sold at a loss during 2010 or 2009.
The Company‘s consolidated financial statements include estimated reserves for unpaid losses and related loss adjustment expenses of the insurance company operation. The Company sets 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 all related loss adjustment expenses incurred as of that date for both reported and unreported 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. In the case of the Company, the estimates proved to be too high in each of the years reflected in the table. The favorable development in 2008 through 2010 underscores the inherent uncertainty in insurance claims costs, especially for a very small insurer.
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 premiums are earned. Deferred acquisition costs are reviewed to determine if they are recoverable from future income, including investment income.
The Company presently occupies approximately 46,000 square feet of an office building located at 23251 Mulholland Drive, Woodland Hills, California, under a master lease expiring March 31, 2012. Erwin Cheldin, the Company's former president and a current director and principal stockholder, is the owner of the building. The Company signed an extension to the lease with a 4% increase in rent effective April 1, 2007. The lease provides for an annual gross rent of $1,066,990 from April 1, 2007, through March 31, 2012. In addition, the lease extension provides for two 5-year options with a rent increase of 5% for each option period. The Company believes that at the inception of the lease agreement and at each subsequent extension, the terms of the lease were at least as favorable to the Company as could have been obtained from non-affiliated third parties. The Company utilizes for its own operations approximately 100% of the space it leases. The total rent expense under this lease agreement was $1,066,990 for the years ended December 31, 2010, 2009, and 2008.
Likewise, the Company is sometimes named as a cross-defendant in litigation, which is principally directed against an insurer who was issued a policy of insurance directly or indirectly through the Company. Incidental actions are sometimes brought by customers or others, which relate to disputes concerning the issuance or non-issuance of individual policies. These items are also handled on a routine basis by the Company's general counsel, and they do not materially affect the operations of the Company. Management is confident that the ultimate outcome of pending litigation should not have an adverse effect on the Company's consolidated results of operations or financial position.
On most of the premium that Crusader cedes to the reinsurer, the reinsurer pays a commission to Crusader that includes a reimbursement of the cost of acquiring the portion of the premium that is ceded. Crusader does not currently assume any reinsurance. The Company intends to continue obtaining reinsurance although the availability and cost may vary from time to time. The unpaid losses ceded to the reinsurer are recorded as an asset on the balance sheet.
The Unico American Corporation Profit Sharing Plan covers Company employees who are at least 21 years of age and have been employed by the Company for at least 2 years are participants in this plan. Pursuant to the terms of this plan, the Company annually contributes to the account of each participant an amount equal to a percentage of the participant's eligible compensation as determined by the Board of Directors. Participants must be employed by the Company on the last day of the plan year to be eligible for contribution. Participants are entitled to receive distribution of benefits under this plan upon retirement, termination of employment, death, or disability.
The Company believes that Crusader's statutory capital and surplus are sufficient to support the insurance premiums written based on guidelines established by the NAIC.
In December 1993, the National Association of Insurance Commissioners (NAIC) adopted a Risk-Based Capital (RBC) Model Law for property and casualty companies. The RBC Model Law is intended to provide standards for calculating a variable regulatory capital requirement related to a company's current operations and its risk exposures (asset risk, underwriting risk, credit risk, and off-balance sheet risk). These standards are intended to serve as a diagnostic solvency tool for regulators that establishes uniform capital levels and specific authority levels for regulatory intervention when an insurer falls below minimum capital levels. The RBC Model Law specifies four distinct action levels at which a regulator can intervene with increasing degrees of authority over a domestic insurer if its RBC is equal to or less than 200% of its computed authorized control level RBC. A company's RBC is required to be disclosed in its statutory annual statement. The RBC is not intended to be used as a rating or ranking tool nor is it to be used in premium rate making or approval. Crusader’s adjusted capital at December 31, 2010, was 875% of authorized control level risk-based capital.
Insurance Regulatory Information System (IRIS) was developed by a committee of state insurance regulators primarily to assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies. IRIS helps those companies that merit highest priority in the allocation of the regulators’ resources on the basis of 13 financial ratios that are calculated annually. The analytical phase is a review of annual statements and the financial ratios. The ratios and trends are valuable in pointing to companies likely to experience financial difficulties but the ratios are not themselves indicative of adverse financial condition. The ratio and benchmark comparisons are mechanically produced and are not intended to replace the state insurance department’s own in-depth financial analysis or on-site examinations.
An unusual range of ratio results has been established from studies of the ratios of companies that have become insolvent or have experienced financial difficulties. In the analytical phase, companies that receive four or more financial ratio values outside the usual range are analyzed in order to identify those companies that appear to require immediate regulatory action. Subsequently, a more comprehensive review of the ratio results and an insurer’s annual statement is performed to confirm that an insurer’s situation calls for increased or close regulatory attention. In 2010, the Company was outside the usual value of one of the thirteen IRIS ratio tests. IRIS ratio test number six considers the Company’s 2010 investment yield. An unusual value for that ratio is equal to or over 6.5% or equal to or less than 3%. Crusader’s 2010 investment yield was 2.7%.
On December 30, 2005, the Company accelerated the vesting of all of its outstanding stock-based compensation awards granted under the Company’s 1999 Omnibus Stock Plan. All accelerated options were “in the money.” The number of shares covered by the options accelerated totaled 67,500 of which 37,500 were originally scheduled to vest on January 1, 2006, and 30,000 were originally scheduled to vest on January 1, 2007. The Company accelerated vesting of the options in order to minimize the compensation costs associated with the adoption of ASC 718. All accelerated options were granted to long-term management employees who were not expected to leave the Company prior to the originally scheduled vesting date. The estimated compensation cost which would have been excluded from future periods as a result of the acceleration of the vesting of the options was approximately $89,100. There were no options granted during 2010, 2009 and 2008 and there were no unvested options as of January 1, 2006. No compensation expenses were recorded for the years ended December 31, 2010, December 31, 2009, and December 31, 2008.
On December 18, 2002, the Company granted 182,000 incentive stock options under the Company’s 1999 Omnibus Stock Plan. As of December 31, 2010, there were 36,773 of those options outstanding and exercisable, 142,727 options had been exercised, and 2,500 options had been terminated. These options expire 10 years from the date of the grant.
The following table summarizes information regarding the stock options outstanding at December 31, 2010:
The income tax provision reflected in the consolidated statements of operations is different than the expected federal income tax on income as shown in the following table:
In the quarter ended December 31, 2009, the Company recorded a tax adjustment to correct for an error that originated in a prior period. The cumulative effect of the adjustment as of December 31, 2009, was a reduction to income tax expense and an increase to 2009 net income of approximately $97,000, and was the result of recognition of the tax effect on certain deferred items for state income tax purposes. The Company concluded that the error was immaterial to all periods impacted.
As of December 31, 2010, the Company had no unrecognized tax benefits and no additional liabilities or reduction in deferred tax asset. In addition, the Company had not accrued interest and penalties related to unrecognized tax benefits. However, if interest and penalties would need to be accrued related to unrecognized tax benefits, such amounts would be recognized as a component of federal income tax expense.
As discussed in Note 13, the Company recorded an adjustment to correct an error that originated in the fourth quarter of 2009. The effect of the adjustment in the quarter ended March 31, 2010, was an increase to net income of approximately $164,000.
As discussed in Note 16, the Company recorded an adjustment to its deferred income tax liability to correct an error in recording the decrease in the percentage of undistributed dividends of its insurance company subsidiary that is subject to California franchise tax. The effect of this adjustment reduced the Company’s income tax expense by approximately $143,000 in the quarter ended September 30, 2010.