The Company presently occupies a 46,000 square foot office building located at 23251 Mulholland Drive, Woodland Hills, California, under a master lease expiring March 31, 2012. Erwin Cheldin, the Company's president, chairman, 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 $1,025,952 through March 31, 2007, and $1,066,990 from April 1, 2007, through March 31, 2012. In addition, the lease extension provides for two, five-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 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. Crusader is writing primarily Commercial Multiple Peril business only in the state of California. A.M. Best Company has upgraded Crusader’s financial strength rating from B+ (Good) to B++ (Good), effective January 2, 2007, and upgraded Crusader’s rating outlook from stable to positive, on January 15, 2008.
A primary challenge of the property and casualty insurance company operation is contending with the fact that the Company sells its products before the ultimate costs are actually known. That is, when pricing its products, the Company must forecast the ultimate claim and loss adjustment costs. In addition, factors such as changes in regulations and legal environment, among other things, can all impact the accuracy of such cost forecasts.
For the twelve months ended December 31, 2007, losses and loss adjustment expenses for insured events of the current year were $26,300,338, offset by $4,118,101 of favorable development for events of prior years. For the twelve months ended December 31, 2006, losses and loss adjustment expenses for insured events of the current year were $29,997,662, offset by $12,170,683 of favorable development for events of prior years. The favorable developments resulted from settling or re-estimating claims for lesser amounts than they were previously forecast.
AIB sells and services health insurance policies for individual/family and small business groups and receives commissions based on the premiums that it writes. Commission income increased 42% for the year ended December 31, 2007, compared to 2006. The increase is primarily due to the increase in sales of small group medical insurance offered through CIGNA HealthCare as discussed above.
AAC provides premium financing for Crusader policies that are produced by Unifax in California. Finance charges and fees earned by AAC during 2007 decreased 18% as compared to 2006. The decrease is primarily a result of a 21% decrease in the number of loans issued in 2007 compared to 2006. Average premium financed increased to $2,769 in 2007 from $2,758 in 2006.
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 increased $15,307 (4%) as compared to 2006.
As of December 31, 2007, the weighted average maturity of the Company’s fixed maturity investments was 2.0 years compared to 1.3 years and 1.2 years as of December 31, 2006, and December 31, 2005, respectively.
The cash flow used by operations in the year ended December 31, 2007, was $113,639, a decrease in cash flow of $6,411,533 compared to the cash flow for the year ending December 31, 2006. The Company has primarily utilized the cash from the maturity of its fixed maturity investments to purchase $69.7 million of fixed maturity securities in 2007. Cash flow provided by operations in the year ended December 31, 2006, was $6,297,894, a decrease in cash flow of $3,500,448 compared to the cash flow for the year ending December 31, 2005. The Company has utilized the cash provided from operating activities and from the maturity of its fixed maturity investments primarily to purchase $68.9 million of fixed maturity securities in 2006.
The investment market 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 that has continued into the first quarter of 2008. The Company’s fixed maturity investment portfolio as of December 31, 2007 consisted of 93% U.S. treasury securities, and 7% consisting of ten highly rated industrial and miscellaneous taxable issues, and 1 state tax exempt issue. As of December 31, 2007, Standard & Poors rated four of these issues AAA, one issue AA+, four issues AA, one issue AA-, and one issue A+.
Crusader's statutory capital and surplus as of December 31, 2007, was $57,862,334, an increase of $7,838,566 (16%) from December 31, 2006. Crusader's statutory capital and surplus as of December 31, 2006, was $50,023,768, an increase of $13,437,327 (37%) from December 31, 2005.
No dividends were declared or paid by Crusader to Unico in 2007, 2006, or 2005. Based on Crusader’s statutory net income for the year ended December 31, 2007, the maximum dividend that could be made by Crusader to Unico without prior regulatory approval in 2008 is $8,194,562.
The Company has certain obligations to make future payments under contracts and credit-related financial instruments and commitments. At December 31, 2007, certain long-term aggregate contractual obligations and credit-related commitments are summarized as follows:
The Company had net income of $6,613,707 for the year ended December 31, 2007, compared to net income of $11,794,241 for the year ended December 31, 2006, and net income of $6,715,004 for the year ended December 31, 2005. Total revenue for the year ended December 31, 2007, was $50,223,293 compared to $54,717,381 for the year ended December 31, 2006, and $61,182,522 for the year ended December 31, 2005.
For the year ended December 31, 2007, the Company had income before taxes of $9,923,551 compared to income before taxes of $18,153,986 in the year ended December 31, 2006, a decrease in income before taxes of $8,230,435. The decrease in pre-tax income was primarily due to a decrease of $9,373,440 in the underwriting profit (net earned premium less losses and loss adjustment expenses and policy acquisition costs) from Crusader.
The insurance marketplace continues to become more competitive. There are more insurers competing for the same customers. Many of those competitors price their insurance at rates that Crusader believes are inadequate to support any profit. Nonetheless, Crusader believes that it can grow its sales and profitability by continuing to focus upon three key areas of its operations: (1) product development, (2) improved service to retail brokers, and (3) appointment of captive and independent retail agents. During the year 2008, Crusader plans to introduce many product changes such as, changes in its rates, eligibility guidelines, rules and coverage forms. Improved service to retail brokers is primarily focused upon transacting business through the internet, as well as providing more options to make the brokers’ time more efficiently spent with us (i.e., as opposed to spending time with our competitors). During 2007, Crusader employed two full-time marketing representatives. Those individuals are charged with the responsibility of identifying product development opportunities, promoting the company and its products to the brokerage community, and charged with the duty to appoint retail agents, so as to introduce the Crusader brand at the consumer’s level of distribution (i.e., retail). Crusader plans to have approximately twelve retail agents appointed by the end of year 2008, and approximately twenty-four by the end of year 2009. Presently it is expected that each such retail agent should be able to reach an annual sales volume of approximately one to two million dollars of Crusader’s products within three to five years of their appointment by the Company.
The Company writes annual policies and, therefore, earns written premium daily over the one-year policy term. Premium earned before reinsurance decreased $8,030,240 (14%) in the year ended December 31, 2007, compared to the year ended December 31, 2006, and decreased $8,020,551 (12%) in the year ended December 31, 2006, compared to the year ended December 31, 2005. The decrease in earned premium before reinsurance in both 2007 and 2006 is a direct result of the decrease in written premium in 2007 and 2006, respectively.
In 2007 Crusader retained a participation in its excess of loss reinsurance treaties of 15% in its 1st layer ($700,000 in excess of $300,000), 15% in its 2nd layer ($1,000,000 in excess of $1,000,000), and 15% in its property clash treaty. In 2006 and 2005 Crusader retained a participation in its excess of loss reinsurance treaties of 10% in its 1st layer ($700,000 in excess of $300,000), 10% in its 2nd layer ($1,000,000 in excess of $1,000,000), and 30% in its property and casualty clash treaties. In 2004 Crusader retained a participation in its excess of loss reinsurance treaties of 10% in its 1st layer ($750,000 in excess of $250,000), 10% in its 2nd layer ($1,000,000 in excess of $1,000,000), and 30% in its property and casualty clash treaties. In 2003 Crusader retained a participation in its excess of loss reinsurance treaties of 5% in its 1st layer ($750,000 in excess of $250,000), 10% in its 2nd layer ($1,000,000 in excess of $1,000,000), and 30% in its property and casualty clash treaties.
As indicated in the above table, the loss ratio for the year ended December 31, 2007, increased to 59.7% from 41.5% in 2006 and decreased to 41.5% in 2006 from 62.4% in 2005. The increase in the 2007 loss ratio was primarily due to a decrease in the amount of favorable development of prior years’ losses recognized in 2007 as compared to 2006. During 2007, the Company recognized $4,118,101 of favorable development of prior years’ losses as compared to $12,170,683 of favorable developments of prior years’ losses recognized during 2006. 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.
The Company’s net losses and loss adjustment expenses for the calendar year ended December 31, 2007, were $22,182,237. This amount is comprised of accident year 2007 net losses and loss adjustment expenses of $26,300,338 and favorable development of prior accident years of $4,118,101. The Company’s net losses and loss adjustment expenses for the calendar year ended December 31, 2006, were $17,826,979. This amount is comprised of accident year 2006 net losses and loss adjustment expenses of $29,997,662 and favorable development of prior accident years of $12,170,683. The Company’s net losses and loss adjustment expenses for the calendar year ended December 31, 2005, were $31,513,732. This amount is comprised of accident year 2005 net losses and loss adjustment expenses of $35,338,196 and favorable development of prior accident years of $3,824,464.
As reflected in the above table, the amount of favorable development recognized during the year ended December 31, 2007, decreased $8,052,581 (66%) from $12,170,683 in 2006 to $4,118,101 in 2007. The decrease is a result of a substantial decrease in the provision for losses and loss adjustment expenses for accident year 2004 during the calendar year 2006. This favorable development arose from the lower than expected emergence of losses during 2006 relative to expectations used to establish loss reserves at the end of 2005 and 2004. The severity of late reported property and casualty claims that emerged during 2006 was lower than expected and case development on previously reported claims was better than expected. During the fourth quarter of 2006 the Company determined that the favorable development of accident year 2004, which developed during 2006, was sufficient to warrant a reduction in the ultimate expected losses and loss adjustment expenses for that accident year. During the first three quarters of 2006, the Company determined that the development during that period was not sufficient to warrant reducing accident year 2004 reserves further than previously recorded. Because the incidence of the CMP losses is subject to a considerable element of fortuity, reserve estimates for this line are based on an analysis of past loss experience on average over a period of years. As a result, the favorable development recognized in 2006 had a minimal effect on our determination of carried CMP loss reserves at December 31, 2007. The adjustment of prior accident year reserves discussed above is not necessarily indicative of the results that may be expected in future periods.
Analysis of the roll forward of reserves for losses and loss adjustment expenses.
The following table provides an analysis of the roll forward of Crusader’s losses and loss adjustment expenses, including a reconciliation of the ending balance sheet liability for the periods indicated:
* In accordance with Financial Accounting Standards Board Statement No. 113, “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts,” reinsurance recoverable on unpaid losses and loss adjustment expenses are reported for GAAP as assets rather than netted against the corresponding liability for such items on the balance sheet.
Membership and fee income for the year ended December 31, 2007, increased $9,185 (3%), compared to the year ended December 31, 2006. Membership and fee income for the year ended December 31, 2006, decreased $17,822 (6%), compared to the year ended December 31, 2005.
In the year ended December 31, 2007, while the Company’s average invested assets (at amortized value) increased $3,372,388 (2%) compared to the year ended December 31, 2006, investment income earned increased $840,089 (14%) compared to the year ended December 31, 2006. The yield on average invested assets increased to 4.65% in 2007 from 4.17% in 2006. The increase in the yield on average invested assets is primarily the result of an increase 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 five years or less and with minimal credit risk. Thus, the weighted average maturity of the Company’s fixed maturity investments as of December 31, 2007, was 2.0 years compared to 1.3 years as of December 31, 2006. The Company’s invested assets (at amortized value) as of December 31, 2007, was $147,348,367 as compared to $147,312,335 as of December 31, 2006. However, the average invested assets increased in the year ending December 31, 2007, as compared to 2006, primarily as a result of the significant increase in invested assets during the year ended December 31, 2006. The mix of taxable and tax-exempt securities in the portfolio affects the investment income return percentage. Tax-exempt securities generally carry a lower yield than taxable securities. These securities (at amortized value) decreased to $15,045 (0% of total investments) at December 31, 2007, compared to $15,134 (0% of total investments) at December 31, 2006.
In the year ended December 31, 2006, while the Company’s average invested assets (at amortized value) increased $7,602,280 (6%) compared to the year ended December 31, 2005, investment income earned increased $1,689,807 (39%) compared to the year ended December 31, 2005. The yield on average invested assets increased to 4.17% in 2006 from 3.17% in 2005. The increase in the yield on average invested assets is primarily the result of an increase in the average return on new and reinvested assets in the Company’s investment portfolio. Due to the interest rate environment in 2006, management believed it was prudent to purchase fixed maturity investments with relatively short maturity duration. Thus, the weighted average maturity of the Company’s fixed maturity investments as of December 31, 2006, was 1.3 years compared to 1.2 years as of December 31, 2005. The Company’s invested assets (at amortized value) as of December 31, 2006, was $147,312,335 as compared to $140,603,590 as of December 31, 2005. The Company’s average invested assets increased in the year ending December 31, 2006, primarily as a result of increased cash flows from operations. The mix of taxable and tax-exempt securities in the portfolio affects the investment income return percentage. Tax-exempt securities generally carry a lower yield than taxable securities. These securities (at amortized value) decreased to $15,134 (0% of total investments) at December 31, 2006, compared to $934,536 (1% of total investments) at December 31, 2005.
At December 31, 2006, the fixed maturity investments with a gross unrealized loss for continuous periods of 0 to 6 months consisted of U.S. treasury securities. The fixed maturity investments with a gross unrealized loss position for continuous periods of 7 to 12 months consisted both U.S. treasury securities and investment grade industrial securities. The fixed maturity investments with a gross unrealized loss position for a continuous period over 12 months consisted of U.S. treasury securities, investment grade industrial securities, and pre-refunded municipal bonds. The unrealized loss was primarily due to rising interest rates.
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 has the ability and intent to hold its fixed maturity investments for a period of time sufficient to allow the Company to recover its costs. The Company has concluded that the gross unrealized losses of $16,121 at December 31, 2007, were temporary in nature. However, facts and circumstances may change which could result in a decline in fair value considered to be other than temporary. The Company did not sell any fixed maturity investment in the year ended December 31, 2007. The Company sold one fixed maturity investment in the year ended December 31, 2006, with net realized gain in the amount of $2,617.
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 allocated expenses of other Unico subsidiaries. On certain reinsurance treaties, Crusader receives a ceding commission from its reinsurer that represents a reimbursement of the acquisition costs related to the premium ceded. No ceding commission is received on facultative, catastrophe, or provisionally rated ceded premium. Policy acquisition costs, net of ceding commission, are deferred and amortized as the related premiums are earned. No significant change in the ratio of policy acquisition cost to net earned premium were noted in the years ended December 31, 2007, 2006 and 2005.
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, the daily automobile rental insurance program, and the earthquake program. Commissions to agents and brokers increased $391,571 (64%) for the year ended December 31, 2007, as compared to the year ended December 31, 2006. The increase is primarily the result of the increase in written premium in the health insurance program and is related to the increase in commission income from that program.
Commissions to agents and brokers decreased $63,474 (9%) for the year ended December 31, 2006, as compared to the year ended December 31, 2005. The decreases is primarily the result of a decrease in premiums written and the related decrease in the commission expense in the health insurance program and the daily automobile rental insurance program.
Income tax expense for the year ended December 31, 2007, was $3,309,844 compared to an income tax expense of $6,359,745 for the year ended December 31, 2006. The effective combined income tax rates for 2007 and 2006 were 33% and 35%, respectively. The pre-tax income decreased $8,230,435 for the year ended December 31, 2007, compared to the year ended December 31, 2006, which resulted in a decreased income tax expense in 2007. The income tax expense for the year ended December 31, 2006, was $6,359,745 compared to an income tax expense of $3,751,426 for the year ended December 31, 2005. The pre-tax income increased $7,687,556 for the year ended December 31, 2006, compared to the year ended December 31, 2005, which resulted in an increased income tax expense in 2006. The effective combined income tax rates for 2006 and 2005 were 35% and 36%, respectively.
The preparation of the Company’s financial statements requires judgments and estimates. The most significant is the estimate of loss reserves as required by Statement of Financial Accounting Standards No. 60 (SFAS No. 60), “Accounting and Reporting by Insurance Enterprises” and Statement of Financial Accounting Standards No. 5 (SFAS No. 5), “Accounting for Contingencies.”
The Company underwrites four statutory annual statement lines of business: (1) commercial multiple peril, (2) liability other than automobile and products, (3) fire, and (4) allied lines. Commercial multiple peril policies comprised 96% and 97% of the Company’s 2007 and 2006 premium volume, respectively. Commercial multiple peril policies include both property and liability coverages. For all of the Company’s coverages and lines of business, the Company’s actuarial loss and loss adjustment expense reserving methods require assumptions that can be grouped into two key categories: (1) expected loss and loss adjustment expense, required by the expected loss ratio and Bornhuetter-Ferguson methods, and (2) expected development patterns, required by the loss development and Bornhuetter-Ferguson methods.
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 past three years. The favorable development in 2005 through 2007 underscores the inherent uncertainty in insurance claims costs, especially for a very small insurer.
The Company’s receivable 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 receivable from reinsurers is regularly reviewed and updated by management as new data becomes available. The Company’s assessment of the collectibility of the recorded amounts receivable from reinsurers is based primarily upon public financial statements and rating agency data. Any adjustments necessary are reflected in then current operations. We evaluate each of our ceded reinsurance contracts at their 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, 2007, all such ceded contracts are accounted for as risk transfer reinsurance.
In accordance with Statement of Financial Accounting Standard No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” the Company is required to classify its investments in debt and equity securities into one of three categories: held-to-maturity, available-for-sale or trading securities.
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, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, 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, health and life 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, unless otherwise indicated. Unico was incorporated under the laws of Nevada in 1969.
The consolidated financial statements include the accounts of Unico American Corporation and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP). As described in Note 13, 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 year balances to conform to the current year presentation.
The Company had unrealized investment gain, net of deferred taxes, of $1,916,154 as of December 31, 2007, and unrealized investment losses, net of deferred taxes, of $216,074 as of December 31, 2006.
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using straight line methods over 3 to 7 years.
Commissions and policy fees due the Company are recognized as income on the effective date of the insurance policies.
As required by law, the Company segregates from its operating accounts the premiums collected from insurers which are payable to insurance companies into separate trust accounts. These amounts are included in cash and short-term investments.
The Company cedes reinsurance to provide for greater diversification of business to allow 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.
Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” establishes standards for the way information about operating segments is reported in financial statements. The Company has identified its insurance company operation as its primary reporting segment. Revenues from this segment comprised 88% of consolidated revenues for the year ended December 31, 2007, 89% of consolidated revenues for the year ended December 31, 2006, and 90% for the year ended December 31, 2005. The Company’s remaining operations constitute a variety of specialty insurance services, each with unique characteristics and individually insignificant to consolidated revenues.
(1) Intersegment revenue eliminations reflect commissions paid by Crusader to Unifax.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), using the modified prospective transition method and, therefore, has not restated results from prior periods. Under this transition method, share-based compensation expense for 2006 includes compensation expense for all share-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation.” Share-based compensation expense for all share-based payment awards granted or modified on or after January 1, 2006, is based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R.
Prior to January 1, 2006, the Company applied the intrinsic-value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations including FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation,” an interpretation of APB Opinion No. 25, to account for its fixed-plan stock options. Under this method, compensation expense was recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. FASB Statement No. 123 (SFAS 123), “Accounting for Stock-Based Compensation,” and FASB Statement No. 148, “Accounting for Stock Based Compensation - Transition and Disclosure,” an amendment of SFAS 123, established accounting and disclosure requirements using a fair-value based method of accounting for stock-based employee compensation plans. As permitted by existing accounting standards, the Company elected to continue to apply the intrinsic-value based method of accounting described above and has adopted only the disclosure requirements of SFAS 123, as amended for applicable periods prior to 2006. In December 2004, FASB Statement No. 123R (SFAS 123R) which revised SFAS 123 was issued and was adopted by the Company in 2006 (see Note 14).
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 SFAS 123R. 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 will be excluded from future periods as a result of the acceleration of the vesting of the options is approximately $89,100. There were no options granted during 2007 and 2006 and there were no unvested options as of January 1, 2006 on adoption of SFAS 123R, as a result, there is no compensation expenses recorded for the years ended December 31, 2006, and December 31, 2007.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (SFAS 157). SFAS 157 provides guidance for using fair value to measure assets and liabilities and applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS No. 157 is not expected to have a material impact on the Company’s consolidated financial statements.
The insurance company operation records a liability for advance premium that represents the written premium on policies that have been submitted to the Company and are bound, billed, and recorded prior to their effective date of coverage. These advance premiums are not included in written premium or the liability for unearned premium.
The following table illustrates the gross unrealized losses included in the Company’s investment portfolio and the fair value of those securities, aggregated by investment category. The table also illustrates the length of time that they have been in a continuous unrealized loss position as of December 31, 2007, and December 31, 2006.
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 at 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.
The following table provides an analysis of the roll-forward of Crusader’s losses and loss adjustment expenses, including a reconciliation of the ending balance sheet liability for the periods indicated:
* In accordance with Financial Accounting Standards Board Statement No. 113, “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts”, reinsurance recoverable on unpaid losses and loss adjustment expenses are reported for GAAP as assets rather than netted against the corresponding liability for such items on the balance sheet.
The aggregate amount of earned premium ceded to the reinsurers was $11,532,308 for the year ended December 31, 2007, $13,758,424 for the year ended December 31, 2006, and $14,234,844 for the year ended December 31, 2005.
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. Ceding commission was $3,547,595 in 2007, $4,376,474 in 2006, and $4,647,748 in 2005. The unpaid losses ceded to the reinsurer are recorded as an asset on the balance sheet.
During the fiscal year ended March 31, 1986, the Company adopted the Unico American Corporation Profit Sharing Plan. Company employees who are at least 21 years of age and have been employed by the Company for at least two years are participants in such Plan. Pursuant to the terms of such 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 the Plan upon retirement, termination of employment, death, or disability.
During the year ended December 31, 1999, the Company adopted the Unico American Corporation Money Purchase Plan. This plan covers the present executive officers of the Company. Pursuant to the terms of such 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. However, amounts contributed to the Unico American Corporation Profit Sharing Plan will be considered first in determining the actual amount available under the Internal Revenue Service maximum contribution limits. 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 the Plan upon retirement, termination of employment, death, or disability.
Crusader is required to file an annual statement with insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory). Statutory accounting practices differ in certain respects from GAAP. The more significant of these differences for statutory accounting are (a) premium income is taken into earnings over the periods covered by the policies, whereas the related acquisition and commission costs are expensed when incurred; (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 NAIC; (c) equity securities are valued by the NAIC as required by Statutory Accounting Principles; d) non-admitted assets are charged directly against surplus; (e) loss reserves and unearned premium reserves are stated net of reinsurance; and (f) 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 10% of statutory surplus; changes in deferred taxes are recorded directly to surplus as regards policyholders. Additionally, the cash flow presentation is not consistent with U.S. generally accepted accounting principles and reconciliation from net income to cash provided by operations is not presented. Comprehensive income is not presented under statutory accounting.
The California Department of Insurance (the insurance department) conducts periodic financial examinations of Crusader. The insurance department has completed a financial examination of Crusader’s December 31, 2004, statutory financial statements. A final report on the examination was issued by the department of insurance on May 10, 2006. No significant issues were reported in the final report.
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, 2007, was 729% of authorized control level risk-based capital.
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 the insurer’s annual statement is performed to confirm that an insurer’s situation calls for increased or close regulatory attention. In 2007, the Company was not outside the usual values on any of the thirteen IRIS ratio tests.
The Company’s 1999 Omnibus Stock Plan that covers 500,000 shares of the Company’s common stock (subject to adjustment in the case of stock splits, reverse stock splits, stock dividends, etc.) was approved by shareholders on June 4, 1999. On August 26, 1999, the Company granted 135,000 incentive stock options. As of December 31, 2007, 92,500 of those options were outstanding and exercisable, 2,500 options had been exercised, and 40,000 options had been terminated. These options expire 10 years from the date of the grant.
On December 18, 2002, the Company granted 182,000 incentive stock options under the Company’s 1999 Omnibus Stock Plan. On December 30, 2005, the Company accelerated the vesting of 37,500 options that were originally scheduled to vest on January 1, 2006, and 30,000 options that were originally scheduled to vest on January 1, 2007 (see Note 1). As of December 31, 2007, 79,750 of those options were outstanding and exercisable, 99,750 options had been exercised, and 2,500 options had been terminated. These options expire 10 years from the date of the grant.
Options exercisable were 124,650 at December 31, 2007, at a weighted average exercise price of $6.065; 172,250 at December 31, 2006, at a weighted average exercise price of $6.407; 268,000 at December 31, 2005, at a weighted average exercise price of $5.286. Aggregate intrinsic value of outstanding and currently exercisable options at December 31, 2007, was $521,660.
The following table summarizes information regarding the stock options outstanding at December 31, 2007:
The Company files income tax returns under U.S. federal and various state jurisdictions. The Company is no longer subject to U.S. federal income tax examination by tax authorities for years before 2003 and state income tax examination for years before 2003. There are no ongoing examinations of income tax returns by federal or state tax authorities.