The Company receives its revenue primarily from earned premium derived from the insurance company operations, 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 generates approximately 86% of the Company’s total revenue. The Company’s remaining operations constitute a variety of specialty insurance services, each with unique characteristics and individually not material to consolidated revenues.
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 costs.
The property and casualty insurance industry is characterized by periods of soft market conditions, in which premium rates are stable or falling and insurance is readily available, and by periods of hard market conditions, in which premium rates rise, coverage may be more difficult to find, and insurers’ profits increase. The Company believes that the California property and casualty insurance market continues to be a “soft market.” The Company cannot determine how long the existing market conditions will continue nor in which direction they might change. Despite the increased competition in the property and casualty marketplace, the Company 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 three key areas of its operations: (1) product development, (2) improved service to retail brokers, and (3) appointment of captive and independent retail agents.
The following table provides an analysis of the losses and loss adjustment expenses:
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 13% in the year ended December 31, 2009, compared to 2008. The decrease is a result of a decrease in the number of members.
AAC provides premium financing for Crusader policies that are produced by Unifax in California. Finance charges and fees earned by AAC during 2009 decreased 20% as compared to 2008. The decrease is primarily a result of a 11% decrease in the number of loans issued in 2009 compared to 2008. The average premium financed by AAC was $2,309 in 2009, $2,653 in 2008 and $2,769 in 2007.
The Company generates revenue from its investment portfolio, which consisted of approximately $137.6 million (at amortized cost) as of December 31, 2009, and $145.0 million (at amortized cost) as of December 31, 2008. Investment income for the twelve months ended December 31, 2009, decreased $1.6 million (27%) as compared to the twelve months ended December 31, 2008. The decrease in investment income was primarily due to a decrease in the Company’s annualized yield on average invested assets to 3.1% in 2009 from 4.0% in 2008. 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 five years or less and with minimal credit risk.
The Company’s investment guidelines on equity securities limit investments in equity securities to an aggregate maximum of $2,000,000. The Company’s investment guidelines on fixed maturities limit those investments to high-grade obligations with a maximum term of eight years. The maximum investment authorized in any one issuer is $2,000,000. This dollar limitation excludes bond premiums paid in excess of par value and U.S. government or U.S. government guaranteed issues. When the Company invests in fixed maturity municipal securities, preference is given to issues that are pre-refunded and secured by U.S. treasury securities. The short-term investments are either U.S. government obligations, FDIC insured, or are in an institution with a Moody's rating of P2 and/or a Standard & Poor's rating of A1. All of the Company's fixed maturity investment securities are rated, readily marketable, and could be liquidated without any materially adverse financial impact.
On March 23, 2009, the Board of Directors declared a cash dividend of $0.18 per common share payable on May 1, 2009, to shareholders of record on April 10, 2009. In addition, on December 7, 2009, the Board of Directors declared a cash dividend of $0.18 per common share payable on December 29, 2009, to shareholders of record on December 17, 2009. Declaration of future cash dividends will be subject to the Company’s profitability and its cash requirements.
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. During the year ended December 31, 2009, the Company repurchased under this program and previously adopted programs an aggregate of 268,111 shares of the Company’s common stock at a cost of $2,447,948 of which $131,756 was allocated to capital and $2,316,192 was allocated to retained earnings. During the twelve months ended December 31, 2008, the Company repurchased under the previously adopted programs an aggregate of 51,092 shares of the Company’s common stock at a cost of $416,583 of which $25,108 was allocated to capital and $391,475 was allocated to retained earnings. As of December 31, 2009, the Company had remaining authority under the 2008 program to repurchase up to an aggregate of 247,356 shares of its common stock. The 2008 program is the only program under which there is remaining authority to repurchase shares of the Company’s common stock. 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 twelve months without the necessity of borrowing funds. There were no trust restrictions on cash and short-term investments at December 31, 2009.
The Company has certain obligations to make future payments under contracts and credit-related financial instruments and commitments. At December 31, 2009, certain long-term aggregate contractual obligations and credit-related commitments are summarized as follows:
The Company had net income of $2,927,375 for the year ended December 31, 2009, compared to net income of $5,283,016 for the year ended December 31, 2008, and net income of $6,712,444 for the year ended December 31, 2007. Total revenue for the year ended December 31, 2009, was $41,617,106 compared to $46,769,444 for the year ended December 31, 2008, and $50,372,895 for the year ended December 31, 2007.
The effect of inflation on the net income of the Company during the years ended December 31, 2009, 2008, and 2007 was not significant.
As of December 31, 2009, Crusader was licensed as an admitted insurance company in the states of Arizona, California, Nevada, Oregon, and Washington and is approved as a non-admitted surplus lines writer in other states.
The Company writes annual policies and, therefore, earns written premium daily over the one-year policy term.
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, 2009, all such ceded contracts are accounted for as risk transfer reinsurance. The earned premium ceded consists of both premium ceded under the Company’s current reinsurance contracts and premium ceded to the Company’s provisionally rated reinsurance contracts.
Crusader’s direct earned premium, earned ceded premium, and ceding commission are as follows:
As indicated in the above table, the loss ratio for the year ended December 31, 2009, increased to 63.5% from 60.7% in 2008 and 59.7% in 2007. The slight increase in the 2009 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. For the year ended December 31, 2009, the provision for insured events of the current year as a percent of net earned premium was 76% as compared to 71% for the years ended December 31, 2008 and 2007, respectively. The Company’s net losses and loss adjustment expenses for the calendar year ended December 31, 2009, were $19,545,761. 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 liability for unpaid loss and loss adjustment expense reserves consists of case reserves and reserves for incurred but not reported (IBNR) claims. Case reserves are established by claims personnel based on a review of the facts known at the time the claim is reported and are subsequently revised as more information about a claim becomes known. IBNR is computed using various actuarial methods and techniques and includes (1) reserves for losses and loss adjustment expenses on claims that have occurred but for which claims have not yet been reported to the Company, and (2) a provision for expected future development on case reserves for information not currently known.
AIB markets health insurance in California through non-affiliated insurance companies for individuals and groups. For these services, AIB receives commission based on the premiums that it writes. Commission income for the year ended December 31, 2009, decreased $227,521 (8%) compared to the year ended December 31, 2008. Commission income for the year ended December 31, 2008, increased $434,132 (19%), compared to the year ended December 31, 2007. The current year decrease is primarily due to the fact that beginning in September 2009, CIGNA substantially reduced the medical plans offered to small group employers in the state of California, from nineteen plans to four. All new employer groups and existing employer groups on their anniversary date will have the option to choose from the four available plans. AIB is assisting its CIGNA policyholders in obtaining new coverage in one of the four CIGNA plans or with other contracted carriers. This reduction in CIGNA medical plans offered to small group employers in the state of California may result in a decrease in AIB commission income and AAQHC fee income. AAQHC will continue to underwrite and administer the remaining four CIGNA medical plans and CIGNA dental plans for individuals and small group employers.
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 is primarily related to the fact that beginning in September 2009, CIGNA substantially reduced the medical plans offered to small group employers in the state of California from nineteen plans to four as previously noted in the health insurance program commission income discussion above. Membership and fee income for the year ended December 31, 2008, decreased $9,498 (3%) compared to the year ended December 31, 2007.
Unifax sells and services insurance policies for Crusader. The policy fee charged to the policyholder by Unifax is recognized as income in the consolidated financial statements. Unifax’s policy fee income is as follows:
Unifax began producing commercial earthquake insurance policies in California for non-affiliated insurance companies in 1999. Unifax receives a commission from these insurance companies based on premium written. Effective February 1, 2009, this program was terminated. Commission income on the earthquake program for the year ended December 31, 2009, decreased $7,682 (94%) compared to 2008 due to the termination of the program effective February 1, 2009. Commission income on the earthquake program for the year ended December 31, 2008, decreased $4,703 (36%) compared to 2007.
AAC provides premium financing for Crusader policies produced by Unifax in California. The growth of this program is dependent and directly related to the growth of Crusader's written premium and AAC’s ability to market its competitive rates and service. Premium finance charges and fees earned decreased $91,137 (20%) in the year ended December 31, 2009, compared to 2008 primarily due to the fact that there were 279 (11%) fewer loans issued in the current year. Premium finance charges and fees earned decreased $93,575 (17%) in the year ended December 31, 2008, compared to 2007 primarily due to the fact that there were 312 (11%) fewer loans issued in the current year. The average premium financed by AAC was $2,309 in 2009, $2,653 in 2008 and $2,769 in 2007. During 2009, 32% of all Unifax policies were financed and 59% of those policies were financed by AAC. During 2008, 28% of all Unifax policies were financed and 81% of those policies were financed by AAC. During 2007, 28% of all Unifax policies were financed and 72% of those policies were financed by AAC.
In the year ended December 31, 2008, the Company’s average invested assets (at amortized value) decreased $1,134,974 (1%) compared to the year ended December 31, 2007. In the year ended December 31, 2008, investment income earned, excluding realized gains, decreased $956,385 (14%) compared to the year ended December 31, 2007. The yield on average invested assets decreased to 4.03% in 2008 from 4.65% in 2007. 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 interest rate environment, management believed it was 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, 2008, was 2.1 years compared to 2.0 years as of December 31, 2007. The Company’s invested assets (at amortized value) as of December 31, 2008, were $145,042,387 as compared to $147,348,367 as of December 31, 2007.
The par value, amortized cost, estimated market value and weighted average yield of fixed maturity investments at December 31, 2009, 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, 2009, the Company had no fixed maturity investments with a gross unrealized loss. The following table summarizes for all fixed maturities in an unrealized loss position at December 31, 2008 and the aggregate fair value and gross unrealized loss by length of time those fixed maturities had been continuously in an unrealized loss.
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 and is not likely that the Company would be required to sell any of its fixed maturity investments prior to recovery of its amortized costs. The Company did not sell any fixed maturity investments in the year ended December 31, 2009. The Company sold one fixed maturity investment in the year ended December 31, 2008, with net realized gain in the amount of $6,306.
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, offset by increases in general salaries and employee benefits costs.
Total salaries and employee benefits incurred for the year ended December 31, 2008, decreased $160,199 (2%) compared to the year ended December 31, 2007. 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 year 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 increased $984,662 (33%) for the year ended December 31, 2009, compared to the year ended December 31, 2008. The increase in other operating expenses is primarily due to an increase in the Company’s bad debt expense, legal fees and the fees charged by the California Department of Insurance for performing its required tri-annual examination of the Company’s insurance subsidiary. The Company’s bad debt expense increased $649,358 for the twelve months ended December 31, 2009, as compared to the prior year, and legal fees increased $199,856 as compared to the prior year, primarily due to a single agent’s failure to remit premiums due Unifax. See “Note 5, Premiums, Commissions and Notes Receivable, Net”.
Income tax expense for the year ended December 31, 2009, was $1,236,603 compared to an income tax expense of $2,701,450 for the year ended December 31, 2008. The effective combined income tax rates for 2009 and 2008 were 30% and 34%, respectively. The decrease in the effective tax rate in 2009 was primarily due to tax adjustments, recorded in the 3 months ended December 31, 2009, related to prior periods which reduced the Company’s income tax expense in the current year by $97,161. The adjustment was the result of recognition of the tax effect of certain deferred items for state income tax purposes. The pre-tax income decreased $3,820,488 (48%) for the year ended December 31, 2009, compared to the year ended December 31, 2008, which resulted in a decreased income tax expense in 2009.
In April 2009, the Financial Accounting Standards Board (“FASB”) issued guidance on “Recognition and Presentation of Other-Than-Temporary Impairments.” This guidance requires entities to separate an other-than-temporary impairment of a debt security into two components when there are credit related losses associated with the impaired debt security for which management asserts that it does not have the intent to sell the security and it is more likely than not that it will not be required to sell the security before recovery of its cost basis. The amount of the other-than-temporary impairment related to a credit loss is recognized in earnings and the amount of the other-than-temporary impairment related to other factors is recorded in other comprehensive income (loss). This guidance was effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this guidance did not materially impact the Company’s consolidated financial condition or results of operations.
In April 2009, the FASB issued guidance on “Interim Disclosures About Fair Value of Financial Instruments.” This guidance requires disclosures about fair value of financial instruments in interim and annual financial statements which is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted this guidance for the interim reporting period ended June 30,2009 and has included required disclosures in the Notes to Consolidated Financial Statements.
In June 2009, the FASB issued guidance which (1) replaces the quantitative-based risks and rewards calculation for determining whether an enterprise is the primary beneficiary in a variable interest entity with an approach that is primarily qualitative, (2) requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity, and (3) requires additional disclosures about an enterprise’s involvement in variable interest entities. This guidance is effective for financial statements issued for fiscal years beginning after November 15, 2009. The adoption of this guidance did not materially impact the Company’s consolidated financial condition or results of operation.
The Company underwrites four statutory annual statement lines of business: (1) commercial multi peril, (2) liability other than automobile and products, (3) fire, and (4) allied lines. Commercial multi peril policies comprised 98% of the Company’s 2009 and 2008 premium volume, respectively, and 96% of the Company’s 2007 premium volume. Commercial multi 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 losses and loss adjustment expenses required by the expected loss ratio and Bornhuetter-Ferguson methods, and (2) expected development patterns required by the loss development and Bornhuetter-Ferguson methods.
The following tables provide the effect of reinsurance on the Company’s financial statements:
*There were no catastrophe losses incurred during the period covered by this table.
The Company’s reinsurance strategy is to reduce volatility in its expected loss and loss adjustment expense results by protecting the Company against liabilities in excess of certain retentions, including major or catastrophic losses that may occur from any one or more of the property and/or casualty risks which it insures. On an annual basis, or sooner if warranted, the Company evaluates whether any changes to its retention, participation, or retained limits are necessary.
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 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, 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.
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008, and 2007
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
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, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
Long-Term Certificates of Deposit - The carrying amounts reported in the balance sheet for these instruments approximate their fair values.
Level 1 - Financial assets and financial liabilities whose values are based on unadjusted quoted prices in active markets for identical assets.
Level 2 - Financial assets and financial liabilities whose values are based on quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in non-active markets; or valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.
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. 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,” 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 statement 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 had unrealized investment gains, net of deferred taxes of $2,742,160 as of December 31, 2009, and unrealized investment gains, net of deferred taxes of $4,904,873 as of December 31, 2008.
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using straight line methods over three to seven years.
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, 2009, 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 reinsurance recoverables. No such allowance was considered necessary at December 31, 2009 or 2008.
ASC 280 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 86% of consolidated revenues for the year ended December 31, 2009, 87% of consolidated revenues for the year ended December 31, 2008, and 88% for the year ended December 31, 2007. The Company’s remaining operations constitute a variety of specialty insurance services, each with unique characteristics and individually insignificant to consolidated revenues.
Effective January 1, 2006, the Company adopted ASC 718, “Compensation - Stock Compensation Topic” using the modified prospective transition method. 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 estimated grant-date fair value. 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 this accounting standard.
In April 2009, the FASB issued guidance on “Determining Fair Value When Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are Not Orderly.” Under this guidance, if an entity determines that there has been a significant decrease in the volume and level of activity for the asset or the liability in relation to the normal market activity for the asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect fair value. In addition, if there is evidence that the transaction for the asset or liability is not orderly, the entity shall place little, if any, weight on that transaction price as an indicator of fair value. This guidance is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this guidance did not materially impact the Company’s consolidated financial condition or results of operations.
In April 2009, the FASB issued guidance on “Interim Disclosures About Fair Value of Financial Instruments.” This guidance requires disclosures about fair value of financial instruments in interim and annual financial statements and is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted this guidance for the interim reporting period ended June 30, 2009.
In June 2009, the FASB issued guidance which (1) replaces the quantitative-based risks and rewards calculation for determining whether an enterprise is the primary beneficiary in a variable interest entity with an approach that is primarily qualitative, (2) requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity, and (3) requires additional disclosures about an enterprise’s involvement in variable interest entities. This guidance is effective for financial statements issued for fiscal years beginning after November 15, 2009. The adoption of this guidance did not materially impact the Company’s consolidated financial condition or results of operations.
At December 31, 2009, the Company had no fixed maturity investments with a gross unrealized loss. The following table summarizes for all fixed maturities in an unrealized loss position at December 31, 2008 the aggregate fair value and gross unrealized loss by length of time those fixed maturities have been continuously in an unrealized loss.
Depreciation is computed using straight line methods over three to seven years.
One of the Company’s agents that was recently appointed to help the Company get its Trucking Program started failed to pay the net premium and policy fees due Unifax, the exclusive general agent for Crusader. The agent was initially late in paying its February 2009 production that was due to Unifax on April 15, 2009. In May 2009, as a result of the agent’s failure to timely pay its balance due to Unifax, the Company terminated its agency agreement and assumed ownership and control of that agent’s policy expirations written with the Company. The agent has not paid any subsequent premium to Unifax. The Company subsequently commenced legal proceedings against the agent and the agent’s guarantors for recovery of the balance due and any related recovery costs incurred. All related recovery costs have been expensed as incurred. As of December 31, 2009, the agent’s balance due to Unifax was $1,484,039. Based on the limited information presently available, the Company increased the bad debt reserve established by approximately $150,000 in the fourth quarter of 2009. Thus, the bad debt reserve for this agent as of December 31, 2009, is $654,885, which represents approximately 44% of the current balance due to Unifax. The Company’s bad debt reserve is subject to change as more information becomes available.
Bad debt expense for the year ended December 31, 2009, 2008 and 2007, was $655,797, $6,439 and $15,253, respectively. Premium finance notes receivable represent the balance due to the Company's premium finance subsidiary from policyholders who elected to finance their premiums over the policy term. These notes are net of unearned finance charges.
* In accordance with ASC 944, 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 consolidated balance sheet.
The following table provides an analysis of the roll forward of Crusader’s deferred policy acquisition costs:
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, 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 total rent expense under this lease agreement was $1,066,990 for the years ended December 31, 2009 and 2008, and $1,056,730 for the year ended December 31, 2007.
The 2007 through 2009 excess of loss treaties do not provide for a contingent commission. Crusader’s 2006 1st layer primary excess of loss treaty provides for a contingent commission equal to 20% of the net profit, if any, accruing to the reinsurer. The first accounting period for the contingent commission covers the period from January 1, 2006, through December 31, 2006. The 2005 excess of loss treaties do not provide for a contingent commission. Crusader’s 2004 and 2003 1st layer primary excess of loss treaties provide for a contingent commission to the Company equal to 45% of the net profit, if any, accruing to the reinsurer. The first accounting period for the contingent commission covers the period from January 1, 2003, through December 31, 2004. For each accounting period as described above, the Company will calculate and report to the reinsurers its net profit (excluding incurred but not reported losses), if any, within 90 days after 36 months following the end of the first accounting period, and within 90 days after the end of each 12-month period thereafter until all losses subject to the agreement have been finally settled. Any contingent commission received is subject to return based on future development of ceded losses and loss adjustment expenses. As of December 31, 2009, the Company has received a total net contingent commission of $3,108,324 for the years subject to contingent commission. Of this amount, the Company has recognized $1,686,380 of contingent commission income, of which $766,651 was recognized in the year ended December 31, 2009. The remaining balance of the net payments received of $1,421,944 is currently unearned and included in “Accrued Expenses and Other Liabilities” in the consolidated balance sheets. The unearned contingent commission maybe subsequently earned or returned to the reinsurer depending on the future development of the ceded IBNR for the years subject to contingent commission.
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, 2009, all such ceded contracts are accounted for as risk transfer reinsurance.
Crusader is restricted in the amount of dividends it may pay to its parent in any twelve month period without prior approval of the Insurance Department of Insurance. Presently, without prior approval, Crusader may pay a dividend in any twelve month period to its parent equal to the greater of (a) 10% of Crusader's statutory policyholders' surplus or (b) Crusader's statutory net income for the preceding calendar year. Based on Crusader’s statutory net income for the year ended December 31, 2009, the maximum dividend that could be made by Crusader to Unico without prior regulatory approval in 2010 is $6,255,381. In the year ended December 31, 2009, Crusader paid to Unico cash dividends in the amount of $7,000,000. There were no dividends paid by Crusader to Unico in 2008 and 2007.
On December 18, 2002, the Company granted 182,000 incentive stock options under the Company’s 1999 Omnibus Stock Plan. As of December 31, 2009, there were 64,650 of those options outstanding and exercisable, 114,850 options had been exercised, and 2,500 options had been terminated. These options expire 10 years from the date of the grant.
Aggregate intrinsic value of outstanding and currently exercisable options at December 31, 2009, was $464,834.
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 of certain deferred items for state income tax purposes. Had this adjustment been made at the beginning of the earliest period presented in the accompanying consolidated financial statements, 2008 and 2007 income tax expense would have increased by approximately $23,000 and $36,000, respectively . The impacts on 2008 total stockholders’ equity as of December 31, 2008, 2007 and 2006 would have been an increase of $106,000, $129,000 and $165,000, respectively. The Company made an assessment of the materiality of this item on the Company’s historical financial statements in accordance with SAB No. 99, “Materiality,” and concluded that the error was immaterial to all periods.
The deferred tax income or expense related to the unrealized gains on securities classified as available-for-sale in the current period was $1,114,125 deferred tax income for the year ended December 31, 2009, $1,539,643 deferred tax expense for the year ended December 31, 2008 and $1,098,422 deferred tax expense for the year ended December 31, 2007.
(1) As discussed in Note 15, in the quarter ended December 31, 2009, the Company recorded a tax adjustment to correct for an error that originated in a prior period. This tax adjustment increased fourth quarter 2009 net income by $97,000 and basic and diluted earnings per share by $.02. Had this adjustment been made at the beginning of the earliest period presented in the table above, the impact on net income and earnings per share for all periods other than fourth quarter 2009 would have been 1% or less and less than $.01 per share. The Company made an assessment of the materiality of this item on the Company’s historical financial statements in accordance with SAB No. 99, “Materiality,” and APB No. 28, and concluded that the error was immaterial to all periods.