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, 2011, 2010, and 2009. The Company intends to relocate its offices and is currently looking to purchase an office building for that purpose. While this process takes place, the Company has entered into a new one-year lease at its current location and will occupy approximately half of the space it currently leases. The new lease provides for an annual gross rent of $486,000 and is effective from April 1, 2012, through March 31, 2013, with options to extend for three 6-month periods at the same terms and conditions for each extension period. The Company anticipates that it will incur approximately $180,000 for tenant improvements and other costs required to downsize its current space. The Company believes that at the inception the lease agreement, at each subsequent extension of that lease and the new lease agreement effective April 1, 2012, the terms of the lease are at least as favorable to the Company as could have been obtained from non-affiliated third parties.
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 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.
Losses and loss adjustment expenses were 54% of net premium earned for the year ended December 31, 2011, compared to 66% of net premium earned for the year ended December 31, 2010, and compared to 64% of net premium earned for the year ended December 31, 2009.
Unifax sells and services insurance policies for Crusader. The commissions paid by Crusader to Unifax are eliminated as intercompany transactions and are not reflected as income in the financial statements. Policy fee income for the 12 months ended December 31, 2011, decreased 8% as compared to the prior year. The decrease in policy fee income is a result of a decrease in the number of policies issued during the 12 months ended December 31, 2011, as compared to 2010.
The termination of the marketing and administrative agreement with CIGNA has resulted in a decrease in AIB commission income and AAQHC fee income. AIB’s commission income decreased approximately 27% for the year ended December 31, 2011, as compared to 2010. AAQHC membership and fee income decreased 26% for the year ended December 31, 2011, compared to 2010. The decrease is primarily a result of the termination of the administrative agreement with CIGNA as discussed above.
The Company generates revenue from its investment portfolio, which consisted of approximately $128.0 million (at amortized cost) as of December 31, 2011, and $129.8 million (at amortized cost) as of December 31, 2010. Investment income for the 12 months ended December 31, 2011, decreased $594,305 (17%) as compared to the 12 months ended December 31, 2010. The decrease in investment income was primarily due to a decrease in the Company’s annualized yield on average invested assets to 2.3% in 2011 from 2.6% in 2010. 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.
As of December 31, 2011, the weighted average maturity of the Company’s fixed maturity investments was .9 years compared to 1.3 years and 1.7 years as of December 31, 2010, and December 31, 2009, respectively.
The Company reported net cash used by operating activities for each of the years ended December 31, 2011, 2010 and 2009. A primary reason for cash being used by operating activities for these years is declining written premium, declining commission and fee income and a decline in investment income. The decrease in written premium is primarily due to the continuing competitive insurance marketplace with fewer policies being written. The Company believes that rate adequacy is more important than premium growth and that underwriting profit is its primary goal. The decline in investment income is a result of the continued low yields in the marketplace on both new and reinvested assets. Cash used in operating activities in 2011, was $1,073,100 compared to cash used of $5,885,624, in 2010, a decrease in the amount of cash used of $4,812,524. This decrease in cash used in operations was primarily due to a decrease in loss and loss adjustment expense payments in 2011 of $6,142,513, which were offset in part by an increase in cash used of approximately $902,000 by the Company’s premium finance subsidiary, AAC, due to increased premium financing resulting from its 0% financing incentive program. 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, 2011, the Company had only 588 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, 2011, all of the Company’s investments are in U.S. treasury securities, FDIC insured certificates of deposit and money market funds. The Company’s investments in U.S treasurey securities and money market funds are readily marketable. The weighted average maturity of the Company’s investments is approximately 0.9 years.
The Company is required to classify its investment securities into one of three categories: held-to-maturity, available-for-sale, or trading securities. Although all of the Company's investment in fixed maturity securities are classified as available-for-sale and while 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.
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, 2011.
Total revenue for the year ended December 31, 2011, was $34,576,701, as compared to $37,120,751 for the year ended December 31, 2010, and $41,617,106 for the year ended December 31, 2009. This represents a decrease of $2,544,050 (7%) for the 2011 year compared to the 2010 year and $4,496,355 (11%) for the 2010 year compared to the 2009 year. The Company had net income of $3,739,876 for the year ended December 31, 2011, $2,329,152, for the year ended December 31, 2010, and $2,927,375 for the year ended December 31, 2009. This represents an increase of $1,410,724 (61%) for the 2011 year compared to the 2010 year, and a decrease of $598,223 (20%) for the 2010 year compared to the 2009 year.
Crusader’s primary line of business is commercial multi-peril policies. This line of business represented approximately 98% of Crusader’s total written premium for the years ended December 31, 2011, 2010, and 2009.
Although Crusader is presently only selling insurance policies in the state of California, as of December 31, 2011, 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.
In the year ended December 31, 2011, premium earned before reinsurance decreased $3,507,176 (10%) to $32,072,262 compared to $35,579,438 for the year ended December 31, 2010. 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. The decrease in earned premium before reinsurance in both 2011 and 2010 is a direct result of the decrease in written premium in 2011 and 2010, respectively.
In 2011 Crusader retained a participation in its excess of loss reinsurance treaties of 10% in its 1st layer ($500,000 in excess of $500,000), 5% in its 2nd layer ($1,000,000 in excess of $1,000,000), and 0% in its property and casualty clash treaty.
The 2007 through 2011 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, 2011, the Company has received a total net contingent commission of $3,643,758 for the years subject to contingent commission. Of this amount, the Company has recognized $2,842,157 of contingent commission income, of which $518,301 was recognized in the year ended December 31, 2011. The remaining balance of the net payments received of $801,601 is currently unearned and included in “Accrued Expenses and Other Liabilities” in the consolidated balance sheets. The unearned contingent commission may be 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, 2011, 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.
As reflected in the above table, the amount of favorable development recognized during the year ended December 31, 2011, increased $274,279 (6%) to $4,842,458 from $4,568,179 in 2010. The amount of favorable development recognized during the year ended December 31, 2010, increased $612,626 (15%) to $4,568,179 from $3,955,553 in 2009. The favorable development in the above table is not necessarily indicative of the results that may be expected in future periods.
The Company’s net loss and loss adjustment expense reserve was $46,512,179 as of December 31, 2011. Since underwriting profit is a significant part of income, a small percentage change in reserve estimates may result in a substantial effect on future reported earnings. Such changes might result from a variety of factors, including claims costs emerging in a different pattern than the average historical development patterns. Considering the continuum of possible development patterns, none of which is necessarily more or less likely than the next, the Company must consider the varying probabilities that the development pattern is off in varying degrees. If future development ultimately ends up being five percent different than the Company’s 2011 net reserve, approximately $2.4 million would be reflected in future periods as an increase or decrease in the provision for events of prior years and would be recognized in the Company’s Consolidated Statements of Operations in future periods. A variance of five percent of net loss and loss adjustment expense reserve is not an unlikely scenario. If future development ultimately ends up being ten percent different than the Company’s 2011 net reserve, approximately $4.7 million would be reflected in future periods as an increase or decrease in the provision for events of prior years and would be recognized in the Company’s Consolidated Statements of Operations in future periods. A variance of ten percent of net loss and loss adjustment expense reserve is not an unlikely scenario. Differences of more than ten percent are also possible, though not quite as likely as differences of ten percent or less.
Membership and fee income for the year ended December 31, 2011, decreased $56,051 (26%) compared to the year ended December 31, 2010. Membership and fee income for the year ended December 31, 2010, decreased $49,764 (19%) compared to the year ended December 31, 2009. The decrease for each of the years presented is a result of a decrease in the number of association members primarily as a result of the decrease in sales of CIGNA medical and dental plans and to the termination of the administrative agreement with CIGNA in 2010 as previously discussed .
Policy fee income for the year ended December 31, 2010, decreased $128,753 (6%) as compared to the year ended December 31, 2009. The 6% decrease in policy fee income is primarily a result of a 955 (8%) decrease in the number of policies issued during 2010 as compared to 2009.
The daily automobile rental insurance program commission income for the year ended December 31, 2011, decreased $56,287 (19%) compared to the year ended December 31, 2010. For the year ended December 31, 2010, commission income decreased $39,220 (12%) compared to the year ended December 31, 2009. Premium written in 2011 decreased 19% compared to premium written in 2010. Premium written in 2010 decreased 11% compared to premium written in 2009. The daily automobile rental insurance program continues to be impacted by the intense price competition in the marketplace and the slow economic recovery during the periods covered by this report. The Company cannot determine how long the existing market conditions will continue, nor in which direction they might change. To avoid underwriting losses for the non-affiliated insurance company that it represents, Bedford continues to produce business only at rates that it believes to be adequate.
The insurance premium financing operation currently finances policies written only through its sister company, Unifax. Consequently, AAC’s growth is primarily dependent on the growth of Crusader and Unifax business. Effective July 20, 2010, AAC reduced the interest rate charged on premiums financed to 0% in an effort to increase the sales of existing renewal and new business written by Unifax for Crusader. Due to the low interest rate environment, the cost of money to provide this incentive is not material. The Company monitors the cost of providing this incentive, and depending on the cost/benefit determination, can continue to offer it or withdraw it at any time. Primarily due to the 0% financing, premium finance charges and fees earned decreased $205,836 (74%) in the year ended December 31, 2011, compared to 2010. Premium finance charges and fees earned decreased $92,548 (25%) in the year ended December 31, 2010, compared to 2009, primarily due to the reduction of interest charged on premiums financed to 0% effective July 20, 2010. The reduction in the interest rate that AAC charges on premiums financed has increased the number of new loans issued by 729, (30%) during 2011 compared to 2010. The average premium financed by AAC was $2,817 in 2011, $2,304 in 2010 and $2,309 in 2009. During 2011, 38% of all Unifax policies were financed and 80% of those policies were financed by AAC. During 2010, 33% of all Unifax policies were financed and 67% of those policies were financed by AAC. During 2009, 32% of all Unifax policies were financed and 59% of those policies were financed by AAC.
In the year ended December 31, 2011, the Company’s average invested assets (at amortized value) decreased $4,778,190 (4%) compared to the year ended December 31, 2010. In the year ended December 31, 2011, investment income earned, excluding realized gains, decreased $594,305 (17%) compared to the year ended December 31, 2010. The yield on average invested assets decreased to 2.25% in 2011 from 2.61% in 2010. 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, 2011, was 0.9 years compared to 1.3 years as of December 31, 2010. The Company’s invested assets (at amortized value) as of December 31, 2011, were $128,042,147 as compared to $129,766,929 as of December 31, 2010.
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 then current interest rate environment, management believed it was 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.
Other income included in Insurance Company Revenues and Insurance Company Operations for the year ended December 31, 2011, increased $477,491 (68%) to $1,184,804, compared to $707,313 for the year ended December 31, 2010. The increase in other income is primarily related to the settlement of a provisionally rated reinsurance treaty with General Reinsurance Corporation during the quarter ended September 30, 2011, resulting in income recognition of $626,073. The provisional liability settlement was offset by a decrease of $119,176 (19%) in the contingent commission the Company recognized on the Company’s 2003, 2004 and 2006 excess of loss reinsurance treaties. Other income miscellaneous items decreased $29,406 compared to the prior year.
Other income included in Insurance Company Revenues and Insurance Company Operations for the year ended December 31, 2010, decreased $138,515 (16%) to $707,313 compared to $845,828 for the year ended December 31, 2009. The decrease was primarily the result of a $129,174 decrease (17%) in the contingent commission the Company recognized in 2010 on the Company’s 2003, 2004 and 2006 excess of loss reinsurance treaties. Other income miscellaneous items decreased $9,341 compared to the prior year.
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.
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 2011, 2010 and 2009 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 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, 2011, all such ceded contracts are accounted for as risk transfer reinsurance.
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 a greater amount of actual loss data available for each accident year.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2011,
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010, and 2009
The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income security whose carrying value may be other-than-temporarily impaired. For each fixed income security in an unrealized loss position, the Company assesses whether it is more likely than not that the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes, or the credit quality of the underlying security. If a security meets this criteria, the security's decline in fair value is considered other than temporary and is recorded as a net realized investment loss, included in the Consolidated Statements of Operations and the Consolidated Statements of Comprehensive Income based on the specific identification method. There were no realized investments gains (losses) for any of the periods presented in the accompanying 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.
Short term investments include U.S. treasury bills, U.S. treasury money market fund and bank money market and savings accounts which are all highly rated and redeemable within one year.
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.)
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.
The liability for unpaid losses and loss adjustment expenses is based upon the accumulation of individual case estimates for losses reported prior to the close of the accounting period plus estimates based on experience and industry data for development of case estimates and for incurred but unreported losses and loss adjustment expenses.
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, 2011 or 2010.
The insurance company operation is conducted through the Company’s wholly owned subsidiary Crusader Insurance Company (Crusader), which as of December 31, 2011, was licensed as an admitted insurance carrier in the states of Arizona, California, Nevada, Oregon, and Washington. Crusader is a multi-line property and casualty insurance company, which began transacting business on January 1, 1985. For the year ended December 31, 2011, 98% of Crusader’s business was commercial multi-peril (CMP) insurance policies. CMP policies provide a combination of property and liability coverage for businesses. Commercial property coverage insures against loss or damage to buildings, inventory and equipment from natural disasters, including hurricanes, windstorms, hail, water, explosions, severe winter weather, and other events such as theft and vandalism, fires and storms and financial loss due to business interruption resulting from covered property damage. However, Crusader does not write earthquake coverage. Commercial liability coverage insures against third party liability from accidents occurring on the insured’s premises or arising out of its operations, such as injuries sustained from products sold or the operation of the insured’s premises. In addition to CMP policies, Crusader also writes separate policies to insure commercial property and commercial liability risks on a mono-line basis.
In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirement in U.S. GAAP and IFRSs” (ASC 820). The new standard does not extend the use of fair value but, rather, provides guidance about how fair value should be applied where it already is required and permitted under IFRS or U.S. GAAP. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS 13. The new guidance is effective on a prospective basis for interim and annual periods beginning after December 15, 2011, with early adoption not permitted. In the period of adoption, a reporting entity will be required to disclose a change, if any, in valuation technique and related inputs that result from applying the new standard and to quantify the total effect, if practicable. The adoption of the new standard will not have a material impact on the Company’s consolidated financial statements.
In October 2010, the FASB issued ASU 2010-26, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts” (ASC 944). The new standard modifies the types of policy acquisition costs that can be capitalized and are eligible for deferral. Specifically, the new guidance limits deferrable costs to those that are incremental direct costs of contract acquisition and certain costs related to acquisition activities performed by the insurer, such as underwriting, policy issuance and processing, inspection costs and broker commissions. The ASU defines incremental direct costs as those costs that result directly from and were essential to the contract acquisition and would not have been incurred absent the acquisition. Accordingly, under the new guidance, deferrable acquisition costs are limited to costs related to successful contract acquisitions. Acquisition costs that are not eligible for deferral are to be charged to expense in the period incurred. The new guidance is effective for interim periods and annual fiscal years beginning after December 15, 2011, and may be applied prospectively or retrospectively. The Company completed its evaluation and assessment using the prospective method to implement this new standard and believes adoption of the standard will not have a material impact on the Company’s consolidated financial statements.
There have been no other accounting standards issued in 2011 that are expected to have a material impact on the Company’s consolidated financial statements.
At December 31, 2011 and 2010, the Company had no fixed maturity investments with a gross 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 it 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 years ended December 31, 2011, 2010 or 2009.
The estimated carrying values of the Company’s financial instruments as of December 31, 2011 and 2010 allocated among the three levels mentioned above are as follows:
One of the Company’s agents that was appointed in 2008 to assist the Company to implement its Trucking Program, 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 corporation, its principals (who personally guaranteed the agent’s obligations), and another individual for the recovery of the balance due and any related recovery costs incurred. All related recovery costs have been expensed as incurred. As of December 31, 2011, the agent’s balance due to Unifax was $1,495,226. Based on the information presently available, the Company has a bad debt reserve established of $1,101,835 which represents approximately 74% of the current balance due to Unifax. The Company’s bad debt reserve is subject to change as more information becomes available.
The Company’s loss and loss adjustment expense reserves are as follows:
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 2009 through 2011 underscores the inherent uncertainty in insurance claims costs, especially for a very small insurer.
The lease commitment provides for the following minimum annual rental commitments:
Likewise, the Company is sometimes named as a cross-defendant in litigation, which is principally directed against an insured 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.
In June 2010, the Company completed its search for a new policy administration software system to replace its existing legacy system, and the Company signed related contracts on July 8, 2010. The Company had discussions and negotiations with the vendor over concerns about the vendor’s delay in the implementation of the system and the system’s functionality. As a result of the vendor’s inability to resolve the issues related to the software’s operation and functionality, the Company unilaterally rescinded the contracts and abandoned the implementation of that vendor’s software. In the year ended December 31, 2011, the Company expensed all capitalized work-in-progress costs paid to date of $80,038 and cancelled the remaining unpaid capitalized balance of approximately $1.6 million due the vendor. The Company renewed its search for a new policy administration software system.
In 2011 Crusader retained a participation in its excess of loss reinsurance treaties of 10% in its 1st layer ($500,000 in excess of $500,000), 5% in its 2nd layer ($1,000,000 in excess of $1,000,000), and 0% in its property and casualty clash treaty. The Company evaluates each of its ceded reinsurance contracts at its inception to determine if there is a sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting literature. As of December 31, 2011, all such ceded contracts are accounted for as risk transfer reinsurance.
The California Department of Insurance (the insurance department) conducts periodic financial examinations of Crusader. The insurance department completed a financial examination of Crusader’s December 31, 2008, statutory financial statements. A final report on the examination was issued by the insurance department on October 22, 2009. No significant issues were reported in the final report.
Crusader is restricted in the amount of dividends it may pay to its parent in any 12-month period without prior approval of the insurance department. Presently, without prior approval, Crusader may pay a dividend in any 12-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 surplus for the year ended December 31, 2011, the maximum dividend that could be made by Crusader to Unico without prior regulatory approval in 2012 is $6,727,703. In the years ended December 31, 2011, 2010 and 2009, Crusader paid to Unico cash dividends in the amount of $1,250,000, $4,250,000 and $7,000,000, respectively.
In December 1993, the 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, 2011, was 1,018% of authorized control level risk-based capital.
The Company’s 1999 Omnibus Stock Plan that covered 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. This plan terminated in accordance with its terms in March 2009. As of December 31, 2011, options to purchase up to 25,396 shares of common stock were outstanding and exercisable under the 1999 Plan.
The exercise price, term and other conditions applicable to each stock option granted under the 2011 Plan are determined by the Company’s compensation committee of the Board of Directors. The exercise price of the stock options is set on the grant date and may not be less than the fair market value per share of the Company’s stock on that date (at market close). Options granted under the 2011 Plan in 2011 become exercisable over a ten year period and expire ten years after the date of the grant. The options granted in 2011 vest 10% as of the grant date and 10% annually thereafter on the anniversary date.
The fair value of each option award is estimated on the date of the grant using the Black-Scholes Option-Pricing Model using a number of complex and subjective variables. These variables include expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, a risk-free interest rate and expected dividends. The weighted average fair value per option granted in the year ended December 31, 2011, was $2.53.
The average assumptions used to value each option award in the year ended December 31, 2011 are as follows.
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price and the exercise price, multiplied by the number of in the money options) that would have been received by the option holders had all options been exercised on December 31, 2011. The aggregate intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009 was $87,441, $165,096 and $0, respectively. During the years ended December 31, 2011, 2010 and 2009, the amount of cash received from the exercise of stock options was $23,641, $77,599 and $0, respectively. There were no options exercised in 2009.
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, 2011, the Company repurchased 1,124 shares of the Company’s common stock in unsolicited private transactions at a cost of $10,959, of which $553 was allocated to capital and $10,406 was allocated to retained earnings. As of December 31, 2011, the Company had remaining authority under the 2008 program to repurchase up to an aggregate of 246,232 shares of its common stock. The 2008 program is the only program under which there is authority to repurchase shares of the Company’s common stock. The Company has retired all stock repurchased.
Summarized unaudited quarterly financial data for each of the calendar years 2011 and 2010 is as follows: