The Company’s net income was $3,739,876 in 2011, $2,329,152 in 2010, and $2,927,375 in 2009.
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 87% 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.
The property and casualty insurance industry is highly competitive and includes many insurers, ranging from large companies offering a wide variety of products worldwide to smaller, specialized companies in a single state or region offering only a single product. Many of the Company's existing or potential competitors have considerably greater financial and other resources, have a higher rating assigned by independent rating organizations such as A.M. Best Company, have greater experience in the insurance industry and offer a broader line of insurance products than the Company. As of December 31, 2011, Crusader was licensed as an admitted insurance carrier in the states of Arizona, California, Nevada, Oregon, and Washington. Since 2004, all of Crusader’s business was written in the state of California. During the year ended December 31, 2011, 98% of Crusader’s business was commercial multi-peril policies. In December of 2011, A.M. Best Company reaffirmed Crusader’s financial strength rating of A- (Excellent) and a rating outlook of “stable.” In addition, Crusader was assigned an Issuer Credit Rating of a- (Excellent).
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inability to resolve the issues related to the software’s operation and functionality, the Company unilaterally rescinded the contracts and abandoned the implementation effort with that vendor. 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 has renewed its search for a new policy administration software system.
The insurance premium financing operation currently finances policies written only through its sister company, Unifax. 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 interest rate reduction, finance charges and fees earned by AAC in 2011 decreased 74% as compared to 2010. The average premium financed by AAC was $2,817 in 2011, $2,304 in 2010 and $2,309 in 2009.
The daily automobile rental insurance program is produced by Bedford Insurance Services, Inc. Bedford receives a commission from a non-affiliated insurance company based on premium written. Commission in the daily automobile rental insurance program decreased 16% in 2011 as compared to 2010. The decrease in commission income is a result of a decrease in the number of policies issued and in-force during the 12 months ended December 31, 2011, as compared to 2010.
Crusader generates a significant amount of cash as a result of its holdings of unearned premium reserves, its reserves for loss payments, and its capital and surplus. Crusader's loss and loss adjustment expense payments are the most significant cash flow requirement of the Company. These payments are continually monitored and projected to ensure that the Company has the liquidity to cover these payments without the need to liquidate its investments. Cash and investments (at amortized cost) of the Company at December 31, 2011, were $128,509,233 compared to $129,812,139 at December 31, 2010. Crusader's cash and investments were 99% and 98% of the total cash and investments held by the Company as of December 31, 2011 and 2010, respectively.
Crusader's statutory capital and surplus as of December 31, 2011, was $67,277,035, an increase of $4,756,077 (8%) from December 31, 2010. Crusader's statutory capital and surplus as of December 31, 2010, was $62,520,958, a decrease of $32,855 (less than 1%) from December 31, 2009. In the years ending December 31, 2011 and 2010, Crusader issued cash dividends of $1,250,000 and $4,250,000, respectively, to Unico, its parent and sole shareholder. These dividends were primarily used for general corporate purposes in 2011. In 2010 the dividends were used primarily to fund the cash dividends paid by Unico to its shareholders and for general corporate purposes. 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.
During the year ended December 31, 2011, no cash dividends were declared or issued to shareholders. Declaration of future cash dividends will be subject to the Company’s profitability and its cash requirements.
The Company has certain obligations to make future payments under contracts and credit-related financial instruments and commitments. At December 31, 2011, certain long-term aggregate contractual obligations and credit-related commitments are summarized as follows:
For the year ended December 31, 2011, gross written premium as reported on the Company’s statutory statement was $32,054,590 compared to $32,697,971, for the year ended December 31, 2010, a decrease of $643,381 (2%). The decline in written premium in 2011 of 2% was an improvement compared to the 16% decline in written premium in 2010. The modest improvement in results was primarily due to improved insurance products and increased marketing efforts. However, the continued year over year decline in written premium, although it appears to be slowing, reflects the continued competition in the Company’s commercial property casualty lines of business, weak economic growth in the state of California and in the nation and management’s continued emphasis on rate adequacy and underwriting discipline.
For the year ended December 31, 2010, gross written premium was $32,697,971 compared to $38,900,176 for the year ended December 31, 2009, a decrease of $6,202,205 (16%). The decline in written premium in 2010 of 16% compared to 2009, primarily reflects the then continuing and increasing price competition in the Company’s commercial property casualty insurance lines of business as well as corrective action management implemented on two of its problematic programs that were contributing higher than expected losses. This action resulted in reducing the number of brokers authorized to write that particular program from 85 to 15. These two programs accounted for approximately 32% of the $6,202,205 decrease in written premium before reinsurance in 2010. This action reinforces the Company’s belief that rate adequacy is more important than premium growth and that underwriting profit is its primary goal.
Earned ceded premium for the 12 months ended December 31, 2011, decreased $2,078,917 (28%) to $5,348,319 compared to $7,427,236 for the 12 months ended December 31, 2010. Earned ceded premium for the 12 months ended December 31, 2010, decreased $1,849,171 (20%) to $7,427,236 compared to $9,276,407 for the 12 months ended December 31, 2009. Earned ceded premiums as a percentage of direct earned premiums were 17% in 2011, 21% in 2010, and 23% for 2009. The decrease in earned ceded premium is partially a result of a decrease in direct premium earned and due to decreases in the rates charged by Crusader’s reinsurers. The decrease in the reinsurer’s rates is primarily due to changes in both the Company’s retention and participation in its reinsurance treaties.
In 2010, 2009 and 2008 Crusader retained a participation in its excess of loss reinsurance treaties of 20% 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 0% in its property and casualty clash treaty. 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 clash treaty. 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 clash treaty. 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 clash treaty.
Losses and loss adjustment expenses and loss ratio are as follows:
As indicated in the above table, the loss ratio for the year ended December 31, 2011, decreased to 53.8% from 65.6% in 2010 and 63.5% in 2009. The decrease in the 2011 loss ratio was primarily due to a decrease in the provision for insured events of the current year as a percent of net earned premium. For the year ended December 31, 2011, the provision for insured events of the current year as a percent of net earned premium was 72% as compared to 82% for the year ended December 31, 2010, and 76% for the year ended December 31, 2009, respectively.
The current accident year losses of 72% of earned premium for the year ended December 31, 2011, are within the range of expected loss and loss expense ratios. In 2010, the current accident year loss ratio of 82% was outside of the expected range and was primarily a result of the losses recorded due to an unexpectedly high number of property claims reported in 2010 on one of the Company’s relatively new programs. Management took immediate corrective action on that program and the program’s loss ratio has improved during the past year. Management expects the program’s loss ratio will continue to improve over time. The Company’s sales in that program, which include both property and liability coverage, began in July 2008.
Any reduction in losses and loss adjustment expenses from redundancies in the Company’s December 31, 2011, reserves over actual future payments, and/or any additional losses and loss adjustment expenses from actual future payments that exceed the Company’s reserves, will be recognized in the consolidated statements of operations of future accounting periods. The Company’s current expected loss and loss adjustment expense ratio assumption closely approximates the Company’s historical average loss and loss adjustment expense ratio. The difference between the Company’s current expected loss and loss adjustment expense ratio assumption and the actual loss and loss adjustment expense ratio for a given accident year will ultimately result in a dollar change (either higher or lower) that is a multiple of the earned premium for that year. The actual loss and loss adjustment expense ratio has been within five percentage points of the current expected loss and loss adjustment expense ratio in 6 of the Company’s 27 years. Since the Company’s net earned premium in 2011 was $26,723,943, a difference between the accident year 2011 actual and current expected loss and loss adjustment expense ratios of only five percentage points will ultimately impact losses and loss adjustment expenses by $1,336,197. The actual loss and loss adjustment expense ratio has been within ten percentage points of the current expected loss and loss adjustment expense ratio in 11 of the Company’s 27 years. A difference of ten percentage points on accident year 2011 will ultimately impact losses and loss adjustment expenses by $2,672,394. The actual loss and loss adjustment expense ratio has been within twenty percentage points of the current expected loss and loss adjustment expense ratio in 20 of the Company’s 27 years. A twenty percentage point difference between the accident year 2011 actual and the current expected loss and loss adjustment expense ratios will ultimately impact losses and loss adjustment expenses by $5,344,788. In addition, accident years 2010 and prior are also still developing. Future development on those years might either offset or add to any future development that emerges on accident year 2011.
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, 2011, decreased $525,798 (27%) compared to the year ended December 31, 2010. Commission income for the year ended December 31, 2010, decreased $593,484 (23%), compared to the year ended December 31, 2009.
The decrease in commission income in 2011 and 2010 is primarily the result of significant changes in the Company’s health insurance operation in 2010. On September 30, 2010, AIB discontinued marketing CIGNA medical and dental plans and on December 1, 2010, AAQHC, ceased administration of all CIGNA medical and dental plans. The CIGNA plans had accounted for approximately 56% of the Company’s health insurance income in 2010. The termination of the marketing and administrative agreement with CIGNA has resulted in a decrease in AIB commission income and AAQHC fee income. Effective October 1, 2010, AIB developed a new partnership with Guardian Life Insurance Company of America (GLIC). AIB began marketing, to brokers and to the public, GLIC’s dental and group life products that were created specifically for AIB. In 2011, approximately 34% of health insurance commission is from Guardian products. The decrease in commission income in 2011 and 2010 that is primarily related to the decrease in commission income from the sales of CIGNA medical and dental plans was approximately $1,085,431 (100%) in 2011 and approximately $828,085 (43%) in 2010. The decrease in commission income from the cancellation of the CIGNA programs was partially offset by an increase in commission income from the sales of the GLIC products and the other individual and group health insurance products marketed by the Company. Commission income from the Company’s other products was $1,407,490 in 2011; $847,857 in 2010; and $613,256 in 2009, respectively, resulting in an increase of approximately $559,633 (66%) in 2011 and $234,601 (38%) in 2010. The Company is continuing efforts to add additional contracted carriers in order to diversify its product offerings and to attract additional individual and group accounts.
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. Unifax also receives non-refundable policy fee income that is directly related to the Crusader policies it sells. For financial statement reporting purposes, policy fees are earned ratably over the life of the related insurance policy. The unearned portion of the policy fee is recorded as a liability on the balance sheet under “Accrued Expenses and Other Liabilities.” The earned portion of 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:
Policy fee income for the year ended December 31, 2011, decreased $151,671 (8%) as compared to the year ended December 31, 2010. The 8% decrease in policy fee income is primarily a result of a 639 (6%) decrease in the number of policies issued during 2011 as compared to 2010.
The par value, amortized cost, estimated market value and weighted average yield of fixed maturity investments at December 31, 2011, 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, 2011 and 2010 the Company had no fixed maturity investments with a gross unrealized loss.
No securities were sold at a loss during 2011 or 2010.
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.
Other Income from insurance company revenues and other insurance operations $1,184,804 $707,313 $845,828
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. The ratio of policy acquisition cost to net earned premium has increased each year presented compared to the prior year primarily as a result of the continued decline in net earned premium. Policy acquisition costs have decreased, but at a slightly lower rate than earned premiums have declined which has resulted in the increase in the ratio.
Total salaries and employee benefits incurred for the year ended December 31, 2011, increased $17,500 (0%) compared to the year ended December 31, 2010.
Total salaries and employee benefits incurred for the year ended December 31, 2010, decreased $883,063 (17%) compared to the year ended December 31, 2009. 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, 2010, and was offset by increases in general salaries and employee benefits costs.
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 and the daily automobile rental insurance program. Commissions to agents and brokers decreased $412,767 (65%) for the year ended December 31, 2011, as compared to the year ended December 31, 2010. The decrease is primarily due to the decrease in written premium in the health insurance program and the decrease in commission income from that program. Commissions to agents and brokers decreased $451,926 (41%) for the year ended December 31, 2010, as compared to the year ended December 31, 2009. The decrease is also primarily due to the decrease in written premium in the health insurance program and the decrease in commission income from that program.
Other operating expenses generally do not change significantly with changes in production. This is true for both increases and decreases in production. Other operating expenses decreased $393,804 (12%) for the year ended December 31, 2011, compared to the year ended December 31, 2010. The decrease in other operating expenses is primarily due to a decrease of approximately $457,000 in the Company’s bad debt expense in 2011 compared to 2010.
Income tax expense for the year ended December 31, 2011, was $2,010,292 compared to income tax expense of $891,429 for the year ended December 31, 2010. The effective combined income tax rates for 2011 and 2010 were 35% and 28%, respectively. The increase in income tax expense was primarily due to an increase in pre-tax income of $2,529,687 (79%) to $5,750,168 in the year ended December 31, 2011, compared to pre-tax income of $3,220,581 in the year ended December 31, 2010. The income tax expense incurred in 2010 included the recognition of a decrease in the percentage of undistributed dividends subject to California franchise tax that reduced the Company’s deferred tax liability by approximately $143,000. Excluding the adjustment to the deferred tax expense, the effective tax rate would have been 35% and 32% for the years ended December 31, 2011 and 2010, respectively.
Management believes the Company’s current critical accounting policies comprise the following:
The Company must estimate its ultimate losses and loss adjustment expenses using a very small claim population size. At the beginning of 2011, the Company had 584 open claim files. During 2011, 1,032 new claim files were opened and 1,028 claim files were closed, leaving 588 open claim files at the end of 2011. Due to the small size of the Company and the related small population of claims, the Company’s losses and loss adjustment expenses for any accident year can vary significantly from the initial expectations. Due to the small number of claims, changes in claim frequency and/or severity can materially affect the Company’s reserve estimate. The potential variability from management’s best estimate cannot be measured from any meaningful statistical basis due to the numerous uncertainties in the claims reserving process and the small population of claims.
The differences between actual and expected claims costs are typically not due to one specific factor but to a combination of many factors such as the period of time between the initial occurrence and the final settlement of the claim, current and perceived social and economic inflation, and many other economic, legal, political, and social factors. Because of these and other factors, actual loss and loss adjustment expense payments should be expected to vary, perhaps significantly, from any estimate made prior to the settling of all claims. Any adjustments to reserves are reflected in the operating results of the periods in which they are made. Management believes that the aggregate reserves for losses and loss adjustment expenses are reasonable and adequate to cover the cost of claims, both reported and unreported.
Changes in ceded paid and unpaid losses and loss adjustment expenses $3,830,227 $4,763,986 $3,301,130
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 (loss),” which is a separate component of stockholders’ equity, net of any deferred tax effect. When a decline in the value of a fixed maturity is considered other-than-temporary, a loss is recognized in the Consolidated Statements of Operations. Realized gains and losses are included in the Consolidated Statements of Operations based on the specific identification method.
Consolidated Statements of Operations for the years ended December 31, 2011, 2010, and 2009
We have audited the accompanying consolidated balance sheets of Unico American Corporation and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Unico American Corporation and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.
All of the Company’s fixed maturity investments are classified as available-for-sale and are stated at fair value, with unrealized gains and losses, net of applicable deferred income taxes, excluded from earnings and credited or charged to a separate component of equity. Although all of the Company's investments are classified as available-for-sale and the Company may sell investment securities from time to time in response to economic and market conditions, its investment guidelines place primary emphasis on buying and holding high-quality investments to maturity. Interest income on fixed maturity investments and short-term investments are recognized on an accrual basis at each measurement date and are included in net investment income in the Company’s Consolidated Statements of Operations.
As of December 31, 2011, the Company had no unrecognized tax benefits and no additional liabilities or reduction in deferred tax asset. In addition, the Company had not accrued interest and penalties related to unrecognized tax benefits. However, if interest and penalties would need to be accrued related to unrecognized tax benefits, such amounts would be recognized as a component of federal income tax expense.
(1) As required by law, the Company segregates from its operating accounts the premiums collected from insured’s which are payable to insurance companies into separate trust accounts. These amounts are included in cash and short-term investments. In the years ended December 31, 2011 and 2010, the Company’s receivables from insurance policies exceeded its premiums payable to insurance companies; therefore, there were no trust restrictions on cash and short-term investments.
(2) Included in fixed maturity investments are statutory deposits assigned to and held by the California State Treasurer and the Insurance Commissioner of the State of Nevada. These deposits are required for writing certain lines of business in California and for admission in states other than California.
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, 2011, all such ceded contracts are accounted for as risk transfer reinsurance.
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 89% of consolidated revenues for the year ended December 31, 2011, 87% of consolidated revenues for the year ended December 31, 2010, and 86% for the year ended December 31, 2009. The Company’s remaining operations constitute a variety of specialty insurance services, each with unique characteristics and individually insignificant to consolidated revenues.
In 2011 and 2010, 100% of Crusader’s gross premium written was derived from California. In 2011, approximately 34% of the $1,407,490 commission income from the Company’s health insurance program was from Guardian Life Insurance Company of America (GLIC) dental and group life plan programs. In 2010, approximately 56% of the $1,933,288 commission income from the Company’s health insurance program was from CIGNA medical and dental plan programs.
At December 31, 2011, the Company’s reinsurance recoverable on paid and unpaid losses and loss adjustment expenses of $8,034,964 was as follows:
In December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05”. The new standard indefinitely defers the requirement in ASU 2011-05 to present reclassification adjustments from other comprehensive income to net income on the face of the financial statements. During the deferral period, entities will still need to comply with the existing requirements for the presentation of reclassification adjustments. The amendment is effective for annual reporting periods beginning after December 15, 2011. The adoption of the new standard will not have a material impact on the Company’s consolidated financial statements
A summary of net investment and related income is as follows:
The Company’s fixed maturity investments, excluding long-term certificates of deposit, are all classified within Level 1 of the fair value hierarchy because they are valued using unadjusted quoted market prices. Long-term certificates of deposit are classified within Level 2. Fair value measurements are not adjusted for transaction costs.
Included in the above table for the year ended December 31, 2010, is work-in-process for software development in the amount of $1,500,162 of which $1,431,917 was unpaid. During the year ended December 31, 2011, the unpaid balance due the vendor associated with the implementation of a new policy administration system was not paid due to the vendor’s inability to resolve the issues related to the software’s operation and functionality. The Company expensed all capitalized work-in-progress costs paid to date (see Note 11).
Bad debt expense for the year ended December 31, 2011, 2010 and 2009, was $11,465, $460,068 and $655,797, respectively.
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 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 2007 through 2010 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.
Earned reinsurance ceded premium as a percentage of direct earned premium was 17% in 2011, 21% in 2010 and 23% in 2009.
The Unico American Corporation Money Purchase Plan covers the present executive officers of the Company and an employee of a subsidiary of the Company. Pursuant to the terms of this plan, the Company annually contributes to the account of each participant an amount equal to a percentage of the participant's eligible compensation as determined by the Board of Directors. 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 this plan upon retirement, termination of employment, death, or disability.
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 4 or more financial ratio values outside the usual range are analyzed in order to identify those companies that appear to require immediate regulatory action. Subsequently, a more comprehensive review of the ratio results and an insurer’s annual statement is performed to confirm that an insurer’s situation calls for increased or close regulatory attention. In 2011, the Company was outside the usual value of one of the 13 IRIS ratio tests. IRIS ratio test No. 6 considers the Company’s 2011 investment yield. An unusual value for that ratio is equal to or over 6.5% or equal to or less than 3%. Crusader’s 2011 investment yield was 2.3%.
The Unico American Corporation 2011 Incentive Stock Plan covers 200,000 shares of the Company’s common stock (subject to adjustment in the case of stock splits, reverse stock splits, stock dividends, etc.) and was approved by shareholders on May 26, 2011. During the year ended December 31, 2011, options to purchase 91,240 shares of common stock were granted under the 2011 plan to one non-executive employee and 9,124 of these shares are currently vested and exercisable.
No options were granted during the year ended December 31, 2010. The Company granted no options to non-employees during the years ended December 31, 2011 and 2010.
As of December 31, 2011, options to purchase an aggregate of 116,636 shares of common stock were outstanding under the 1999 and 2011 Plans, of which 34,520 were vested and exercisable.
The Company recognized stock-based compensation expense in the amount of $30,676 and $0 for all awards issued under the Company’s 2011 Stock Option plan in the salaries and employee benefits line item in the consolidated statements of operations in the year ended December 31, 2011 and 2010, respectively. As of December 31, 2011, there was $200,356 of total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock-based payments which are expected to be recognized over a weighted average remaining period of 8.67 years.
The following table summarizes stock option activity for year ended December 31, 2011:
Exercise Price Number of Options Outstanding Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price of Outstanding Options Number of Options Exercisable Weighted Average Exercise Price of Exercisable Options
The deferred tax benefit or expense related to the change in unrealized gains on securities classified as available-for-sale in the current period was a $665,296 deferred tax benefit for the year ended December 31, 2011, a $252,989 deferred tax benefit for the year ended December 31, 2010, and a $1,114,125 deferred tax expense for the year ended December 31, 2009.