The Company’s net income was $2,329,152 in 2010, $2,927,375 in 2009, and $5,283,016 in 2008.
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 has concerns about the basis for the vendor’s delay in the implementation of the system and about the new system’s expected functionality. The Company is working with the vendor to resolve the issues and to renegotiate the contracts. As of December 31, 2010, the Company had capitalized work-in-progress software in the amount of $1,500,162 of which $1,431,917 remained unpaid.
Losses and loss adjustment expenses were 66% of net premium earned for the year ended December 31, 2010, compared to 64% of net premium earned for the year ended December 31, 2009, and compared to 61% of net premium earned for the year ended December 31, 2008.
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, 2010, decreased 6% 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, 2010, as compared to 2009.
There have been significant changes in the Company’s health insurance operation in 2010. In 2010, approximately 61% of the Company’s health insurance income was derived from the CIGNA medical and dental programs. This represents a decline from 76% in 2009 and 82% in 2008. In September 2009, CIGNA substantially reduced the medical plans offered to small group employers in the state of California from 19 plans down to 4 plans. Primarily as a result of CIGNA’s decision to reduce the number of plans offered, AIB decided to terminate its marketing and administrative agreement with CIGNA effective August 31, 2010. On September 1, 2010, AIB stopped marketing all CIGNA products. AAQHC, An Administrator, ceased administration of CIGNA dental plans effective November 1, 2010 and CIGNA medical plans effective December 1, 2010. AIB is assisting the AAQHC members in obtaining medical and dental coverage with other contracted carriers. These carriers are paying AIB commissions for these members. AIB has developed a new partnership with Guardian Life Insurance Company of America (GLIC). Effective October 1, 2010, AIB has been marketing GLIC’s dental and group life products to both brokers and the public. GLIC has created plans specifically for AIB.
As of December 31, 2010, the weighted average maturity of the Company’s fixed maturity investments was 1.3 years compared to 1.7 years and 2.1 years as of December 31, 2009, and December 31, 2008, respectively.
Due to the nature of the Company's business (insurance and insurance services) and whereas Company growth does not normally require material reinvestments of profits into property or equipment, the cash flow generated from operations usually results in improved liquidity for the Company. Because the Company is a holding company and operates through its subsidiaries, its cash flow is dependent upon the earnings of its subsidiaries and the distributions of those earnings to the Company.
The investment marketplace in general, and in certain asset classes specifically, has been impacted by volatility as a result of uncertainty in the credit markets that began in 2007 and continued throughout 2010. The Company’s fixed maturity (amortized cost) investment portfolio as of December 31, 2010, consisted of 78% U.S. treasury securities and 22% certificates of deposit.
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. Crusader's statutory capital and surplus as of December 31, 2009, was $62,553,813, a decrease of $2,182,417 (3%) from December 31, 2008. In the years ending December 31, 2010 and 2009, Crusader issued cash dividends of $4,250,000 and $7,000,000, respectively, to Unico, its parent and sole shareholder. These dividends were primarily used to fund the cash dividends paid by Unico to its shareholders, to repurchase and retire shares of Unico common stock and for general corporate purposes. No dividends were declared or paid by Crusader to Unico in 2008. Based on Crusader’s statutory surplus for the year ended December 31, 2010, the maximum dividend that could be made by Crusader to Unico without prior regulatory approval in 2011 is $6,252,096.
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, 2010, the Company did not repurchase any stock under this program. As of December 31, 2010, 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 retired all stock repurchased.
The Company has certain obligations to make future payments under contracts and credit-related financial instruments and commitments. At December 31, 2010, certain long-term aggregate contractual obligations and credit-related commitments are summarized as follows:
For the year ended December 31, 2010, the Company had income before taxes of $3,220,581 compared to income before taxes of $4,163,978 for the year ended December 31, 2009, a decrease of $943,397 (23%) in income before taxes. The decrease in income before taxes was primarily due to a decrease of $1,216,453 in the underwriting profit, a decrease of $833,543 in investment income and a decrease in other insurance revenues of $893,987, which were partially offset by a reduction in operating expenses of $2,147,142.
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, 2010, 2009, and 2008.
As of December 31, 2010, 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.
Earned ceded premium for the 12 months ended December 31, 2010, decreased $1,849,172 (20%) to $7,427,236 compared to $9,276,407 for the 12 months ended December 31, 2009. Earned ceded premium for the 12 months ended December 31, 2009, increased $505,338 (6%) to $9,276,407 compared to $8,771,069 for the 12 months ended December 31, 2008. Earned ceded premiums as a percentage of direct earned premiums were 21% in 2010, 23% in 2009, and 21% for 2008.
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, 2010, 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.
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 covered 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, 2010, the Company has received a total net contingent commission of $3,668,199 for the years subject to contingent commission. Of this amount, the Company has recognized $2,323,858 of contingent commission income, of which $637,477 was recognized in the year ended December 31, 2010. The remaining balance of the net payments received of $1,344,341 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 changes in the ratio of earned ceded premium to direct earned premium is primarily due to changes in ceded reinsurance rates charged by reinsurers and changes in the level of Crusader’s participation.
As reflected in the above table, 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 amount of favorable development recognized during the year ended December 31, 2009, increased $398,752 (11%) to $3,955,553 from $3,556,801 in 2008. The favorable development in the above table is not necessarily indicative of the results that may be expected in future periods.
Any reduction in losses and loss adjustment expenses from redundancies in the Company’s December 31, 2010, 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 5 of the Company’s 26 years. Since the Company’s net earned premium in 2010 was $28,152,202, a difference between the accident year 2010 actual and current expected loss and loss adjustment expense ratios of only five percentage points will ultimately impact losses and loss adjustment expenses by $1,407,610. 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 10 of the Company’s 26 years. A difference of ten percentage points on accident year 2010 will ultimately impact losses and loss adjustment expenses by $2,815,220. 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 19 of the Company’s 26 years. A twenty percentage point difference between the accident year 2010 actual and the current expected loss and loss adjustment expense ratios will ultimately impact losses and loss adjustment expenses by $5,630,440. In addition, accident years 2009 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 2010.
The Company’s net loss and loss adjustment expense reserve was $49,743,381 as of December 31, 2010. 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 2010 net reserve, approximately $2.5 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 2010 net reserve, approximately $5 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.
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, 2010, decreased $593,484 (23%) compared to the year ended December 31, 2009. Commission income for the year ended December 31, 2009, decreased $227,521 (8%), compared to the year ended December 31, 2008. The decrease in commission income in 2010 and 2009 is primarily due to the decrease in commission income from the sales of CIGNA medical and dental plans. There had been significant changes in the Company’s health insurance operation in 2010. In 2010, approximately 61% of the Company’s health insurance income was derived from the CIGNA medical and dental programs. This represents a decline from 76% in 2009 and 82% in 2008. In September 2009, CIGNA substantially reduced the medical plans offered to small group employers in the state of California from 19 plans down to 4 plans. Primarily as a result of CIGNA’s decision to reduce the number of plans offered, AIB decided to terminate its marketing and administrative agreement with CIGNA effective August 31, 2010. On September 1, 2010, AIB stopped marketing all CIGNA products. AAQHC, An Administrator, ceased administration of CIGNA dental plans effective November 1, 2010 and CIGNA medical plans effective December 1, 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 is assisting the AAQHC members in obtaining medical and dental coverage with other contracted carriers. These carriers are paying AIB commissions for these members. AIB has developed a new partnership with Guardian Life Insurance Company of America (GLIC). Effective October 1, 2010, AIB has been marketing GLIC’s dental and group life products to both brokers and the public. GLIC has created plans specifically for AIB.
The daily automobile rental insurance program commission income for the year ended December 31, 2010, decreased $36,861 (9%) compared to the year ended December 31, 2009. For the year ended December 31, 2009, commission income decreased $2,114 (1%) compared to the year ended December 31, 2008. The daily automobile rental insurance program commission income, excluding contingent commission, decreased $39,220 (12%) to $297,095 in 2010 from $336,315 in 2009. The daily automobile rental insurance program commission income, excluding contingent commission, decreased $9,035 (3%) to $336,315 in 2009 from $345,350 in 2008. Premium written in 2010 decreased 11% compared to premium written in 2009. Premium written in 2009 and 2008 were comparable. 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.
Unifax began producing commercial earthquake insurance policies in California for non-affiliated insurance companies in 1999. Unifax received a commission from these insurance companies based on premium written. Effective February 1, 2009, this program was terminated.
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 $92,548 (25%) in the year ended December 31, 2010, compared to 2009. 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 during the 2009 year. The average premium financed by AAC was $2,304 in 2010, $2,309 in 2009 and $2,653 in 2008. 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. During 2008, 28% of all Unifax policies were financed and 81% of those policies were financed by AAC.
In the year ended December 31, 2009, the Company’s average invested assets (at amortized value) decreased $4,874,920 (3%) compared to the year ended December 31, 2008. In the year ended December 31, 2009, investment income earned, excluding realized gains, decreased $1,564,265 (27%) compared to the year ended December 31, 2008. The yield on average invested assets decreased to 3.06% in 2009 from 4.03% in 2008. 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, 2009, was 1.7 years compared to 2.1 years as of December 31, 2008. The Company’s invested assets (at amortized value) as of December 31, 2009, were $137,598,527 as compared to $145,042,387 as of December 31, 2008.
At December 31, 2010 and 2009 the Company had no fixed maturity investments with a gross unrealized loss.
Policy acquisition costs consist of commissions, premium taxes, inspection fees, and certain other underwriting costs that are directly related to and vary with the production of Crusader insurance policies. These costs include both Crusader expenses and allocated expenses of other Unico subsidiaries. On certain reinsurance treaties, Crusader receives a ceding commission from its reinsurer that represents a reimbursement of the acquisition costs related to the premium ceded. No ceding commission is received on facultative, catastrophe, or provisionally rated ceded premium. Policy acquisition costs, net of ceding commission, are deferred and amortized as the related premiums are earned. No significant change in the ratio of policy acquisition cost to net earned premium were noted in the years ended December 31, 2010, 2009 and 2008.
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 the result of a decrease in the number of employees as compared to the prior year and the retirement of the former chief executive of the Company on April 1, 2009, and the effect of the adjustment on the quarter ended March 31, 2010, to reduce the Company’s annual contribution to the employee profit sharing plan for the plan year ending March 31, 2010, by approximately $249,000 (See Note 13).
Commissions to agents/brokers (not including commissions on Crusader policies that are reflected in policy acquisition costs) are generally related to gross commission income from the health insurance program, the daily automobile rental insurance program, and the earthquake program. Commissions to agents and brokers decreased $451,926 (41%) for the year ended December 31, 2010, as compared to the year ended December 31, 2009. 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 $190,034 (15%) for the year ended December 31, 2009, as compared to the year ended December 31, 2008. 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.
Other operating expenses increased $984,662 (33%) for the year ended December 31, 2009, compared to the year ended December 31, 2008. The Company’s bad debt expense increased $649,358 for the year ended December 31, 2009, as compared to the year ended December 31, 2008, and legal fees increased $199,856 as compared to December 31, 2008, primarily due to a single agent’s failure to remit premiums due Unifax. See “Note 6, Premiums, Commissions and Notes Receivable, Net.”
Income tax expense for the year ended December 31, 2009, was $1,236,603 compared to 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 October 2010, the FASB issued a new standard to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. Costs that meet the definition defined in the new standard are recognized as assets and referred to as deferred acquisition costs. Deferred acquisition costs are amortized over time using amortization methods dependent upon the nature of the underlying insurance product. Other costs that do not vary with and are not primarily related to the acquisition of new and renewal insurance contracts are charged to expense as incurred. The new standard will be effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011. The Company is in the process of evaluating the impact of adoption on the Company’s consolidated financial statements.
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 2010, 2009 and 2008 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.
At the end of each fiscal quarter, the Company’s reserves are re-evaluated for each accident year (i.e., for all claims incurred within each year) by a committee consisting of the Company’s president and the Company’s chief financial officer. It is also reviewed by an independent consulting actuary. The Company uses the loss ratio method, Bornhuetter-Ferguson methods and loss development methods to estimate ultimate claims costs. In general the loss ratio method is more appropriate for the current accident year, the loss development methods are more appropriate for the older more mature accident years, and the Bornhuetter-Ferguson methods combine the other two methods. The estimates of the loss ratio method and the Bornhuetter-Ferguson incurred method have not been significantly different on the current accident year at recent valuation dates through 2009. During 2010 the actual emerged claims cost for the current accident year are higher than expected, hence the incurred but not reported (IBNR) estimate from Bornhuetter-Ferguson incurred method is greater than the IBNR estimate from the loss ratio method. Management reviews such differences to determine whether they are aberrations that are a normal part of the process or an indication that a change in reserve assumptions is appropriate. In this case management has recognized the adverse experience observed in 2010 as one of the normal differences between actual and expected claim costs that can emerge from time to time, particularly in an insurer the size of the Company and does not believe a that a change in assumptions to estimate the ultimate claims costs for the current accident year to be appropriate.
There have been no changes in key assumptions of estimating future loss and loss adjustment payments. The changes in estimates of prior accident year incurred losses and loss adjustment expenses are attributed to the passage of time and the greater amount of actual loss data available for each accident year.
The effect of reinsurance on losses and loss adjustment expenses are as follows:
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. Loss and loss adjustment expense reserves are determined separately on both a direct basis and a net of reinsurance basis, and the ceded reserves are determined by subtraction. Therefore, reinsurance recoverable is determined in a manner consistent with the associated loss reserves. There have been no recent changes in key assumptions underlying the estimation of loss and loss adjustment expense reserves, and no changes are anticipated. Paid losses and loss adjustment expenses ceded are determined by the terms of the individual treaties. We continually monitor and evaluate the collectability of reinsurance recoverable to determine if any allowance is 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 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.
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2010, 2009, and 2008
Long-term certificates of deposit - The carrying amounts reported at cost in the balance sheet for these instruments approximate their fair values.
The Company and its wholly owned subsidiaries file consolidated federal and state income tax returns. Pursuant to the tax allocation agreement, two of the Company’s subsidiaries, Crusader and American Acceptance Corporation are allocated taxes, or tax credits in the case of losses, at current corporate rates based on their own taxable income or loss. The Company is subject to examination by U.S. federal income tax authorities for tax returns filed starting at taxable year 2007 and California state income tax authorities for tax returns filed starting at taxable year 2006. There are no ongoing examinations of income tax returns by federal or state tax authorities.
As required by law, the Company segregates from its operating accounts the premiums collected from insureds 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, 2010 and 2009, 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.
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 87% of consolidated revenues for the year ended December 31, 2010, 86% of consolidated revenues for the year ended December 31, 2009, and 87% for the year ended December 31, 2008. The Company’s remaining operations constitute a variety of specialty insurance services, each with unique characteristics and individually insignificant to consolidated revenues.
At December 31, 2010, the Company’s reinsurance recoverable on paid and unpaid losses and loss adjustment expenses of $11,865,191 was as follows:
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 ASC 718, “Compensation - Stock Compensation” using the modified prospective transition method.
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 year ended December 31, 2010 and 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.
The estimated carrying values of the Company’s financial instruments as of December 31, 2010 and 2009 allocated among the three levels mentioned above are 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, broker or dealer quotations, or alternative pricing sources in active markets for identical assets with reasonable levels of price transparency. Long-term certificates of deposit are classified within Level 2. Fair value measurements are not adjusted for transaction costs.
The above table includes work-in-process for software development of $1,500,162 of which $1,431,917 is unpaid.
One of the Company’s agents that was appointed in 2008 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 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, 2010, the agent’s balance due to Unifax was $1,495,226. Based on the information presently available, the Company increased the bad debt reserve established by approximately $450,000 in the year ended December 31, 2010, from the reserve balance established at December 31, 2009, of approximately $651,835. Thus, the bad debt reserve for this agent as of December 31, 2010, is $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.
Bad debt expense for the year ended December 31, 2010, 2009 and 2008, was $460,068, $655,797 and $6,439, respectively.
Reserves for losses and loss adjustment expenses before reinsurance for each of Crusader’s lines of business were as follows:
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, 2010, the Company has received a total net contingent commission of $3,668,199 for the years subject to contingent commission. Of this amount, the Company has recognized $2,323,858 of contingent commission income, of which $637,477 was recognized in the year ended December 31, 2010. The remaining balance of the net payments received of $1,344,341 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 21% in 2010, 23% in 2009 and 21% in 2008.
The Unico American Corporation Money Purchase Plan covers the present executive officers 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.
The Company’s Profit Sharing Plan and Money Purchase Plan expenses were as follows:
In the quarter ended March 31, 2010, the Company recorded an adjustment to correct an error that originated in the fourth quarter of 2009. The effect of the adjustment on the year ended December 31, 2010, was a reduction to salaries and employee benefit expenses of approximately $249,000 and an increase to net income of approximately $164,000. The correction was the result of a decision made in March 2010 to reduce the Company’s annual contribution to the employee profit sharing plan for the plan year ending March 31, 2010. Had this accrual adjustment been properly reflected in the fourth quarter of 2009, total stockholders’ equity as of December 31, 2009, and net income for the year ended December 31, 2009, would have increased approximately $164,000. The Company made an assessment of the materiality of this item on the Company’s historical consolidated financial statements in accordance with SAB No. 99, “Materiality,” and concluded that the error was immaterial to all periods.
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, 2010, the maximum dividend that could be made by Crusader to Unico without prior regulatory approval in 2011 is $6,252,096. In the years ended December 31, 2010 and 2009, Crusader paid to Unico cash dividends in the amount of $4,250,000 and $7,000,000, respectively. There were no dividends paid by Crusader to Unico in 2008.
Aggregate intrinsic value of outstanding and currently exercisable options at December 31, 2010, was $221,741.
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 $252,989 deferred tax benefit for the year ended December 31, 2010, a $1,114,125 deferred tax benefit for the year ended December 31, 2009, and a $1,539,643 deferred tax expense for the year ended December 31, 2008.
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, 2010, the Company did not repurchase any shares of common stock under this program. 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. As of December 31, 2010, 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 retired all stock repurchased.
Summarized unaudited quarterly financial data for each of the calendar years 2010 and 2009 is as follows.
As discussed in Note 16, the Company recorded a tax adjustment to correct for an error that originated in a prior period. This effect of the tax adjustment in the quarter ended December 31, 2009, was an increase to net income of approximately $97,000 and increased basic and diluted earnings per share by $.02.