This Management's Discussion and Analysis
(“MD&A”) is intended to provide an understanding of the Company’s financial condition and results of
operations by focusing on changes in certain key measures from year to year. This MD&A should be read in conjunction with
the Company’s consolidated financial statements and notes thereto. This discussion contains forward-looking
statements that involve risks and uncertainties. The Company’s actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors, including those discussed elsewhere in this
Annual Report on Form 10-K, particularly in Item 1A – “Risk Factors.”
Unico American Corporation is an insurance holding
company. Currently, the Company’s subsidiary Crusader Insurance Company (“Crusader”) underwrites commercial property
and casualty insurance, the Company’s subsidiaries Unifax Insurance Systems, Inc. (“Unifax”) and American Insurance
Brokers, Inc. (“AIB”) provide marketing and various underwriting support services related to property, casualty, health
and life insurance, the Company’s subsidiary American Acceptance Company (“AAC”) provides insurance premium financing,
and the Company’s subsidiary Insurance Club, Inc., dba AAQHC, an Administrator (“AAQHC”) provides membership
association services.
Total revenues for the year ended December 31,
2020, were $32,560,111 compared to $31,372,814 for the year ended December 31, 2019, an increase of $1,187,297. The Company’s
net loss for the year ended December 31, 2020 was $21,491,113 compared to net loss of $3,115,703 for the year ended December 31,
2019.
Repeated and sustained underwriting losses in
Crusader’s Apartments & Commercial Buildings vertical and growth in the Transportation vertical, a product which is generally
known for its difficulty to be underwritten profitably, coupled with changes in market conditions, caused Crusader’s management
to reevaluate the assumptions used in its process for estimating loss and loss adjustment expense reserves. This reevaluation resulted
in a $9,399,547 increase in Crusader’s IBNR reserves, net of reinsurance, which was a primary contributor to the $12,066,793
increase in losses and loss adjustment expenses of $34,642,920 recognized for the twelve months ended December 31, 2020 compared
to $22,576,127 recognized for the twelve months ended December 31, 2019.
Another significant contributor to the Company’s
increased net loss for the year ended December 31, 2020 was an increase in income tax expense of $3,681,785 during the twelve months
ended December 31, 2020, due primarily to an increase in the valuation allowance related to deferred tax assets on federal net
operating losses.
This overview discusses some of the relevant
factors that management considers in evaluating the Company's performance, prospects and risks. It is not all inclusive and is
meant to be read in conjunction with the entirety of the MD&A, the Company's consolidated financial statements and notes thereto,
and all other items contained within this Annual Report on Form 10-K.
As a result of the ongoing coronavirus (“COVID-19”)
pandemic, economic uncertainties have arisen, which negatively impacted and may continue to negatively impact the fair value of
investments, day to day administration of the Company’s business and the Company’s results of operations, financial
condition and prospects.
The effects of the ongoing COVID-19 pandemic were a major contributor to the variability in fair value
of the Company’s fixed income and equity investments during the twelve months ended December 31, 2020, and the economic
uncertainty caused by the pandemic may lead to further investment valuation volatility. In addition, the recent decline in investment
yields resulted in lower reinvestment rates, compared to the previous years, which will cap the Company’s investment portfolio’s
ability to generate higher levels of investment income, absent a larger invested asset base or a change in investment philosophy.
Although the COVID-19 pandemic did not have
a material impact on Crusader’s overall gross written premium (direct and assumed written premium before cessions to reinsurers
under reinsurance treaties) during the twelve months ended December 31, 2020, Crusader has experienced a decrease in new business
submissions and renewals related to the pandemic in its Bars/Taverns market sector niche as a result of government regulations,
such as shelter-in-place orders and in-door dining limitations, which had adversely impacted the gross written premium for that
niche.
Crusader has received a number of
coronavirus-related business interruption claims. While the Company does not believe it is exposed to substantial risk from
those claims under the insurance policies written by Crusader, the individual circumstances of each such claim are reviewed
to fulfill Crusader’s obligation to its policyholders if coverage applies. Further, there may be impacts to the timing
of loss emergence and ultimate loss ratios for certain of Crusader’s products due to postponements of civil court
cases, extensions of various statutes of limitations, changes in settlement trends and other new legislative, regulatory or
judicial developments, which could result in loss reserve deficiencies and negative impact on results of operations.
The Company’s financial results for the
twelve months ended December 31, 2020, do not fully reflect the potential adverse impacts that the ongoing coronavirus pandemic
has had or will have on its business due to a high degree of uncertainty around this relatively new and continuously evolving environment.
The financial impact of these uncertainties is unknown at this time but could result in a material adverse effect on the Company’s
business, results of operations, financial condition and prospects.
While the coronavirus pandemic is also affecting
the Company’s internal operations, the Company implemented a plan at the onset of the COVID-19 pandemic to help its operations
continue effectively during the ongoing pandemic, including processes to limit the spread of COVID-19 among employees. For example,
the Company modified its business practices in accordance with social distancing and safety guidelines, allowing many employees
work-from-home arrangements, flexible work schedules, and restricted business travel. The Company’s employees are following
the guidelines and approximately 75% are working from their homes. The Company will follow governmental safety guidelines to determine
when to remove the coronavirus-related business restrictions and to allow employees working from home to return to the workplace.
At this point, the Company does not have an estimate on when these changes will occur. While the pandemic has created new challenges
for the Company, the Company’s ability to maintain its operations, internal controls and relationships has not been adversely
affected.
In light of the challenges faced and operational
results, the Company has taken several steps to improve its results. To improve Crusader's loss ratios, beginning in January 2017,
the Company made significant changes in its staffing and in its pricing and risk selection practices. To improve revenues the Company
is working to improve its sales in the markets that it has historically served, to gain access to markets that it has not previously
served, and to generate new sources of revenue on a fee-for-service basis. For example, the Company also re-activated its U.S.
Risk Managers, Inc. subsidiary so that it can provide claims adjustment services to non-affiliated insurers and to self-insurers
on a fee-for-service basis (i.e., where Crusader will not be underwriting the risk), providing the potential for an alternative
revenue source to the Company.
On April 1, 2020, Crusader and Unifax, entered
into a reinsurance arrangement with United Specialty Insurance Company (“USIC”), pursuant to which USIC would underwrite
property and casualty insurance policies by and through Unifax and such policies would be reinsured by Crusader. On September 2,
2020, the Company placed a moratorium on placing any new risks with USIC by Unifax pending negotiations among Crusader, Unifax,
and USIC pursuant to the issues raised by the DOI regarding the structure of the reinsurance arrangement and its compliance with
the California Insurance Holding Company System Act (the “Insurance Act”).
On November 24, 2020, as a result of such negotiations
with the DOI, Crusader, Unifax and USIC agreed to rescind certain agreements by and among USIC, Crusader and Unifax. The effect
of such rescissions was that the rescinded agreements were deemed never to have existed and no insurance policies were deemed issued,
and no premium deemed written, collected or reported with respect to those agreements. Further, on November 24, 2020, the parties
entered into various restructured arrangements in order to address the issues raised by the DOI with respect to California insurance
laws. In particular, the parties eliminated all intercompany duties so that the arrangement would not require prior approval by
the DOI under the Insurance Act. Details of the restructured arrangements with USIC include the following:
In 2018, the Company determined that
the cost to replace its legacy IT system would be between $4,000,000 and $8,000,000, and the installation of such a system would
take between two to four years. After weighing the time and expense involved against the anticipated benefit from such an investment,
the Company opted for what it then perceived to be a less expensive upgrade to its legacy system, an upgrade that then seemed
to offer more incremental benefits in a shorter timeframe. While initially expected to be completed by the end of 2019, at a cost
of approximately $300,000, excluding costs of Unico’s employees involved in the upgrade, the system upgrade is now expected
to be completed by the end of first quarter of 2021 at a cost not to exceed $1,500,000, excluding costs of Unico’s employees
involved in the upgrade, due to unexpected technical challenges. In light of the significant delays and increases in cost associated
with its legacy upgrade project, the Company has deployed additional resources toward the management of this project and has renegotiated
the relationship that it has with the non-affiliated vendor working on this project.
The Company receives its revenues primarily
from earned premium derived from the insurance company operation, commission and fee income generated from the insurance agency
operations, finance fee income from the premium finance operations, and investment income from cash generated primarily from the
insurance company operation. The insurance company operation generated approximately 94% of the Company’s total revenue for
the years ended December 31, 2020 and 2019. None of the Company’s other operations is individually material to consolidated
revenues.
As of December 31, 2020, Crusader was licensed
as an admitted insurance carrier in the states of Arizona, California, Nevada, Oregon, and Washington. From 2004 until June 2014,
all of Crusader’s business was written in the state of California. Crusader’s business remains concentrated in California
(99.9% of gross written premium, which represents written premium before cession to reinsurers, in the years ended 2020 and 2019)).
During the years ended December 31, 2020 and 2019, 99.6% and 98.3% of Crusader’s business was CMP policies, respectively.
Crusader’s total gross written
premium (direct and assumed written premium before cessions to reinsurers
under reinsurance treaties), as reported on Crusader’s statutory financial statements, was produced geographically as follows:
Crusader believes that it can grow its
sales and profitability through improved specialization and sales incentives. Crusader currently focuses in four underwriting verticals:
(1) Transportation, (2) Food, Beverage & Entertainment, (3) Garage & Mercantile, and (4) Apartments & Commercial Buildings.
Crusader also is evaluating the possibility of expanding its operations geographically, on an admitted or non-admitted basis, so
as to offer similar products in other states, but the timing of any such expansion is not yet determined.
The following is a reconciliation of gross
written premium (direct and assumed written premium before cessions to reinsurers
under reinsurance treaties) to net earned premium (after premium ceded to reinsurers under reinsurance treaties):
The insurance company operation’s
underwriting profitability is defined by pre-tax underwriting gain or loss which is calculated as net earned premium less losses
and loss adjustment expenses and policy acquisition costs.
Underwriting gain or loss before income
taxes is a non-GAAP financial measure. Underwriting gain or loss before income taxes represents one measure of the pretax profitability
of the insurance company operation and is derived by subtracting losses and loss adjustment expenses, and policy acquisition costs
from net earned premium, which are all GAAP financial measures. Management believes disclosure of underwriting profit or loss before
income taxes is useful supplemental information that helps align the reader’s understanding with management’s view
of insurance company operations profitability. Each of these captions is presented in the Consolidated Statements of Operations
but is not subtotaled.
The following is a reconciliation of Crusader’s
underwriting loss before income taxes to the Company’s loss before taxes:
Unearned premiums represent premium applicable
to the unexpired terms of policies in force. The Company evaluates its unearned premiums periodically for premium deficiencies
by comparing the sum of expected claim costs, unamortized deferred policy acquisition costs, and maintenance costs partially offset
by net investment income to related unearned premiums. To the extent that any of the Company’s programs become unprofitable,
a premium deficiency reserve may be required. The Company recognized a premium deficiency of $150,000 as of December 31, 2020.
The Company did not carry a premium deficiency reserve as of December 31, 2019. The premium deficiency was recorded as a reduction
in deferred policy acquisition costs.
The insurance company operation combined ratio
is the sum of (1) the ratio of net losses and loss adjustment expenses incurred (including a provision for IBNR) to net earned
premium (loss ratio) and (2) the ratio of policy acquisition costs to net earned premium (expense ratio). If
the combined ratio is below 100%, an insurance company has an underwriting profit; if it is above 100%, the company has an underwriting
loss.
The following table shows the loss ratios,
expense ratios, and combined ratios of Crusader:
(1) Loss ratio is defined as losses and loss adjustment expenses
divided by net earned premium.
(2) Expense ratio is defined as a sum of policy acquisition
costs and portions of indirect salaries and employee benefits and other operating expenses allocation to the insurance company
operations, reduced by allocation of gross commissions and fees and other income, divided by net earned premium.
The following table provides an analysis of losses and loss
adjustment expenses:
On February 5, 2021,
A.M. Best Company revised the outlooks to negative from stable and affirmed the FSR of B++ (Good) and Long-Term ICR of “bbb”
of Crusader. Additionally, A.M. Best has revised the outlook to negative from stable and affirmed the Long-Term ICR of “bb”
of the Company. Crusader is a wholly owned subsidiary of the Company.
The negative outlooks capture A.M. Best’s
concerns with Crusader’s declining underwriting performance, the Company’s overall capitalization and the execution
risk associated with implementing strategic operating changes to address these conditions.
The Long-Term ICRs
reflect Crusader’s balance sheet strength, which A.M. Best categorizes as very strong, as well as its marginal operating
performance, limited business profile and marginal enterprise risk management.
Some of Crusader’s policyholders,
or the lenders, landlords or clients of Crusader’s policyholders, require insurance from a company that has an A.M. Best
FSR of “A-” or higher, and the A.M. Best’s changed ratings of Crusader may also have a negative impact on Crusader’s
reputation. Therefore, Crusader’s and Unico’s changed ratings may have a negative impact on the Company’s revenue
and results of operations. The Company cannot quantify the impact that the rating changes have had or will have on its revenue
and results of operations, and the Company cannot determine if or when Crusader might regain the “A-” FSR from A.M.
Best.
The reinsurance arrangement with USIC allows
Unifax to offer its customers policies written on USIC paper, which has A.M. Best FSR of “A,” when such rating is required.
The property and casualty insurance business
is cyclical in nature. The conditions of a “soft market” include premium rates that are stable or falling and insurance
is readily available. Contrarily, “hard market” conditions occur during periods in which premium rates rise and coverage
may be more difficult to find. The Company believes that the California property and casualty insurance market is relatively mature
and intensely competitive, with different products in different stages of the soft/hard market cycle at any given time.
The Company’s revenues from other insurance
operations consist of commissions, fees, investment and other income. Excluding investment and other income, these operations accounted
for approximately 6% and 8% of total revenues for the years ended December 31, 2020 and 2019, respectively.
The Company generated revenues from its total
invested assets of $83,617,720 (fixed maturities at amortized cost, equity securities at cost and short-term investments at fair
value) and $84,997,226 (fixed maturities at amortized cost and short-term investments at fair value) as of December 31, 2020 and
2019, respectively.
Due to the current interest rate
environment, the current target effective duration for the Company’s investment portfolio is between 2.0 and 4.0 years.
As of December 31, 2020, all of the Company’s investments are in U.S. Treasury securities, corporate fixed maturity
securities, agency mortgage-backed securities, equity securities, Federal Deposit Insurance Corporation (“FDIC”)
insured certificates of deposit, and short-term investments. All of the Company’s investments, except for the
certificates of deposit, are readily marketable. As
of December 31, 2020, the weighted average maturity of the Company’s investments was approximately 8.0 years, and the
effective duration for available-for-sale investments (investments managed under the investment guidelines) was 2.9
years.
Results of Operations
General
Total revenues for the year ended December
31, 2020, were $32,560,111, an increase of $1,187,297 (4%) compared to $31,372,814 for the year ended December 31, 2019. For the
year ended December 31, 2020, the Company had loss before taxes of $17,943,515 compared to loss before taxes of $3,249,890 for
the year ended December 31, 2019. For the year ended December 31, 2020, the Company had net loss of $21,491,113 compared to net
loss of $3,115,703 for the year ended December 31, 2019.
The increase in total revenues for the year ended December 31, 2020, compared
to the year ended December 31, 2019, was due primarily to an increase in net earned premium of $1,430,700 (5%).
The increase in net loss for the year ended December 31, 2020, compared to the year ended December 31, 2019,
was due primarily to an increase in losses and loss adjustment expenses of $12,066,793 (53%), increase in salaries and employee
benefits of $2,296,318 (56%), an increase in other operating expenses of $1,658,331 (58%), and an increase in income tax expense
of $3,681,785 (2744%), partially offset by the increase in net earned premium.
During the twelve months ended December
31, 2020, the Company reevaluated certain assumptions used in its process for estimating loss and loss adjustment reserves
due to its experiences in Crusader’s Apartments & Commercial Buildings and Transportation verticals as well as
changes in market conditions. This reevaluation resulted in a $9,399,547 increase in Crusader’s IBNR reserves, net of
reinsurance, which was a primary contributor to the increase of $12,066,793 in losses and loss adjustment expenses from
$22,576,127 recognized for the twelve months ended December 31, 2019 to $34,642,920 recognized for the twelve months ended
December 31, 2020.
The increase in salaries and employee benefits
during the twelve months ended December 31, 2020 of $2,296,318 was due primarily to costs associated with a termination of an employment
agreement with an executive, increases in executive compensation, increases in employee benefits due to higher medical insurance
rates, and vacation accruals due to less vacation taken by the employees as a result of the ongoing coronavirus pandemic.
The increase in other operating expenses of
$1,658,331 during the twelve months ended December 31, 2020, was due primarily to increases in legal, depreciation and communication
expenses, fees associated with the reinsurance arrangement with USIC, and higher board of director fees.
The increase in income tax expense of $3,681,785
during the twelve months ended December 31, 2020, was due primarily to an increase in the valuation allowance related to deferred
tax assets on federal net operating losses.
The effect of inflation on the Company’s
net loss during the years ended December 31, 2020 and 2019 was not significant.
Revenues
Crusader Premium
Crusader’s primary lines of business are
written on Commercial Multi Peril policies. These policies represented approximately 99.6% and 98.3% of Crusader’s total
written premium for the years ended December 31, 2020 and 2019, respectively.
Gross written premium (direct and assumed written
premium before cessions to reinsurers under reinsurance treaties) reported on Crusader’s statutory financial statements increased
$838,880 (2%) to $36,642,830 for the year ended December 31, 2020, compared to $35,803,950 for the year ended December 31, 2019.
The increase in gross written premium for the year ended December 31,
2020, was due primarily to growth in the Company’s Transportation vertical, transacted by Crusader. The Transportation vertical
transacts insurance primarily for long-haul trucking operations that are domiciled in California. The growth in the Company’s
Transportation vertical was partially offset by coronavirus-related contraction in the Food, Beverage & Entertainment underwriting
vertical for Crusader.
Although the ongoing coronavirus pandemic
did not have a significant impact on Crusader’s overall gross written premium (direct and assumed written premium
before cessions to reinsurers under reinsurance treaties) during the year ended December 31, 2020, Crusader has experienced a
decrease in new business submissions and renewals related to the pandemic in its Bars/Taverns market sector niche as a result
of government regulations, such as shelter-in-place orders and in-door dining limitations, which had adversely impacted the
gross written premium for that niche.
Written premium
Written premium is a required statutory measure.
Written premium is a non-GAAP financial measure that is defined, under SAP, as the contractually determined amount charged by the
insurance company to the policyholder for the effective period of the contract based on the expectation of risk, policy benefits,
and expenses associated with the coverage provided by the terms of the policies.
Written premium is defined under GAAP in Accounting
Standards Codification Topic 405, “Liabilities,” as “premiums on all policies an entity has issued in a period.”
Earned premium, the most directly comparable GAAP measure to written premium, represents the portion of written premium that is
recognized as income in the financial statements for the period presented and earned on a pro-rata basis over the terms of the
policies. Written premium is intended to reflect production levels and is meant as supplemental information and not intended to
replace earned premium. Such information should be read in connection with the Company’s GAAP financial results.
Gross earned premium
Gross earned premium (direct and assumed earned
premium before cessions to reinsurers under reinsurance treaties) increased $2,306,667 (7%) to $36,264,869 for the year ended December
31, 2020, compared to $33,958,202 for the year ended December 31, 2019. The Company writes annual policies. Earned premium represents
a portion of written premium that is recognized as income in the financial statements for the period presented and earned daily
on a pro-rata basis over the terms of the policies, and, therefore, premiums earned in the current year are related to policies
written during both the current year and immediately preceding year. The increase in gross earned premium for the year ended December
31, 2020, was due primarily to an increase in gross written premium in 2019.
Ceded earned premium
Ceded earned premium (premium ceded to reinsurers
under reinsurance treaties) increased $875,967 (12%) to $8,096,701 for the year ended December 31, 2020, compared to $7,220,734
for the year ended December 31, 2019. Ceded earned premium as a percentage of gross earned premium was 22% for the year ended December
31, 2020, and 21% for the year ended December 31, 2019. The increase in the ceded earned premium as a percentage of gross earned
premium for the year ended December 31, 2020, compared to the year ended December 31, 2019, was due primarily to higher gross earned
premium subject to reinsurance treaties and higher rates on excess of loss reinsurance treaties.
Reinsurance treaties are generally structured
in layers, with different negotiated economic terms and retention of participation, or liability, in each layer. In calendar years
2020 and 2019, Crusader retained participation in its excess of loss reinsurance treaties of 0% in its 1st layer (reinsured
losses between $500,000 and $1,000,000), 0% in its 2nd layer (reinsured losses between $1,000,000 and $4,000,000), and
0% in its property and casualty clash treaty.
Crusader also has catastrophe reinsurance treaties
from various highly rated California authorized and California unauthorized reinsurance companies. These reinsurance treaties help
protect Crusader against losses in excess of certain retentions from catastrophic events that may occur on property risks which
Crusader insures. In calendar years 2020 and 2019, Crusader retained a participation in its catastrophe excess of loss reinsurance
treaties of 5% in its 1st layer (reinsured losses between $1,000,000 and $10,000,000) and 0% in its 2nd layer
(reinsured losses between $10,000,000 and $46,000,000).
Crusader 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, 2020, all such ceded contracts are accounted for as risk transfer reinsurance.
A tabular presentation of Crusader’s
direct, assumed, ceded and net earned premium is as follows:
|
|
Year ended December 31
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Direct earned premium
|
|
$
|
36,108,230
|
|
|
$
|
33,958,202
|
|
Assumed earned premium
|
|
|
156,639
|
|
|
|
—
|
|
Ceded earned premium
|
|
|
(8,096,701
|
)
|
|
|
(7,220,734
|
)
|
Net earned premium
|
|
$
|
28,168,168
|
|
|
$
|
26,737,468
|
|
Ratio of ceded earned premium to gross earned premium (direct and assumed earned premium)
|
|
|
22
|
%
|
|
|
21
|
%
|
Investment Income, Net Realized Investment
Gains and Losses, and
Net Unrealized Investment Gains on Equity
Securities
Net investment income decreased
$109,699 (5%) to $1,988,243 for the year ended December 31, 2020, compared to $2,097,942 for the year ended December 31,
2019. This decrease in net investment income was due primarily to a decrease in average invested assets. The Company had net
realized investment gains of $97,771 and net unrealized investment gains on equity securities of $198,266, for the year ended
December 31, 2020, compared to net realized investment losses of $12,661 and no net unrealized investment gains on equity
securities for the year ended December 31, 2019.
Net investment income, excluding net realized
investment losses/gains, and yields on Company’s average invested assets are as follows:
|
|
Year ended December 31
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Average invested assets (1) – at amortized cost
|
|
$
|
84,307,473
|
|
|
$
|
89,350,796
|
|
|
|
|
|
|
|
|
|
|
Net investment income from:
|
|
|
|
|
|
|
|
|
Invested assets (2)
|
|
$
|
1,984,548
|
|
|
$
|
2,051,428
|
|
Cash equivalents
|
|
|
3,695
|
|
|
|
46,528
|
|
Total
|
|
$
|
1,988,243
|
|
|
$
|
2,097,956
|
|
|
|
|
|
|
|
|
|
|
Yield on average invested assets (3)
|
|
|
2.4
|
%
|
|
|
2.3
|
%
|
(1) The
average is based on the beginning and ending balances of the amortized cost of the invested assets for each respective year.
(2) Investment
income from invested assets included $133,679 of investment expense for the year ended December 31, 2020, compared to $129,842
for the year ended December 31, 2019.
(3) Annualized
yield on average invested assets did not include the investment income from cash equivalents.
The par value, amortized cost, estimated
market value and weighted average yield of fixed maturity investments at December 31, 2020, by contractual maturity are as
follows:
Maturities by Calendar Year
|
|
Par
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Weighted Average Yield
|
|
|
|
|
|
|
|
|
|
Due in one year
|
|
$
|
11,070,641
|
|
|
$
|
11,064,202
|
|
|
$
|
11,169,232
|
|
|
|
2.57
|
%
|
Due after one year through five years
|
|
|
30,065,671
|
|
|
|
30,090,910
|
|
|
|
31,260,694
|
|
|
|
2.59
|
%
|
Due after five years through ten years
|
|
|
18,363,570
|
|
|
|
18,476,051
|
|
|
|
19,806,444
|
|
|
|
2.51
|
%
|
Due after ten years and beyond
|
|
|
20,927,571
|
|
|
|
21,238,117
|
|
|
|
21,971,324
|
|
|
|
2.63
|
%
|
Total
|
|
$
|
80,427,453
|
|
|
$
|
80,869,280
|
|
|
$
|
84,207,694
|
|
|
|
2.58
|
%
|
Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without penalties.
The weighted average maturity of the Company’s
investments was approximately 8.0 years as of December 31, 2020, and 7.7 years as of December 31, 2019.
As of December 31, 2020, all of the Company’s
investments are in U.S. Treasury securities, FDIC insured certificates of deposit, corporate fixed maturity securities, agency
mortgage-backed securities, equity securities and short-term investments. The investments in the certificates of deposit are classified
as held-to-maturity investments, and all other fixed maturity investments are classified as available-for-sale. All of the Company’s
investments, except for the certificates of deposit, are readily marketable. The following table sets forth the composition of
the investment portfolio of the Company at the dates indicated:
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
Type of Security
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
|
|
|
|
|
|
|
|
Available-for-sale fixed maturity investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
10,596,808
|
|
|
$
|
10,832,181
|
|
|
$
|
15,105,795
|
|
|
$
|
15,235,332
|
|
Corporate securities
|
|
|
44,159,926
|
|
|
|
46,451,905
|
|
|
|
41,953,378
|
|
|
|
43,029,333
|
|
Agency mortgage-backed securities
|
|
|
25,314,546
|
|
|
|
26,125,608
|
|
|
|
24,943,238
|
|
|
|
25,235,045
|
|
Held-to-maturity fixed maturity investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
798,000
|
|
|
|
798,000
|
|
|
|
798,000
|
|
|
|
798,000
|
|
Total fixed maturity investments
|
|
|
80,869,280
|
|
|
|
84,207,694
|
|
|
|
82,800,411
|
|
|
|
84,297,710
|
|
Equity securities
|
|
|
2,548,440
|
|
|
|
2,746,706
|
|
|
|
—
|
|
|
|
—
|
|
Short-term cash investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bills
|
|
|
—
|
|
|
|
—
|
|
|
|
1,996,815
|
|
|
|
1,996,815
|
|
Certificates of deposit
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
200,000
|
|
Short-term cash investments
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
2,196,815
|
|
|
|
2,196,815
|
|
Total investments
|
|
$
|
83,617,720
|
|
|
$
|
87,154,400
|
|
|
$
|
84,997,226
|
|
|
$
|
86,494,525
|
|
A summary of estimated fair value and
gross unrealized losses in a gross unrealized loss position by the length of time in which the securities have continually been
in that position is shown below:
|
|
Less than 12 Months
|
|
12 Months or Longer
|
|
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Number
of Securities
|
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Number
of Securities
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
Corporate securities
|
|
|
2,101,986
|
|
|
|
(55,847
|
)
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agency mortgage-backed securities
|
|
|
3,223,329
|
|
|
|
(22,274
|
)
|
|
|
12
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total debt securities
|
|
|
5,325,315
|
|
|
|
(78,121
|
)
|
|
|
14
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Equity securities
|
|
|
723,346
|
|
|
|
(37,357
|
)
|
|
|
25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
6,048,661
|
|
|
$
|
(115,478
|
)
|
|
|
39
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
Less than 12 Months
|
|
12 Months or Longer
|
|
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Number
of Securities
|
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Number
of Securities
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
1,996,562
|
|
|
$
|
(253
|
)
|
|
|
1
|
|
|
$
|
1,002,031
|
|
|
$
|
(775
|
)
|
|
|
1
|
|
Corporate securities
|
|
|
999,818
|
|
|
|
(56
|
)
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agency mortgage-backed securities
|
|
|
750,058
|
|
|
|
(1,950
|
)
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
3,746,438
|
|
|
$
|
(2,259
|
)
|
|
|
4
|
|
|
$
|
1,002,031
|
|
|
$
|
(775
|
)
|
|
|
1
|
|
While the fair value of Company’s
investment portfolio at December 31, 2020, has recovered from the declines recorded for the three months ended March 31, 2020,
the effects of the coronavirus pandemic were a major contributor to the variability in fair value of the Company’s fixed
income and equity investments during the year ended December 31, 2020, and the economic uncertainty caused by the pandemic may
lead to further investment valuation volatility. In addition, the recent decline in investment yields resulted in lower reinvestment
rates, compared to the previous years, which will cap the Company’s investment portfolio’s ability to generate higher
levels of investment income, absent a larger invested asset base or a change in investment philosophy
The Company closely monitors its investments.
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. During the year ended December 31, 2020, one fixed maturity
corporate security experienced a significant decline in market value; the market and book value of that security at December 31,
2020, was $867,375 and $910,893, respectively. The unrealized losses on all securities as of December 31, 2020 and December 31,
2019, were determined to be temporary.
Although the Company does not intend to sell
its fixed maturity investments prior to maturity, the Company may sell investment securities from time to time in response to cash
flow requirements, economic, regulatory, and/or market conditions or investment securities may be called by their issuers prior
to the securities’ maturity. The fixed maturity securities previously held by the Company were sold and called prior to maturity
as follows:
|
|
December 31
|
|
December 31
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Fixed maturities securities sold
|
|
|
|
|
|
|
|
|
Number of securities sold
|
|
|
15
|
|
|
|
3
|
|
Amortized cost of sold securities
|
|
$
|
5,529,470
|
|
|
$
|
2,997,098
|
|
Realized gains (losses) on sales
|
|
$
|
52,053
|
|
|
$
|
(12,679
|
)
|
|
|
|
|
|
|
|
|
|
Fixed maturities securities called
|
|
|
|
|
|
|
|
|
Number of securities called
|
|
|
4
|
|
|
|
1
|
|
Amortized cost of called securities
|
|
$
|
2,449,503
|
|
|
$
|
999,982
|
|
Realized gains on calls
|
|
$
|
497
|
|
|
$
|
18
|
|
The unrealized gains or losses from fixed maturities
are reported as “Accumulated other comprehensive income or loss,” which is a separate component of stockholders’
equity, net of any deferred tax effect.
Other Income
Other income included in insurance company operation
and other insurance operations decreased $94,072 (70%) to $39,811 for year ended December 31, 2020, compared to $133,883 for the
year ended December 31, 2019. The decrease during the year ended December 31, 2020, is due primarily to decreases in rental income
of $27,277 and Crusader’s share of California FAIR Plan Equity of $58,646.
Gross commissions and fees
Gross commissions and fees decreased $349,395
(16%) to $1,827,263 for the year ended December 31, 2020, compared to $2,176,658 for the year ended December 31, 2019.
The comparison of gross commission and
fees for the year ended December 31, 2020, to the year ended December 31, 2019, is as follows:
|
|
Year ended December 31
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Brokerage fee income
|
|
$
|
1,006,505
|
|
|
$
|
1,146,420
|
|
Health insurance program
|
|
|
727,515
|
|
|
|
939,689
|
|
Membership and fee income
|
|
|
93,243
|
|
|
|
90,549
|
|
Gross commissions and fees
|
|
$
|
1,827,263
|
|
|
$
|
2,176,658
|
|
Unifax
sells and services insurance policies for Crusader and USIC. For these brokerage services, Unifax receives commissions from insurance
companies and fees from policyholders. The commissions paid by Crusader to Unifax are eliminated as intercompany transactions
and are not reflected as income in the consolidated financial statements. Policy fee income received by Unifax is related to the
Crusader policies and service fee income received by Unifax is related to the USIC policies. For financial statement reporting
purposes, brokerage fees are earned ratably over the life of the related insurance policy. The unearned portion of the brokerage
fees is recorded as a liability on the Consolidated Balance Sheets under “Accrued expenses and other liabilities.”
The earned portion of the brokerage fees charged to the policyholder by Unifax is recognized as income in the consolidated financial
statements. Brokerage fee income for the year ended December 31, 2020, decreased $139,915 (12%) as compared to the year ended
December 31, 2019. This decrease in brokerage fee income in 2020 compared to 2019 was primarily the result of a 826 (13%) decrease
in the number of policies issued of 5,401 during 2020 compared to 6,227 policies issued during 2019.
AIB markets health insurance in California
through non-affiliated insurance companies for individuals and groups. For these services, AIB receives commission based on the
premium that it writes. Commission income for the year ended December 31, 2020, decreased $212,174 (23%) compared to the year
ended December 31, 2019. The decrease in commission income is primarily a result of a loss of a large group account.
In 2020, approximately 30% and 56% of the
commission income from health insurance sales was from Guardian Life Insurance Company of America dental and group life plan
programs and the Blue Shield Care Trust health and life insurance programs, respectively. In 2019, approximately 39% and 49%
of the commission income from health insurance sales was from
Guardian Life Insurance Company of America dental and group life plan programs and the Blue Shield Care Trust health and life
insurance programs, respectively.
AAQHC is
a third party administrator for contracted insurance companies and is a membership association that provides various consumer benefits
to its members, including participation in group health care insurance policies that AAQHC negotiates for the association. For
these services, AAQHC receives membership and fee income from its members. Membership and fee income for the year ended December
31, 2020, increased $2,694 (3%) compared to the year ended December 31, 2019. The increase is a result of an increase in administration
fees.
Finance charges and fees earned
Finance
charges and fees earned consist of finance charges, late fees, returned check fees and payment processing fees. These charges and
fees earned by AAC increased $1,065 (0%) to $240,589 for the year ended December 31, 2020, compared to $239,524 for the year ended
December 31, 2019, due primarily to the increase in earned finance charges as a result of the change in annual percentage rate
charged on AAC new loans from a single fixed interest rate to a tiered interest rate structure effective April 1, 2019 offset by
a decrease in number of polices financed. During the year ended December 31, 2020, AAC issued 1,111 loans and had 821 loans outstanding
as of December 31, 2020. During the year ended December 31, 2019, AAC issued 1,547 loans and had 1,173 loans outstanding as of
December 31, 2019. AAC provides premium financing only for Crusader and USIC policies produced by Unifax in California. The number
of loans issued decreased by 436 (28%) during 2020 when compared to 2019. The average premium financed by AAC was $6,477 and $5,672
in 2020 and 2019, respectively. During 2020, 48% of all Unifax generated policies were financed and 43% of those policies were
financed by AAC. During 2019, 44% of all Unifax generated policies were financed and 56% of those policies were financed by AAC.
Expenses
Losses and Loss Adjustment Expenses
Crusader’s emerging loss ratios for each
accident year are reviewed in detail at the end of each quarter as part of the reserve review process. Losses and loss adjustment
expenses for the calendar years ended December 31, 2020 and 2019 were $34,642,920 and $22,576,127, respectively. Loss
ratio, which is calculated by dividing losses and loss adjustment expenses by net earned premium, was 123% for the year ended December
31, 2020, compared to 85% for the year ended December 31, 2019.
Losses and loss adjustment expenses and
loss ratios are as follows:
|
Year ended December 31
|
|
2020
|
|
2020 Loss Ratio
|
|
2019
|
|
2019 Loss Ratio
|
|
|
|
|
|
|
|
|
Net earned premium
|
$
|
28,168,168
|
|
|
|
|
|
|
$
|
26,737,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for insured events of current year
|
|
26,683,872
|
|
|
|
95
|
%
|
|
|
19,384,942
|
|
|
|
72
|
%
|
Development of insured events of prior years
|
|
7,959,048
|
|
|
|
28
|
%
|
|
|
3,191,185
|
|
|
|
12
|
%
|
Total losses and loss adjustment expenses
|
$
|
34,642,920
|
|
|
|
123
|
%
|
|
$
|
22,576,127
|
|
|
|
84
|
%
|
Some lines of insurance are commonly referred
to as "long-tail" lines because of the extended time required before claims are ultimately settled. Lines of insurance
in which claims are settled relatively quickly are called "short-tail" lines. It is generally more difficult to estimate
loss reserves for long-tail lines because of the long period of time that elapses between the occurrence of a claim and its final
disposition and the difficulty of estimating the settlement value of the claim. Crusader’s short-tail lines consist of its
property coverages, and its long-tail lines consist of its liability coverages. However, Crusader’s long-tail liability claims
tend to be settled relatively quicker than other long-tail lines not underwritten by Crusader, such as workers’ compensation,
professional liability, umbrella liability, and medical malpractice. Since trends develop over longer periods of time on long-tail
lines of business, the Company generally gives credibility to those trends more slowly than for short-tail or less volatile lines
of business.
The difficulty in estimating the loss
and loss adjustment expense reserves contributed to adverse development of insured events of prior years in the amount of $7,959,048
which Crusader experienced in 2020. During the twelve months ended December 31, 2020, the Company reevaluated certain assumptions
used in its process for estimating loss and loss adjustment reserves due to its experiences in Crusader’s Apartments &
Commercial Buildings and Transportation verticals as well as changes in market conditions. This reevaluation resulted in a $9,399,547
increase in Crusader’s IBNR reserves, net of reinsurance, which was a primary contributor to the increase of $12,066,793
in losses and loss adjustment expenses from $22,576,127 recognized for the twelve months ended December 31, 2019 to $34,642,920
recognized for the twelve months ended December 31, 2020. Crusader sets loss and loss adjustment expense reserves at each balance
sheet date based upon management’s best estimate of the ultimate payments that it anticipates will be made to settle all
losses incurred and related loss adjustment expenses incurred as of that date for both reported and unreported losses. The ultimate
cost of claims is dependent upon future events, the outcomes of which are affected by many factors. Crusader claim reserving procedures
and settlement philosophy, current and perceived social and economic inflation, current and future court rulings and jury attitudes,
improvements in medical technology, and many other economic, scientific, legal, political, and social factors all can have significant
effects on the ultimate costs of claims. Changes in Crusader operations and management philosophy also may cause actual developments
to vary from the past. Since the emergence and disposition of claims are subject to uncertainties, the net amounts that will ultimately
be paid to settle claims may vary significantly from the estimated amounts provided for in the accompanying consolidated financial
statements. Any adjustments to reserves are reflected in the operating results of the periods in which they are made.
The
$26,683,872 provision for insured events of current year for the year ended December 31, 2020, was $7,298,930 higher than
the $19,384,942 provision for insured events of current year for the year ended December 31, 2019,
due primarily to increased IBNR reserves associated with the Apartments & Commercial Buildings and Transportation verticals.
The increases in IBNR reserves were due to higher actuarially developed ultimate incurred losses and loss adjustment expenses primarily
as a result of elevated expected claims severity.
The $7,959,048 adverse development of insured
events of prior years for the year ended December 31, 2020, was $4,767,863 higher than the $3,191,185 adverse development of insured
events of prior year for the year ended December 31, 2019, due primarily to increases in 2018 and 2019 accident year IBNR reserves
associated with the Apartments & Commercial Buildings and Transportation verticals. The increases in IBNR were due to higher
actuarially developed ultimate incurred losses and loss adjustment expenses primarily as a result of elevated expected claims severity.
Crusader has received 151 coronavirus-related
business interruption claims through December 31, 2020. While the Company does not believe it is exposed to substantial risk from
those claims under the insurance policies written by Crusader or USIC, the individual circumstances of each such claim are reviewed
to fulfill Crusader’s obligation to its policyholders if coverage applies. Further, there may be impacts to the timing of
loss emergence and ultimate loss ratios for certain Crusader’s products due to postponements of civil court cases, extensions
of various statutes of limitations, changes in settlement trends and other new legislative, regulatory or judicial developments
which could result in loss reserve deficiencies and negative impact on results of operations.
Crusader has received seven claims related
to the recent civil unrest through December 31, 2020. Crusader has sufficient excess of loss and catastrophe reinsurance treaties
to protect from exposure of such claims. The Company believes the losses and loss adjustment expenses associated with those claims
will not exceed Crusader’s $500,000 excess of loss reinsurance treaty retention.
The following table breaks out adverse (favorable)
development from total losses and loss adjustment expenses by accident year is as follows:
|
|
Year ended December 31
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
Accident
Year
|
|
Adverse
(Favorable)
Development
|
|
%
of Total
|
|
Adverse
(Favorable)
Development
|
|
%
of Total
|
|
|
|
|
|
|
|
|
|
|
Prior to 2011
|
|
|
$
|
64,196
|
|
|
|
1
|
%
|
|
$
|
67,320
|
|
|
|
2
|
%
|
|
2011
|
|
|
|
(6,000
|
)
|
|
|
—
|
|
|
|
60,490
|
|
|
|
2
|
%
|
|
2012
|
|
|
|
(27,901
|
)
|
|
|
—
|
|
|
|
117,414
|
|
|
|
4
|
%
|
|
2013
|
|
|
|
(56,367
|
)
|
|
|
(1
|
)%
|
|
|
459,602
|
|
|
|
14
|
%
|
|
2014
|
|
|
|
149,181
|
|
|
|
2
|
%
|
|
|
(139,187
|
)
|
|
|
(4
|
)%
|
|
2015
|
|
|
|
1,559,422
|
|
|
|
20
|
%
|
|
|
1,452,170
|
|
|
|
45
|
%
|
|
2016
|
|
|
|
663,546
|
|
|
|
8
|
%
|
|
|
1,547,242
|
|
|
|
48
|
%
|
|
2017
|
|
|
|
1,201,175
|
|
|
|
15
|
%
|
|
|
404,322
|
|
|
|
13
|
%
|
|
2018
|
|
|
|
2,539,483
|
|
|
|
32
|
%
|
|
|
(778,188
|
)
|
|
|
(24
|
)%
|
|
2019
|
|
|
|
1,872,313
|
|
|
|
23
|
%
|
|
|
—
|
|
|
|
—
|
|
|
Total prior accident years
|
|
|
$
|
7,959,048
|
|
|
|
100
|
%
|
|
$
|
3,191,185
|
|
|
|
100
|
%
|
At the end of each fiscal quarter, Crusader’s
loss and loss adjustment expense reserves for each accident year (i.e., for all claims incurred within each year) are re-evaluated
independently by the Company’s president, the Company’s chief financial officer, and by an independent consulting
actuary. Generally accepted actuarial methods, including the widely used Bornhuetter-Ferguson and loss development methods, are
employed to estimate ultimate claims costs. An actuarial central estimate of the ultimate claims costs and IBNR reserves is ultimately
determined by management and tested for reasonableness by the independent consulting actuary.
Repeated and sustained
underwriting losses in Crusader’s Apartments & Commercial Buildings vertical and growth in Crusader’s Transportation
vertical, a product which is generally known for its difficulty to be underwritten profitably, coupled with changes in the market
conditions and increases in social inflation (discussed below), caused Crusader management to reevaluate the assumptions used in
its process for estimating loss and loss adjustment expense reserves. This reevaluation and the use of updated assumptions led
to higher estimates for expected claims frequency, claims severity and ultimate incurred losses and loss
adjustment expenses during the quarterly reevaluation of the loss and loss adjustment expense reserves as of September 30, 2020.
The increase in the ultimate incurred losses and loss adjustment expenses manifested primarily through higher IBNR reserves as
of December 31, 2020 for 2018, 2019, and 2020 accident year claims pertaining to Apartments & Commercial Buildings and Transportation
liability coverages.
Crusader attributes much
of its adverse loss development experienced in the three most recent years ending December 31, 2020, to social inflation. Used
here, social inflation is a term that encompasses a relatively new adverse trend related to society’s application of the
law when it comes to insurance. In this context, social inflation is generally described by the rising costs of insurance
claims due to societal trends which results in increased litigation, broader definitions of liability and contractual interpretations,
plaintiff friendly legal decisions, larger compensatory jury awards, and larger awards for non-economic damages Crusader
has experienced increased costs due to social inflation in all three of its largest market sector niches, Long-haul Transportation,
Residential Apartment Buildings, and Bars/Taverns, resulting in higher-than-expected frequency and severity of third-party liability
claims.
The variability of Crusader’s losses and
loss adjustment expenses for the periods presented is primarily due to the small and diverse population of Crusader’s policyholders
and claims, which may result in greater fluctuations in claim frequency and/or severity. In addition, Crusader’s reinsurance
retention, which is relatively high in relationship to its net earned premium, can result in increased loss ratio volatility when
large losses are incurred in a relatively short period of time. Nevertheless, management believes that its reinsurance retention
is reasonable given the amount of Crusader’s surplus and its goal to minimize ceded premium.
The preparation of the Company’s
consolidated financial statements requires estimation of certain liabilities, most significantly the liability for unpaid
losses and loss adjustment expenses. Management makes its best estimate of the liability for these unpaid claims costs as of
the end of each fiscal quarter. Due to the inherent uncertainties in estimating the Crusader’s unpaid claims costs,
actual loss and loss adjustment expense payments are expected to vary, perhaps significantly, from any estimate made prior to
the settling of all claims. Variability is inherent in establishing loss and loss adjustment expense reserves, especially for
a small insurer such as Crusader. For any given line of insurance, accident year, or other group of claims, there is a
continuum of possible loss and loss adjustment expense reserve estimates, each having its own unique degree of propriety or
reasonableness. Due to the complexity and nature of the insurance claims process, there are potentially an infinite number of
reasonably likely scenarios. Management draws on its collective experience to judgmentally determine its best estimate. In
addition to applying a variety of standard actuarial methods to the data, an extensive series of diagnostic tests are applied
to the resultant loss and loss adjustment expense reserve estimates to determine management’s best estimate of the
unpaid claims liability. Among the statistics reviewed for each accident year are: loss and loss adjustment expense
development patterns; frequencies; severities; and ratios of loss to premium, loss adjustment expense to premium, and loss
adjustment expense to loss.
When there is clear evidence that the actual
claims costs emerged are different than expected for any prior accident year, the claims cost estimates for that year are revised
accordingly. If the claims costs that emerge are less favorable than initially anticipated, generally, Crusader increases its loss
and loss adjustment expense reserves immediately. However, if the claims costs that emerge are more favorable than initially anticipated,
generally, Crusader reduces its loss and loss adjustment expense reserves over time while it continues to assess the validity of
the observed trends based on the subsequent emerged claim costs.
The establishment of loss and loss adjustment
expense reserves is a detailed process as there are many factors that can ultimately affect the final settlement of a claim. Estimates
are based on a variety of industry data and on Crusader’s current and historical accident year claims data, including but
not limited to reported claim counts, open claim counts, closed claim counts, closed claim counts with payments, paid losses, paid
loss adjustment expenses, case loss reserves, case loss adjustment expense reserves, earned premiums and policy exposures, salvage
and subrogation, and unallocated loss adjustment expenses paid. Many other factors, including changes in reinsurance, changes in
pricing, changes in policy forms and coverage, changes in underwriting and risk selection, legislative changes, results of litigation
and inflation are also taken into account.
Based on the loss and loss adjustment expense
reserve estimates as of December 31, 2020, the estimated ultimate loss ratio is within five percentage points of the initial expected
loss ratio in 8 of Crusader’s 36 years. Since Crusader’s net earned premium in 2020 was $28,168,168, a difference between
the accident year 2020 actual and initial expected loss ratios of five percentage points will or may ultimately impact losses and
loss adjustment expenses by $1,408,408. The estimated ultimate loss ratio is within ten percentage points of the initial expected
loss ratio in 13 of Crusader’s 36 years. A ten percentage point difference between the accident year 2020 actual and the
initial expected loss ratios will or may ultimately impact losses and loss adjustment expenses by $2,816,817. The estimated ultimate
loss ratio is within twenty percentage points of the initial expected loss ratio in 28 of Crusader’s 36 years. A twenty percentage
point difference between the accident year 2020 actual and the initial expected loss ratios will or may ultimately impact losses
and loss adjustment expenses by $5,633,634.
Loss and Loss Adjustment Expense Reserves
Crusader's liability for
unpaid loss and loss adjustment expense reserves consists of case reserves and reserves for IBNR claims. Case reserves are established
by claims personnel based on a review of the facts known at the time the claim is reported and are subsequently revised as more
information about a claim becomes known. IBNR is estimated using various actuarial methods and techniques and includes (1) reserves
for losses and loss adjustment expenses on claims that have occurred but for which claims have not yet been reported to Crusader,
and (2) a provision for expected future development on case reserves for information not currently known.
Crusader’s loss and loss adjustment
expense reserves are as follows:
|
|
Year ended December 31
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Gross reserves:
|
|
|
|
|
|
|
|
|
Case reserves
|
|
$
|
26,363,695
|
|
|
$
|
23,663,743
|
|
IBNR reserves
|
|
|
48,529,814
|
|
|
|
31,402,737
|
|
Total gross reserves
|
|
$
|
74,893,509
|
|
|
$
|
55,066,480
|
|
|
|
|
|
|
|
|
|
|
Reserves net of reinsurance:
|
|
|
|
|
|
|
|
|
Case reserves
|
|
$
|
21,027,703
|
|
|
$
|
18,128,008
|
|
IBNR reserves
|
|
|
31,612,164
|
|
|
|
22,212,617
|
|
Total net reserves
|
|
$
|
52,639,867
|
|
|
$
|
40,340,625
|
|
Reserves for losses and loss adjustment
expenses before reinsurance for each of Crusader’s lines of business are as follows:
|
|
Year
ended December 31
|
Line of Business
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
CMP
|
|
$
|
73,545,182
|
|
|
|
98.2
|
%
|
|
$
|
54,270,633
|
|
|
|
98.6
|
%
|
Other liability
|
|
|
1,283,174
|
|
|
|
1.7
|
%
|
|
|
776,957
|
|
|
|
1.4
|
%
|
Other
|
|
|
65,153
|
|
|
|
0.1
|
%
|
|
|
18,890
|
|
|
|
0.0
|
%
|
Total
|
|
$
|
74,893,509
|
|
|
|
100.0
|
%
|
|
$
|
55,066,480
|
|
|
|
100.0
|
%
|
The Company‘s consolidated financial
statements include estimated reserves for both reported and unreported claims. The Company sets these reserves at each quarterly
balance sheet date based upon management’s best estimate of the ultimate loss and loss adjustment expense payments that it
anticipates will be made to settle all reported and unreported claims.
The following table is a roll forward
of Crusader’s loss and loss adjustment expense reserves, including a reconciliation of the beginning and ending balance sheet
liability for the periods indicated:
|
|
Year ended December 31
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Reserve for unpaid losses and loss adjustment expenses at beginning of year – net of reinsurance
|
|
$
|
40,340,625
|
|
|
$
|
42,125,553
|
|
|
|
|
|
|
|
|
|
|
Incurred losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
Provision for insured events of current year
|
|
|
26,683,872
|
|
|
|
19,384,942
|
|
Provision for incurred events of prior years
|
|
|
7,959,048
|
|
|
|
3,191,185
|
|
Total incurred losses and loss adjustment expenses
|
|
|
34,642,920
|
|
|
|
22,576,127
|
|
|
|
|
|
|
|
|
|
|
Payments:
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses attributable to insured events of the current year
|
|
|
8,285,021
|
|
|
|
6,210,475
|
|
Losses and loss adjustment expenses attributable to insured events of prior years
|
|
|
14,058,657
|
|
|
|
18,150,580
|
|
Total payments
|
|
|
22,343,678
|
|
|
|
24,361,055
|
|
|
|
|
|
|
|
|
|
|
Reserve for unpaid losses and loss adjustment expenses at end of year
– net of reinsurance
|
|
|
52,639,867
|
|
|
|
40,340,625
|
|
Reinsurance recoverable on unpaid losses and loss adjustment expenses at end of year
|
|
|
22,253,642
|
|
|
|
14,725,855
|
|
Reserve for unpaid losses and loss adjustment expenses
at end of year per balance sheet, gross of reinsurance
|
|
$
|
74,893,509
|
|
|
$
|
55,066,480
|
|
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.
If future development
ultimately differs by five percent from Crusader’s 2020 net reserve, $2,631,993 would be reflected in future periods as an
increase or decrease in the development of insured events of prior years and would be recognized in the Company’s Consolidated
Statements of Operations in future periods. If future development ultimately differs by ten percent from Crusader’s 2020
net reserve, $5,263,987 would be reflected in future periods as an increase or decrease in the development of insured events of
prior years and would be recognized in the Company’s Consolidated Statements of Operations in future periods.
Policy Acquisition Costs
Policy acquisition costs decreased $62,039
(1%) to $4,898,807 for the year ended December 31, 2020, compared to $4,960,846 for the year ended December 31, 2019.
Policy acquisition costs consist of commissions, premium taxes, inspection fees, and certain other underwriting costs that
are directly related to and vary with the successful production of Crusader insurance policies. These costs include both
Crusader expenses and the allocated expenses of other Unico subsidiaries. Crusader's reinsurers pay Crusader a ceding
commission, which is primarily a reimbursement of the acquisition cost related to the ceded premium. No ceding commission is
received on ceded premium associated with property facultative excess of loss or catastrophe excess of loss reinsurance
treaties. Policy acquisition costs, net of ceding commission, are deferred and amortized as the related premiums are earned.
The Company annually reevaluates its acquisition costs to determine that costs related to successful policy acquisition are
capitalized and deferred.
Policy acquisition costs and the ratio
to net earned premium are as follows:
|
|
Year ended December 31
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Policy acquisition costs
|
|
$
|
4,898,807
|
|
|
$
|
4,960,846
|
|
Ratio to net earned premium (GAAP ratio)
|
|
|
17
|
%
|
|
|
19
|
%
|
Policy acquisition costs decreased in the
year ended December 31, 2020, compared to the year ended December 31, 2019, due primarily to increase of ceding commission
that Crusader received as a result of increase in premium ceded to its reinsurers.
Salaries and Employee Benefits
Total salaries and employee benefits incurred
increased $2,334,794 (30%) to $10,058,536 for the year ended December 31, 2020, compared to $7,723,742 for the year ended December
31, 2019.
Salaries and employee benefits incurred
and charged to operating expenses are as follows:
|
|
Year ended December 31
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Total salaries and employee benefits incurred
|
|
$
|
10,058,536
|
|
|
$
|
7,723,742
|
|
Less: charged to losses and loss adjustment expenses
|
|
|
(2,027,978
|
)
|
|
|
(2,025,088
|
)
|
Less: capitalized to policy acquisition costs
|
|
|
(1,383,315
|
)
|
|
|
(1,320,792
|
)
|
Less: capitalized to IT system upgrade
|
|
|
(283,073
|
)
|
|
|
(310,010
|
)
|
Net amount charged to operating expenses
|
|
$
|
6,364,170
|
|
|
$
|
4,067,852
|
|
The increase in the total salaries and
employee benefits incurred for the year ended December 31, 2020, compared to the year ended December 31, 2019, was due primarily
to costs associated with a termination of an employment agreement with an executive, increases in executive compensation, increases
in employee benefits due to higher medical insurance rates, and vacation accruals due to less vacation taken by the employees
as a result of the ongoing coronavirus pandemic.
Commissions to Agents/Brokers
Commissions to agents/brokers (not
including commissions on Crusader and USIC policies that are reflected in policy acquisition costs) are generally related
to gross commission income from the health insurance program. Commissions to agents and brokers decreased $78,481 (45%) to $95,315
for the year ended December 31, 2020, as compared to $173,796 for the year ended December 31, 2019. This fluctuation in commissions
to agents/brokers was due primarily to lower commissions associated with loss of a large group account.
Other Operating Expenses
Other operating expenses increased $1,658,331
(58%) to $4,502,414 for the year ended December 31, 2020, compared to $2,844,083 for the year ended December 31, 2019. The increase
in other operating expenses for the year ended December 31, 2020, compared to the year ended December 31, 2019, was due primarily
to increases in legal, depreciation and communication expenses, fees associated with the reinsurance arrangement with USIC, and
higher board of director fees.
Income Tax Expense/Benefit
Income tax expense was $3,547,598 (-20% of pre-tax
loss) for the twelve months ended December 31, 2020 and income tax benefit was $134,187 (4% of pre-tax loss) for the twelve months
ended December 31, 2019. The fluctuation in the income tax rate as a percentage of pre-tax loss for the twelve months ended December
31, 2020, when compared to the twelve months ended December 31, 2019, is primarily due to an increase in the valuation allowance
related to deferred tax assets on federal net operating losses.
As of December 31, 2020, the Company had
deferred tax assets of $7,769,603 generated from $36,998,110 of federal net operating loss carryforwards that will begin to
expire in 2035 and deferred tax assets of $2,402,438 generated from state net operating loss carryforwards which expire
between 2028 and 2040. In connection with preparation of its consolidated financial statements, the Company periodically
performs an analysis of future income projections to determine the adequacy of the valuation allowance. In light of the net
losses that were generated in recent years, for the twelve months ended December 31, 2020, the Company has established a
valuation allowance for the aggregate amount of the federal and state net operating losses and other deferred tax assets in
the amount of $10,557,080 that, in management’s judgment, are not more-likely-than-not to be realized. For the year
ended December 31, 2019, the Company carried a valuation allowance on deferred tax assets generated from federal and state
net operating losses in the amount of $600,000 and $1,931,665, respectively.
Critical Accounting Policies
The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. While every effort is made to ensure the integrity of such estimates, actual results
could differ.
Management believes the Company’s current
critical accounting policies comprise the following:
Losses and Loss Adjustment Expenses
The preparation of the Company’s consolidated
financial statements requires estimation of certain liabilities, most significantly the liability for unpaid losses and loss adjustment
expenses. Management makes its best estimate of the liability for these unpaid claims costs as of the end of each fiscal quarter.
Due to the inherent uncertainties in estimating the Company’s unpaid claims costs, actual loss and loss adjustment expense
payments are expected to vary, perhaps significantly, from any estimate made prior to the settling of all claims. Variability is
inherent in establishing loss and loss adjustment expense reserves, especially for a small insurer such as Crusader. For any given
line of insurance, accident year, or other group of claims, there is a continuum of possible loss and loss adjustment expense reserve
estimates, each having its own unique degree of propriety or reasonableness. Due to the complexity and nature of the insurance
claims process, there are potentially an infinite number of reasonably likely scenarios. Management draws on its collective experience
to judgmentally determine its best estimate. In addition to applying a variety of standard actuarial methods to the data, extensive
series of diagnostic tests are applied to the resultant loss and loss adjustment expense reserve estimates to determine management’s
best estimate of the unpaid claims liability. Among the statistics reviewed for each accident year are: loss and loss adjustment
expense development patterns; frequencies; severities; and ratios of loss to premium, loss adjustment expense to premium, and loss
adjustment expense to loss.
When there is clear evidence that the actual
claims costs emerged are different than expected for any prior accident year, the claims cost estimates for that year are revised
accordingly. If the claims costs that emerge are less favorable than initially anticipated, generally, the Company increases its
loss and loss adjustment expense reserves immediately. However, if the claims costs that emerge are more favorable than initially
anticipated, generally, the Company reduces its loss and loss adjustment expense reserves over time while it continues to assess
the validity of the observed trends based on the subsequent emerged claims costs.
Some lines of insurance are commonly referred
to as "long-tail" lines because of the extended time required before claims are ultimately settled. Lines of insurance
in which claims are settled relatively quicker are called "short-tail" lines. It is generally more difficult to estimate
loss reserves for long-tail lines because of the long period of time that elapses between the occurrence of a claim and its final
disposition and the difficulty of estimating the settlement value of the claim. Crusader’s short-tail lines consist of its
property coverages, and its long-tail lines consist of its liability coverages. However, compared to other long-tail liability
lines that are not underwritten by Crusader, such as workers’ compensation, professional liability, umbrella liability, and
medical malpractice, Crusader’s liability claims tend to be settled relatively quicker. Since trends develop over longer
periods of time on long-tail lines of business, the Company generally gives credibility to those trends more slowly than for short-tail
or less volatile lines of business.
Crusader underwrites three statutory
annual statement lines of business: (1) CMP, (2) liability other than automobile and products, and (3) fire. CMP policies
comprised 99.6% and 98.3% of Crusader’s 2020 and 2019 gross written premium, respectively. CMP policies include both
property and liability coverages. For all of Crusader’s coverages and lines of business, Crusader’s actuarial
loss and loss adjustment expense reserving methods require assumptions that can be grouped into two key categories: (1)
expected loss and loss adjustment expense development patterns and (2) expected loss and loss adjustment expense per premium
dollar.
The Company also segregates most of its business
into smaller homogeneous categories primarily for management’s internal detailed reserve review and analysis. These homogeneous
categories used by the Company include various combinations and special groupings of its lines of business, programs types, states
and coverages. Some categories exclude certain items and/or others include certain items. Not all categories are defined in the
same way. This analysis includes the tracking of historical claims costs and development patterns separately for each of these
uniquely defined categories. Generally, neither the liability development patterns nor the property development patterns vary significantly
by category.
The establishment of loss and loss adjustment
expense reserves is a detailed process as there are many factors that can ultimately affect the final settlement of a claim and,
therefore, the reserve that is needed. Estimates are based on a variety of industry data and on Crusader’s current and historical
accident year claims data, including but not limited to reported claim counts, open claim counts, closed claim counts, closed claim
counts with payments, paid losses, paid loss adjustment expenses, case loss reserves, case loss adjustment expense reserves, earned
premium and policy exposures, salvage and subrogation, and unallocated loss adjustment expenses paid. Many other factors, including
changes in reinsurance, changes in pricing, changes in policy forms and coverage, changes in underwriting and risk selection, legislative
changes, results of litigation and inflation are also taken into account.
At the end of each fiscal quarter, the Company’s
loss and loss adjustment reserves for each accident year (i.e., for all claims incurred within each year) are re-evaluated independently
by the Company’s president, the Company’s chief financial officer, and by an independent consulting actuary.
Generally accepted actuarial methods, including the widely used Bornhuetter-Ferguson and loss development methods, are employed
to estimate ultimate claims costs. An actuarial central estimate of the ultimate claims costs and IBNR reserves is ultimately determined
by management and tested for reasonableness by the independent consulting actuary.
Each year, management compares the actual claims
costs that emerge to the claims costs that were expected to emerge and evaluates whether any observed significant differences are
due to normal variances in the development process that occur from time to time, particularly in an insurer the size of Crusader,
or if they are an indication that changes in the key reserve assumptions or methodologies are appropriate. Repeated and sustained
underwriting losses in Crusader’s Apartments & Commercial Buildings vertical and growth in Crusader’s Transportation
vertical, a product which is generally known for its difficulty to be underwritten profitably, coupled with changes in the market
conditions and increases in social inflation caused Crusader management to reevaluate the assumptions used in its process for estimating
loss and loss adjustment expense reserves during the year ended December 31, 2020.
Crusader’s actuarially based loss
and loss adjustment expense reserve methodology does not include an implicit or explicit provision for uncertainty. Insurance claims
costs are inherently uncertain. There is not a precise means of quantifying in advance a provision for uncertainty when determining
an appropriate liability for unpaid claims costs. Rather, the potential for claims costs being less than estimated and the potential
for claims costs being more than estimated are considered when selecting the parameters to be used in the application of the actuarial
methods and when testing the estimates for reasonableness. Management believes that its recorded loss and loss adjustment expense
reserves make reasonable provision for its liability for unpaid claims costs.
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. The information that management uses to arrive at
its booked reserve estimate comes from many sources within the Company, including its accounting, claims, and underwriting
departments. Informed managerial judgment is applied throughout the reserving process. In addition, time can be a critical
part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of
the claim, the more variable the ultimate settlement amount will tend to be. Accordingly, short-tail claims, such as the
emergence of property damage claims costs, tend to be subject to less variability than the emergence of long-tail liability
claims costs. 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 unreported losses and loss adjustment expenses. Since the emergence and
disposition of claims are subject to uncertainties, the net amounts that will ultimately be paid to settle claims should be
expected to vary, perhaps significantly, from the estimated amounts provided for in the accompanying consolidated financial
statements. 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.
The Company must estimate its ultimate
losses and loss adjustment expenses using a very small claim population size. At the beginning of 2020, Crusader had 510 open
claim files. During 2020, 793 new claim files were opened and 811 claim files were closed, leaving 492 open claim files at the
end of 2020. Due to the small size of Crusader and the related small population of claims, Crusader’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 Crusader’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.
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. The
fluctuation in development of insured events of prior years underscores the inherent uncertainty in insurance claims costs,
especially for a relatively small insurer, such as Crusader. While the Company believes the reserves were adequate at
December 31, 2020 after the reevaluation, adverse or (favorable) development may emerge in the future.
|
|
Year ended December 31
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Net reserves for unpaid losses and loss adjustment expenses at beginning of year
|
|
$
|
40,340,625
|
|
|
$
|
42,125,553
|
|
Adverse development of insured events of prior years
|
|
$
|
7,959,048
|
|
|
$
|
3,191,185
|
|
Percentage of adverse development to beginning reserves
|
|
|
20
|
%
|
|
|
8
|
%
|
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 make reasonable provision for all unpaid losses and loss adjustment expenses of the Company.
The changes in estimates of prior accident year
incurred losses and loss adjustment expenses was due primarily to increases in IBNR reserves associated with the Apartments &
Commercial Buildings and Transportation verticals resulting from higher estimates for expected claims
frequency, claims severity and ultimate incurred losses and loss adjustment expenses during the re-evaluation of the loss and loss
adjustment expense reserves.
The Company applies judgment in determining
estimates for reserves associated with anticipated recoveries of salvage and subrogation on paid losses and loss adjustment expenses.
During the year ended December 31, 2019, the Company changed that estimate to be in-line with its historic salvage and subrogation
recovery success pattern. The impact of that change was a $968,400 reduction in losses and loss adjustment expenses for the year
ended December 31, 2019, and in unpaid losses and loss adjustment expenses. The change was accounted for as a change in accounting
estimate.
Reinsurance
Crusader’s recoverable from
reinsurers represents an estimate of the amount of future loss and loss adjustment expense payments that will be recoverable
from Crusader’s reinsurers. These estimates are based upon estimates of the ultimate losses and loss adjustment
expenses that Crusader 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. Crusader’s estimate of the amounts
recoverable from reinsurers is regularly reviewed and updated by management as new data becomes available. Crusader’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. Crusader 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, 2020, all such ceded contracts are
accounted for as risk transfer reinsurance.
The following tables provide the effect of reinsurance
on the Company’s consolidated financial statements:
The effect of reinsurance on financial
position is as follows:
|
|
Year ended December 31
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Ceded losses and loss adjustment expenses recoverable on excess of loss treaties:
|
|
|
|
|
|
|
|
|
Ceded case loss and loss adjustment expense reserves recoverable
|
|
$
|
5,335,992
|
|
|
$
|
5,535,735
|
|
Ceded IBNR loss and loss adjustment expense reserves recoverable
|
|
|
16,917,650
|
|
|
|
9,190,120
|
|
Total ceded loss and loss adjustment expense reserves recoverable
|
|
$
|
22,253,642
|
|
|
$
|
14,725,855
|
|
The effect of reinsurance on the results
of operations is as follows:
The effect of reinsurance on earned premium
is as follows:
|
|
Year ended December 31
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Direct earned premium
|
|
$
|
36,108,230
|
|
|
$
|
33,958,202
|
|
Assumed earned premium
|
|
|
156,639
|
|
|
|
—
|
|
Ceded earned premium
|
|
|
(8,096,701
|
)
|
|
|
(7,220,734
|
)
|
Net premium earned
|
|
$
|
28,168,168
|
|
|
$
|
26,737,468
|
|
Ratio of ceded earned premium to gross earned premium (direct and assumed earned premium)
|
|
|
22
|
%
|
|
|
21
|
%
|
The effect of reinsurance on losses and
loss adjustment expenses is as follows:
|
|
Year ended December 31
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Direct losses and loss adjustment expenses incurred
|
|
$
|
48,971,172
|
|
|
$
|
36,712,252
|
|
Assumed losses and loss adjustment expenses incurred
|
|
|
89,204
|
|
|
|
—
|
|
Ceded losses and loss adjustment expenses incurred on excess of loss treaties:
|
|
|
|
|
|
|
|
|
Ceded paid losses and loss adjustment expenses
|
|
|
(6,889,668
|
)
|
|
|
(8,941,872
|
)
|
Change in ceded case reserves
|
|
|
199,742
|
|
|
|
(1,742,853
|
)
|
Change in ceded IBNR reserves
|
|
|
(7,727,530
|
)
|
|
|
(3,451,400
|
)
|
Total ceded losses and loss adjustment expenses incurred
|
|
|
(14,417,456
|
)
|
|
|
(14,136,125
|
)
|
Net losses and loss adjustment expenses incurred
|
|
$
|
34,642,920
|
|
|
$
|
22,576,127
|
|
Ceded premium and ceded losses and loss adjustment
expenses are as follows:
|
|
Year ended December 31
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Ceded earned premium
|
|
$
|
8,096,701
|
|
|
$
|
7,220,734
|
|
Ceded losses and loss adjustment expenses incurred
|
|
|
(14,417,456
|
)
|
|
|
(14,136,125
|
)
|
Ceded earned premium less ceded losses and loss adjustment expenses incurred
|
|
$
|
(6,320,755
|
)
|
|
$
|
(6,915,391
|
)
|
The effect of reinsurance on cash flow
is the sum of the effect of reinsurance on the results of operations reflected above and the following changes in reinsurance recoverable:
|
|
Year ended December 31
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
Change in reinsurance recoverable on ceded paid and unpaid losses and loss adjustment expenses
|
|
$
|
(7,463,253
|
)
|
|
$
|
(5,881,413
|
)
|
There were no losses subject to catastrophe
reinsurance treaties coverage incurred during the years ended December 31, 2020 and 2019.
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.
Crusader’s reinsurance strategy is to
protect Crusader 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, Crusader 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.
Ceded paid losses and loss adjustment expenses are determined by the terms of the individual treaties. The Company continually
monitors and evaluates the collectability of reinsurance recoverable to determine if any allowance is necessary.
For years ended December 31, 2020 and 2019,
Crusader wrote 99.9% of its business in the state of California. The types of businesses and the coverage limits written by Crusader
are not considered difficult lines for obtaining reinsurance. In addition, because the major catastrophe exposure is primarily
from riots and from fire following earthquakes, Crusader does not anticipate significant limitations on its ability to cede future
losses on a basis consistent with its historical results.
Investments
The Company’s fixed maturity investments
are classified either as held-to-maturity or available-for-sale and are stated at fair value. Although
part of the Company's investments is classified as available-for-sale and the Company may sell investment securities from
time to time in response to economic and market conditions, or investment securities may be called by their issuers prior
to the securities’ maturity, 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 Company started investing in common stock equity securities during
the year ended December 31, 2020. The Company’s equity securities allocation is intended to enhance the return of and provide
diversification for the total investment portfolio. 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. The net unrealized investment gains on equity
securities is reported in the Consolidated Statements of Operations. 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.
Deferred Tax Assets
The provision for federal income taxes is computed
on the basis of income as reported for financial reporting purposes. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes, and are measured using the enacted tax rates and laws expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Income tax expense provisions increase or decrease in the same period
in which a change in tax rates is enacted.
At each balance sheet date, management
assesses the need to establish a valuation allowance that reduces deferred tax assets when it is more-likely-than-not that
any portion of the deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon
generating sufficient taxable income of the appropriate character within the carryback and carryforward periods available
under the tax law. Management considers the reversal of deferred tax liabilities, projected future taxable income of an
appropriate nature and tax-planning strategies when making this assessment. In connection with preparation of its
consolidated financial statements, the Company periodically performs an analysis of future income projections to determine
the adequacy of the valuation allowance. In light of the net losses that were generated in recent years, for the twelve
months ended December 31, 2020, the Company has established a valuation allowance for the aggregate amount of the federal and
state net operating losses and other deferred tax assets in the amount of $10,557,080 that, in management’s judgment,
are not more-likely-than-not to be realized. For the year ended December 31, 2019, the Company carried a valuation allowance
on deferred tax assets generated from federal and state net operating losses in the amount of $600,000 and $1,931,665,
respectively.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet
arrangements that are currently material or reasonably likely to be material to its consolidated financial position or results
of operations.