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UNICO AMERICAN CORP – 10-K/A – Management's Discussion and Analysis of Financial Condition and Results of Operations.
Edgar Glimpses
Forward-Looking Statements
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."
Overview
General
Unico American Corporation is an insurance holding company. Unico's insurance
company subsidiary Crusader Insurance Company ("Crusader") underwrote commercial
property and casualty insurance. The Company's subsidiaries Unifax Insurance
Systems, Inc. ("Unifax") and American Insurance Brokers, Inc. ("AIB") provided
marketing and continues to provide various underwriting support services related
to property, casualty, health and life insurance. The Company's subsidiary
American Acceptance Company ("AAC") provided insurance premium financing, and
the Company's subsidiary Insurance Club, Inc. , dba AAQHC, an Administrator")
provides membership association services. The Company's subsidiary U.S. Risk
Managers, Inc. ("U.S. Risk") provides claims adjustment services. Unico American
Corporation is referred to herein as the "Company" or "Unico" and such
references include both the corporation and its subsidiaries, all of which are
wholly owned. Unico was incorporated under the laws of Nevada in 1969.
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Table of Contents
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.
Total revenues for the year ended December 31, 2021 , were $36,388,384 compared
to $32,560,111 for the year ended December 31, 2020 , an increase of $3,828,273 .
The increase in revenues was primarily due to an increase in policies written in
the Transportation line of business. The Company's net loss for the year ended
December 31, 2021 was $5,673,251 compared to net loss of $21,491,113 for the
year ended December 31, 2020 , a decrease in net loss of $15,817,862 . On February
12, 2021 , the Company through Crusader, completed the sale of the Company's
headquarters at 26050 Mureau Road , Calabasas, California 91302, for $12,695,000 ,
which netted $12,028,876 . The Company recognized a gain of $3,693,858 on the
sale in 2021. The large decrease in net loss from 2020 compared to 2021 was
primarily due to the substantial increase in IBNR as described in the Company's
Annual Report on Form 10-K for the year ended December 31, 2020 , which generated
much of the 2020 loss. The loss in 2021 is primarily attributable to the
increases in legal fees, supervision fees, and severance payments and the
payment of retention bonuses during 2021.
In connection with the Company's previously announced review of strategic
alternatives, during the quarter ended September 30, 2021 , Unico took actions to
cause Crusader to enter into runoff. In connection with its runoff, Crusader
began to cease writing new and renewal business and to wind down operations that
support the writing of insurance policies. Effective September 30, 2021 ,
Crusader ceased writing any new insurance policies and no longer renewed
policies subsequent to December 8, 2021 . Crusader has issued notices in
accordance with the California Department of Insurance ("CA DOI") rules and
regulations of non-renewal for its existing in-force policies to terminate such
policies at the expiration of the current policy periods. Crusader continues to
provide services to existing insurance policyholders and claimants during its
runoff. Actions to wind down operations that support the writing of new
insurance policies and the issuance of renewal insurance policies began
immediately, and the servicing operations will be adjusted over time to support
business requirements including the retention of the necessary staff. In August
2021 , Unico also discontinued its premium financing operations formerly
conducted through its subsidiary AAC, which activity is reflected on the
Statement of Operations under "Other insurance operations."
Going Concern
Based on Unico's current cash and shortterm investments atDecember 31, 2021 , as well as the other factors described herein, there is substantial doubt that Unico will have sufficient cash to meet its operating and other liquidity requirements when they become due during the next twelve months from the date of issuance of the accompanying consolidated financial statements. Unico has a history of recurring losses from operations, negative cash flows from its operating activities which may continue in the future and as an insurance holding company, Unico does not independently generate significant revenue, and is dependent on dividends and other cash distributions from Crusader and its other subsidiaries to fund its operations and expenses. Historically, Unico received dividends periodically from Crusader, but does not expect to receive any such dividends for the foreseeable future due to prohibitions on dividends imposed by the CA DOI pursuant to the Administration Supervision Agreement (the " Supervision Agreement"), dated as ofSeptember 7, 2021 , by and between Crusader and CA DOI and other actions by the CA DOI in its review of the financial statements of Crusader. Any continued financial support from Crusader will be at the discretion of the Special Examiner appointed pursuant to the Supervision Agreement. The CA DOI advised inApril 2021 , that Crusader was prohibited from paying dividends during the year 2021 and for the years 2022 through 2025. If the Special Examiner does not permit Crusader to continue to provide financial support to Unico, Unico will be unable to continue to fund its continued operations and expenses. The Special Examiner has recently informed Crusader that the CA DOI does not intend to continue to permit Crusader to fund certain expenses attributable to Unico's status as a public company, including certain legal and accounting expenses without an undertaking by the Company to repay payments made on its behalf by Crusader. The Company will have an account payable to Crusader and Crusader will have an intercompany account receivable due from the Company for such payments made by Crusader and authorized by the Special Examiner. The inability of Crusader to pay certain expenses of the Company will exacerbate Unico's lack of liquidity. Additionally, many of the potential strategic alternatives that the Unico Board of Directors is considering will also depend on continued financial support from Crusader to fund transaction expenses and other costs. If Crusader is not permitted to do so, Unico would be unable to pursue such alternatives, which may otherwise be in the best interests of its stockholders. These circumstances raise substantial doubt about Unico's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and reclassification of assets or the amounts and classifications of liabilities that may result from the outcome of the uncertainty of our ability to remain a going concern. 31 Table of Contents Unico needs to improve its consolidated operating results, continue to receive financial support from Crusader, and/or raise substantial additional capital to continue to fund its operations. Unico has taken actions to cause Crusader to enter into runoff and to wind down operations that support the writing of insurance policies. To address its liquidity concerns and meet its capital obligations, Unico has announced a review of strategic alternatives and, with the assistance of a financial advisor, is considering multiple alternatives, including, but not limited to, strategic financing, further scaling back, or eliminating some or all of its remaining business operations, expense reductions, reorganization, merger with another entity, filing for bankruptcy or cessation of operations. There can be no assurances that capital will be available when needed or that, if available, it will be obtained on terms favorable to the Company and its stockholders, particularly in light of the effects that the coronavirus COVID-19 pandemic has had on the capital markets and investor sentiment. In addition, equity or debt financings may have a dilutive effect on the holdings of Unico's existing stockholders, and debt financings may subject Unico to restrictive covenants, operational restrictions, and security interests in Unico's assets. Many of these potential alternatives will also depend on continued financial support from Crusader to fund transaction expenses and other costs. If Unico becomes unable to continue as a going concern, Unico may have to dispose of or liquidate its assets and might realize significantly less than the values at which they are carried on its consolidated financial statements. Additionally, Unico may have to write down some or all of its capitalized assets or liquidate some or all of its investments in gross unrealized loss position. These actions may cause Unico's stockholders to lose all or part of their investment in Unico's common stock. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. OnSeptember 13, 2021 , the Special Examiner advised Crusader, through its counsel, that a deficiency existed in certain funds that Unifax is required to maintain, in a fiduciary capacity, for Crusader's benefit. Pursuant to the provisions of California Insurance Code Sections 1733 and 1734, Unifax is required to hold premium payment funds received from policyholders as fiduciary funds in trust maintained for the benefit of Crusader. The Special Examiner informed Crusader that the CA DOI believed that the deficiency in such fiduciary funds was approximately$3,100,000 as ofSeptember 13, 2021 . The Company believes that as ofSeptember 30, 2021 , the amount of such deficiency was$2,452,835 . InJanuary 2022 Unico, Crusader, and Unifax agreed, with the pre-approval of the Special Examiner, to transfer a computer system, owned by Unico, to Crusader. Unico contributed the computer system at its book value of$1,991,956 , to Unifax, and Unifax in turn contributed the computer system to Crusader at its book value of$1,991,956 as a direct reduction in the amount due to Crusader which resulted in a dollar-for-dollar reduction in the premium trust deficiency. The amount of such deficiency was$275,901 as ofMarch 31, 2022 , and$432,900 as ofMay 31, 2022 . Supervision Agreement OnSeptember 10, 2021 , Crusader and the CA DOI entered into the "Supervision Agreement", datedSeptember 7, 2021 , at the request of the CA DOI. The Supervision Agreement was requested by the CA DOI because of the CA DOI's expressed concerns regarding the financial stability of Crusader and the potential effects on Crusader and Crusader'sCalifornia policyholders of any potential bankruptcy of Unico. The Supervision Agreement among other things, provides for the appointment by the CA DOI of a Special Examiner to provide supervision and regulatory oversight of Crusader. The Supervision Agreement imposes limitations on Crusader's ability to take certain actions without the prior written consent of the California Insurance Commissioner (the "Commissioner"), the Special Examiner, or the Special Examiner's appointed representative. Among the actions that Crusader is prohibited from making without such prior written consent are the following: (i) making payments, engaging in any transaction with or entering into any agreement with, any affiliated or otherwise related person or entity if the cost to Crusader is an individual payment of more than$5,000 or aggregate payments of more than$20,000 ; (ii) making payments, engaging in any transaction with or entering into any agreement with, any non-affiliated or otherwise unrelated person or entity if the cost to Crusader is an individual payment of more than$5,000 or aggregate payments of more than$20,000 ; (iii) paying any dividend of any amount; (iv) except as provided in (i) and (ii), making any payments to or on behalf of the Company in connection with any agreement entered into between Crusader and the Company; (v) making any loans to affiliates, officers, directors, stockholders or third parties; (vi) incurring any debt, obligation or liability greater than$5,000 ; (vii) entering into any new reinsurance contract or treaty or amending any existing reinsurance contract or treaty; (viii) making any material changes in management and essential staffing; (ix) increasing salaries or benefits of officers or directors or making any preferential payment of bonuses or other payments considered legally preferential; and (x) making any other material changes in its normal course of operations, including but not limited to, entering into new lines of business, making major corporate reorganizations, or redomesticating fromCalifornia . The Supervision Agreement provides that the Special Examiner will meet with Crusader to develop a list of recurring payments under items (i) and (ii) that may not require prior written approval. To date, the Special Examiner has permitted Crusader to provide significant financial support to Unico in the form of reimbursement and/or direct payment of certain operating and other expenses, but there can be no assurance that the Special Examiner will continue to permit Crusader to do so under the Supervision Agreement. If the Special Examiner does not continue to permit Crusader to financially support Unico in the future, Unico will be unable to continue to fund its ongoing operations.
Independent Investigation
InOctober 2021 , the Audit Committee of Unico's Board of Directors retained independent outside counsel, who in turn engaged forensic accountants to work at their direction, to conduct an independent investigation and provide legal advice to the Audit Committee (the "Independent Investigation"), regarding the facts and circumstances relating to, and resulting in, the observed fiduciary funds deficiency. As a result of the Independent Investigation, the Company has determined that, over a period of multiple years, (i) Unifax did not comply with the requirements of the California Insurance Code ("CIC") to hold premium trust funds in separate accounts or segregate such funds in accordance with the CIC; (ii) the funds in question were improperly transferred to an operating account of Unifax and were subsequently transferred to a Unico operating account; and (iii) the funds in question were utilized by Unico and its consolidated subsidiaries for general corporate purposes. The Independent Investigation did not find any evidence that any of such funds had been stolen or used for non-corporate purposes. 32 Table of Contents Work Force Reduction In connection with the runoff of Crusader, onOctober 7 andOctober 8, 2021 , the Company informed thirteen employees of the Company's determination to terminate their employment, effective as ofOctober 8, 2021 (the "October 2021 Work Force Reduction"). Additionally, onDecember 16, 2021 , andDecember 17, 2021 , the Company informed an additional twelve employees of the Company's determination to terminate their employment, effective as ofDecember 17, 2021 (the "December 2021 Work Force Reduction"). The terminated employees were primarily employed in the Company's underwriting and marketing groups. In connection with theOctober 2021 Work Force Reduction and theDecember 2021 Work Force Reduction, the Company expects to incur total pre-tax costs of$968,139 , consisting of severance payments under the Company's existing policy. In addition, the Company has offered retention bonuses to certain of the Company's employees that were not subject to theOctober 2021 Work Force Reduction and theDecember 2021 Work Force Reduction, in connection with which, depending on employee participation, the Company expects to incur total pre-tax costs of$62,269 . The Company implemented another retention bonus plan to certain employees and expects to incur total pre-tax costs of$193,731 related to the plan, which will be recognized ratably over the last three quarters of 2022. The Company may incur additional costs in connection with the runoff of Crusader, including additional costs associated with workforce reductions. In 2021, the Company paid$331,331 in severance payments and$0 in retention bonus payments. In 2022, the Company has paid$270,705 in severance payments and$284,810 in retention bonus payments.
COVID-19
As a result, of the ongoing COVID-19 pandemic, economic uncertainties have arisen which can impact the fair value of investments, day-to-day administration of the business and premium volume. While the Company does not believe it is exposed to substantial risk from coronavirus-related claims under the insurance policies written by Crusader, it is possible that the Company's results of operations, financial condition and the fair value of its investment portfolio may be adversely affected by the general economic conditions as a result of
the pandemic. 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 first half of 2020, however, the investment portfolio recovered in value in subsequent quarters. The overall response to the pandemic contributed to the recent decline in investment yields, compared to 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. Crusader has received a number of coronavirus-related business interruption claims. With the exception of one claim for which investigation is still ongoing, all such claims were denied after the individual circumstances of each claim were reviewed to determine whether insurance coverage applied. Like many companies in the property casualty insurance industry, Crusader was named as defendant in lawsuits seeking insurance coverage under the policies issued by Crusader for alleged economic losses resulting from the shutdown or suspension of their businesses due to the COVID-19 pandemic. Although the allegations vary, the plaintiffs generally seek a declaration of insurance coverage, damages for breach of contract in unspecified amounts for claim denials, interest, and attorney fees. Some of the lawsuits also allege that the insurance claims were denied in bad faith or otherwise in violation of state laws and seek extra-contractual or punitive damages. Crusader denies the allegations in these lawsuits and intends to continue to vigorously defend them. Although the policy terms vary in general, the claims at issue in these lawsuits were denied because the policyholder identified no direct physical loss, such as fire or water damage, to property at the insured premises, and the governmental orders that led to the complete or partial shutdown of the business were not due to the existence of any direct physical loss or damage to property in the immediate vicinity of the insured premises and did not prohibit access to the insured premises, as required by the terms of the insurance policies. Depending on the individual policy, additional policy terms and conditions may also prohibit coverage, such as exclusions for pollutants, ordinance or law, loss of use, and acts or decisions. Most of Crusader's policies also contain an exclusion for losses caused directly or indirectly
by
"virus or bacteria."
In addition to the inherent difficulty in predicting litigation outcomes, the
COVID-19 pandemic business income coverage lawsuits present a number of
uncertainties and contingencies that are not yet known, including how many
policyholders will ultimately file claims, the number of lawsuits that will be
filed, the extent to which any class may be certified, and the size and scope of
any such classes. The legal theories advanced by plaintiffs vary by case; many
complaints continue to be amended; several have been dismissed voluntarily and
may be refiled; and others have been dismissed by trial courts. Some early
decisions on motion filings have been appealed.
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Table of Contents
On March 23, 2021 , ten policyholders sued Crusader in a putative class action
entitled Anchors & Whales LLC et al. v. Crusader Insurance Company , Superior
Court of the State of California for the County of San Francisco
(CGC-21-590999). The action alleges that Crusader wrongly denied claims for
business interruption coverage made by bars and restaurants related to the
COVID-19 pandemic and related government orders that limited or halted
operations of bars and restaurants. The action further alleges that Crusader
acted unreasonably in denying the claims, and it seeks as damages the amounts
allegedly due as contract benefits under the insurance policies, attorneys' fees
and costs, punitive damages, and other unspecified damages. The lawsuit alleges
a putative class of all bars and restaurants in California that were insured by
Crusader for loss of business income, who made such a claim as a result of "one
or more Governmental Orders and the presence of the COVID-19 virus on the
property," and whose claim was denied by Crusader. On October 1, 2021 , Crusader
was granted its motions on the pleadings without leave to amend and the lawsuit
was dismissed. On December 15, 2021 , Anchors & Whales LLC filed a notice of
appeal with California Court of Appeals , 1st Appellate District , Division 2
(A164412). The opening brief of Anchors & Whales LLC is due to be filed by
August 12, 2022 . The Company cannot predict the actions of the Court of Appeals. 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 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 follows governmental safety guidelines in determining when to remove the coronavirus-related business restrictions and where and when to request the employees working from their homes return to their workplaces for a few days per week. 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.
Termination of Reinsurance Arrangement
OnAugust 31, 2021 ,Crusader and United Specialty Insurance Company ("USIC"), terminated the Quota Share Reinsurance Agreement (the "Reinsurance Agreement"), effectiveApril 1, 2020 , by and between Crusader and USIC. Pursuant to the Reinsurance Agreement, Crusader agreed to reinsure all of USIC's liability for policies issued by USIC and produced by Unifax, for property, general liability, commercial multiple peril ("CMP"), liability and other miscellaneous coverages, subject to certain maximum policy limits. Crusader's obligations under the Reinsurance Agreement continue after termination for business in force at the time of termination, for policies with effective dates prior to the termination but issued after the termination date, and for policies that must be issued or renewed as a matter of law until the expiration of the policies. OnAugust 31, 2021 , as a result of the termination of the Reinsurance Agreement, the Surplus Line Broker Agreement (the "Broker Agreement"), effectiveApril 1, 2020 , by and between Unifax and USIC, automatically terminated. Pursuant to the Broker Agreement, USIC authorized Unifax to act as its broker for the purpose of producing and administering certain specified classes of insurance policies, which are the subject of the Reinsurance Agreement. Unifax's obligations under the Broker Agreement continue after termination for insurance business reinsured under the Broker Agreement. Unifax's obligations include handling and servicing of all policies until their expiration. OnAugust 31, 2021 , as a result of the termination of the Broker Agreement, the Claims Administration Agreement (the "Claims Administration Agreement"), effectiveApril 1, 2020 , by and betweenU.S. Risk and USIC, automatically terminated. Pursuant to the Claims Administration Agreement, USIC appointedU.S. Risk to adjust and settle claims on its behalf in connection with the surplus lines policies issued by USIC in connection with the Reinsurance Agreement. Upon termination of the Claims Administration Agreement,U.S. Risk is obligated (unless revoked by USIC) to continue to manage claims during the runoff of
the business reinsured. The parties agreed to mutually terminate the Reinsurance Agreement. There were no early termination penalties incurred as a result of the termination. The Reinsurance Agreement provides for a minimum ceding fee, and, upon termination of the Reinsurance Agreement, the minimum ceding fee was pro-rated to the date of termination unless there were policies issued after the termination of the Reinsurance Agreement. In such case, the minimum ceding fee will continue past the termination of the Reinsurance Agreement until such time as no further policies are issued. USIC waived any additional ceding fees payable under the Reinsurance Agreement under the agreement to terminate that agreement. Under the Reinsurance Agreement, Crusader was required to secure its obligations to USIC for unearned premium reserves, if any, and loss reserves (losses incurred and not reported and loss reported but unpaid) in a security fund, trust agreement or letter of credit to permit USIC to receive credit for the reinsurance ceded to Crusader by USIC. Such security was required because Crusader is not authorized to transact insurance inDelaware , the domiciliary state of USIC. Initially, the security required to be provided by Crusader was 150% of the unearned premium and loss reserves. USIC was permitted to request additional security for the unearned premium and loss reserves in the event (i) theA.M. Best rating of Crusader is at any time reduced? or (ii) theA.M. Best rating of Crusader is at any time removed or withdrawn? or (iii) there is a reduction the capital and policyholder surplus of Crusader by 10% or more in any rolling 12-month period or (iv) Crusader fails to maintain its Cat excess of loss reinsurance coverage at certain levels. As ofDecember 31, 2021 , six securities were held as collateral withComerica Bank & Trust , N. A. ("Comerica"), pursuant to the reinsurance trust agreement among Crusader, USIC and Comerica to secure payment of Crusader's liabilities and performance of its obligations under the reinsurance arrangement with USIC. The estimated fair value and amortized cost of those securities was$8,243,758 and$8,162,053 onDecember 31, 2021 , respectively. The estimated aggregate fair value and amortized cost of these securities was$7,944,916 and$7,836,756 , onMarch 31, 2022 , respectively. As ofApril 30, 2022 , the estimated market value decreased to$7,663,701 . Such market values are used in the trust fund calculation by USIC. The increase in the security request is a result of a decline in the market value of the securities and an increase in the collateral from 150% to 325% because of Crusader's loss of the AM Best rating and the decline in policyholder surplus. If Crusader fails to provide the additional security requested by USIC, USIC may draw down the full amount of the funds in the reinsurance trust agreement. Crusader is reviewing the request of USIC and believes that the asserted loss reserves used in their calculation may be incorrect. Any increase to the reinsurance trust agreement by Crusader will require the consent of the Special Examiner. Any drawdown of the reinsurance trust agreement by USIC may have a materially adverse effect on the financial condition of Unico. As ofDecember 31, 2020 , one corporate security, included in available-for-sale fixed maturities, was held as collateral with Comerica, pursuant to the reinsurance trust agreement among Crusader, USIC and Comerica to secure payment of Crusader's liabilities and performance of its obligations under the reinsurance arrangement with USIC. The estimated fair value and amortized cost of that security was$824,500 and$787,653 onDecember 31, 2020 , respectively. IT System Upgrade In 2018 the Company determined it needed to upgrade or replace its legacy IT system, which it opted to upgrade because the cost was substantially less. The upgrade was completed in first quarter of 2021 at a cost of approximately$1,500,000 , excluding costs of Unico's employees involved in the upgrade, due to unexpected technical challenges. The Company started depreciating the associated capitalized costs, including the costs of Unico's employees involved in the upgrade, during the second quarter of 2021.
Revenue and Income Generation
The Company historically received its revenues primarily from earned premium derived from the insurance company operations, commission and fee income generated from the insurance agency operations, finance charges and fee income from the premium finance operations, and investment income from cash generated primarily from the insurance company operation. However, in light of the runoff of Crusader, and the cessation of the premium finance operations provided by AAC, the Company's revenues from these sources have and will continue to decline significantly in the future. The insurance company operation revenues generated approximately 95.2% of consolidated revenues for the fiscal year endedDecember 31, 2021 , compared to 93.6% of consolidated revenues for the fiscal year endedDecember 31, 2020 . None of the Company's other operations is individually material to consolidated revenues. 34 Table of Contents Insurance Company Operation As ofDecember 31, 2021 , Crusader was licensed as an admitted insurance carrier in the states ofArizona ,California ,Nevada ,Oregon , andWashington . From 2004 untilJune 2014 , all of Crusader's business was written in the state ofCalifornia . Crusader's business remains concentrated inCalifornia (100% and 99.9% of gross written premium, which represents written premium before cession to reinsurers, in the years ended 2021 and 2020, respectively). During the years endedDecember 31, 2021 and 2020, 99.7% and 99.6% 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: Year ended December 31 2021 2020 California$ 36,266,636 $ 36,618,013 Arizona - 24,817 Total gross written premium$ 36,266,636 $ 36,642,830
Crusader previously focused its business in three underwriting businesses: (1) Transportation, (2) Mainstreet, and (3) Buildings. The Company reorganized its underwriting businesses for proper staffing and business focus during the first quarter of 2021. The former Food,Beverage and Entertainment and Garage and Mercantile businesses became Mainstreet, and the former Apartments & Commercial Buildings business was renamed Buildings. The Company's Board of Directors decided to put Crusader into run off inSeptember 2021 and now Crusader's business is in runoff. Written premium is a non-GAAP financial measure that is defined, under statutory accounting principles ("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 a required statutory measure. 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. 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): Year ended December 31 2021 2020 Direct written premium$ 32,871,625 $ 36,338,800 Assumed written premium 3,395,010 304,030
Less: written premium ceded to reinsurers (11,551,580 ) (8,078,748 )
Net written premium
24,715,055 28,564,082 Change in direct unearned premium 5,407,105 (230,570 ) Change in assumed unearned premium (1,550,080 ) (147,391 ) Change in ceded unearned premium (142,175 ) (17,953
) Net earned premium$ 28,429,905 $ 28,168,168 The Company's insurance operational 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. 35 Table of Contents
Crusader's underwriting loss before income taxes is as follows
Year ended December 31
2021 2020 Change
Net written premium $ 24,715,055 $ 28,564,082 $ (3,849,027 )
Change in net unearned premium 3,714,850 (395,914 )
4,110,764
Net earned premium 28,429,905 28,168,168
261,737
Less:
Losses and loss adjustment expenses 25,972,840 34,642,920
(8,670,080 ) Policy acquisition costs 5,442,645 4,898,807 543,838 Total underwriting expenses 31,415,485 39,541,727
(8,126,242 )
Underwriting loss before income taxes
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 income or loss before income taxes is useful supplemental information that helps align the reader's understanding with management's view of Crusader's 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:
Year ended December 31
2021 2020
Underwriting loss before income taxes$ (2,985,580 ) $ (11,373,559 ) Insurance company operation revenues: Net investment income 1,932,993
1,988,243
Net realized investment gains (losses) 259,912
97,771
Net realized investment gains (losses) on real estate 3,693,858
-
Net unrealized investment gains on equity securities 400,862
198,266
Other income (83,043 )
32,713
Other insurance operations revenues: Gross commissions and fees 1,601,427
1,827,263
Finance charges and fees earned 151,920
240,589
Other income 550
7,098
Less expenses: Salaries and employee benefits 3,850,568
6,364,170
Commissions to agents/brokers 80,586
95,315 Other operating expenses 6,256,079 4,502,414 Loss before taxes$ (5,214,334 ) $ (17,943,515 ) 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 an allowance against its deferred acquisition costs of$1,409,654 and$0 for the years endedDecember 31, 2021 and 2020, respectively. The insurance company operation combined ratio is the sum of (1) the ratio of net losses and loss adjustment expenses incurred (including a provision for IBNR) to net earned premium (loss ratio) and (2) the ratio of policy acquisition costs to net earned premium (expense ratio). If the combined ratio is below 100%, an insurance company has an underwriting profit; if it is above 100%, the company has an underwriting loss. 36 Table of Contents The following table shows the loss ratios, expense ratios, and combined ratios of Crusader: Year ended December 31 2021 2020 Loss ratio (1) 91 % 123 % Expense ratio (2) 41 % 38 % Combined ratio (3) 132 % 161 %
(1) Loss ratio is defined as losses and loss adjustment expenses divided by net
earned premium.
(2) Expense ratio is defined as a sum of policy acquisition costs and portions of
indirect salaries and employee benefits and other operating expenses
allocation to the insurance company operations, reduced by allocation of
gross commissions and fees and other income, divided by net earned premium.
The calculation of this expense ratio is different from the one used for
computing the statutory accounting basis expense ratio.
(3) Combined ratio is defined as a sum of loss ratio and expense ratio. The
combined ratio is different from the statutory accounting basis combined
ratio.
The following table provides an analysis of losses and loss adjustment expenses:
Year ended December 31
2021 2020 Change
Losses and loss adjustment expenses
Provision for insured events of current year$ 26,097,435 $ 26,683,872 $ (586,437 ) Development of insured events of prior years (124,595 ) 7,959,048
(8,083,643 )
Total losses and loss adjustment expenses
$ (8,670,080 ) OnSeptember 24, 2021 ,A.M. Best Company ("A.M. Best") downgraded Crusader's Financial Strength Rating ("FRB") to "C++" (Marginal) from "B" (Fair) and its Long-Term Issuer Credit Rating ("Long-Term ICR") to "b" (Marginal) from "bb+" (Fair).A.M. Best also downgraded Unico's Long-Term ICR to "ccc-" (Weak) from "b" (Marginal). In addition,A.M. Best maintained the "under review with negative implications" status for these Credit Ratings. OnSeptember 24, 2021 ,A.M. Best's ratings reflected concerns regarding Crusader's balance sheet strength, whichA.M. Best assessed as weak, as well as its weak operating performance, limited business profile and marginal enterprise risk management.A.M. Best stated that, while Crusader maintains sufficient liquidity, and its risk-adjusted capital levels remain at the strongest level, as measured byA.M. Best's Capital Adequacy Ratio, the downgrades reflect the lowered assessment of the balance sheet strength given the enterprise's diminished financial flexibility and the constraints imposed on Crusader by the CA DOI under the Supervision Agreement. TheA.M Best rating was withdrawn by the Company onSeptember 24, 2021 . Some of Crusader's policyholders, or the lenders, landlords or clients of Crusader's policyholders, require insurance from a company that has anA.M. Best FSR of "A-" or higher, and theA.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 and the ultimate withdrawal of these ratings would have a negative impact on the Company's revenue and results of operations if Crusader's operations were not in runoff. In addition, certain policyholders of Crusader may have cancelled their policies because of the change in the rating and ultimate withdrawal of these ratings. The Company cannot quantify the impact that the rating changes or the withdrawal of the ratings have had or will have on its revenue and results of operations.
Revenues from Other Insurance Operations
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 5% and 6% of total revenues for the years endedDecember 31, 2021 and 2020, respectively.
Investments
The Company generated revenues from its total invested assets of$76,205,181 (fixed maturities at amortized cost, equity securities at cost and short-term investments at fair value) and$83,617,720 (fixed maturities at amortized cost, equity securities at cost and short-term investments at fair value) as ofDecember 31, 2021 and 2020, respectively. Net investment income (net of investment expenses) decreased$55,250 (-3%) for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 . This decrease in net investment income was due primarily to a decrease in average invested assets and increases in interest rates impacting the Company's portfolio. Average invested assets are expected to continue to decrease in future periods because Crusader is in runoff and will be using the investments to satisfy future claims. 37 Table of Contents
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 ofDecember 31, 2021 , all of the Company's investments are inU.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 ofDecember 31, 2021 , the weighted average maturity of the Company's investments was approximately 6.7 years, and the effective duration for available-for-sale investments (investments managed under the investment guidelines) was 2.4 years. Liquidity and Capital Resources
The Company prepared the accompanying consolidated financial statements on a going concern basis, which assumes that it will realize its assets and satisfy its liabilities in the normal course of business. Unico has a history of recurring losses from operations, negative cash flows from its operating activities which may continue in the future, and, as a holding company, does not independently generate significant revenue and is dependent on dividends and other cash distributions from Crusader and its other subsidiaries to fund its operations and expenses. Historically, Unico generally received dividends periodically from Crusader, but does not expect to receive any such dividends for the foreseeable future due to prohibitions on dividends imposed by the CA DOI pursuant to the Supervision Agreement, Crusader's decreased policyholder surplus caused by additional underwriting losses during 2021, and the need to preserve policyholder surplus at Crusader. Any continued financial support from Crusader will be at the discretion of the Special Examiner appointed pursuant to the Supervision Agreement. If the Special Examiner does not permit Crusader to continue to provide significant financial support to Unico, Unico will be unable to continue to fund its continued operations and expenses. The Special Examiner has recently informed Crusader that the CA DOI does not intend to continue to permit Crusader to fund certain expenses attributable to Unico's status as a public company, including certain legal and accounting expenses without an undertaking by the Company to repay payments made on its behalf by Crusader. The Company will have an account payable to Crusader and Crusader will have an intercompany account receivable due from the Company for such payments made by Crusader and authorized by the Special Examiner. The inability of Crusader to pay certain expenses of the Company will exacerbate Unico's lack of liquidity. Additionally, many of the potential strategic alternatives that the Unico Board of Directors is considering will also depend on continued financial support from Crusader to fund transaction expenses and other costs. If Crusader is not permitted to do so, Unico would be unable to pursue such alternatives, which may otherwise be in the best interests of its stockholders. These circumstances raise substantial doubt about Unico's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of the uncertainty of our ability to remain a going concern.
No assurance can be given that the Company's estimate of ultimate loss and loss adjustment expense reserves will be sufficient but based on the Company's current loss and loss expense reserves and expected current and future payments, the Company believes that there are no current liquidity constraints for Crusader. However, as an insurance holding company, the Company does not independently generate significant revenue and is dependent on dividends and other cash distributions from Crusader and its other subsidiaries to fund its operations and expenses. As discussed below, the Company does not expect to receive any dividends from Crusader for the foreseeable future, and accordingly, its financial position and ability to pay operating expenses will be adversely impacted. As a result of Crusader being placed into runoff, Crusader is no longer able to generate any significant amounts of premium and the holdings of unearned premium reserves will be depleted over time. As a result, Crusader will need to liquidate some of its investment holdings to support its operations. Accordingly, the size of Crusader's investment portfolio and investment income are expected to decrease. OnDecember 31, 2021 andDecember 31, 2020 , Crusader's RBC Level was less than 300% of its Authorized Control Level RBC, and its statutory accounting basis combined ratio was in excess of 120% for the years then ended. The RBC Level when coupled with the statutory accounting basis combined ratio triggered Company Action Level Events under the RBC for the years then ended. OnMarch 24, 2021 Crusader submitted to the CA DOI a comprehensiveRisk Based Capital Plan (the "RBC Plan") to increase the adjusted capital above 300% and to address the actions that Crusader would take to correct the conditions that resulted in the Company Action Level Event. The CA DOI found the RBC Plan to be deficient and requested that a revised RBC Plan be submitted. OnJuly 2, 2021 , the Company submitted a revised RBC Plan, which addressed issues raised by the CA DOI (the "2021 Revised RBC Plan"). No action was taken by the CA DOI regarding the 2021 Revised RBC Plan. As ofDecember 31, 2021 a second Company Action Event occurred. AtDecember 31, 2021 , Crusader's RBC Level was less than 300%, with a combined ratio greater than 130%, which resulted in another Company Action Level event (the "2022 Company Action Level Event"). As a result of the 2022 Company Action Level Event, Crusader was required to submit another comprehensive Risk Based Capital Plan ("2022 RBC Plan") to the CA DOI. Crusader submitted its 2022 RBC Plan onMay 15, 2022 . OnJune 9, 2022 , the CA DOI requested additional information regarding the 2022 RBC Plan, which information is to be submitted byJuly 24, 2022 . The CA DOI may accept Crusader's 2022 RBC Plan to correct the conditions that lead to the 2022 Company Action Event, or it may request that a revised plan be submitted, or it may take no action with respect to the 2022 RBC Plan. After the Plans are submitted, the CA DOI may request additional changes to the revised RBC Plan to address various corrective actions that Crusader and/or the Company will take, including, without limitation, increasing the capital of Crusader. Depending on the scope and nature of any such requests from the CA DOI, regarding the 2022 RBC Plan the Company and Crusader may not be able to implement certain corrective actions, including the potential infusion of capital to Crusader. The Company continues to be engaged in discussions with the CA DOI on various strategic alternatives to address the RBC issues. 38 Table of Contents Another liquidity risk faced by the Company is adverse development of Crusader's loss and loss adjustment expense reserves. Based on the Company's current loss and loss expense reserves and expected current and future payments, the Company believes that Crusader's loss and loss adjustment expense reserves are adequate to address anticipated claims. However, no assurance can be given that the Company's estimate of ultimate loss and loss adjustment expense reserves will be sufficient. Crusader has a significant amount of cash, restricted cash, cash equivalents, and investments as a result of its holdings of unearned premium reserves, its reserves for loss and loss adjustment expense payments and its capital and surplus. Crusader's loss and loss adjustment expense payments are the most significant cash flow requirement of the Company. These payments are continually monitored and projected to ensure that the Company has the liquidity to cover these payments. Cash, restricted cash, and investments (at amortized cost) of the Company atDecember 31, 2021 , were$91,831,832 compared to$87,575,700 atDecember 31, 2020 . Crusader's cash, restricted cash, and investments were 99% and 98% of the total cash, restricted cash, and investments (at amortized cost) held by the Company as ofDecember 31, 2021 and 2020, respectively.
As of
securities,
securities, agency mortgage-backed securities, equity securities and short-term
investments. All the Company's investments except for the certificates of
deposit, are readily marketable.
The composition of Company's investment portfolio is as follows:
December 31, 2021 December 31, 2020
Amortized Fair Amortized Fair
Cost Value Cost Value
Fixed maturities:
U.S. Treasury securities $ 6,278,764 $ 6,309,805 $ 10,596,808 $ 10,832,181
Corporate securities 44,370,193 45,249,973 44,159,926 46,451,905
Agency mortgage-backed
securities 20,569,448 20,853,627 25,314,546 26,125,608
Certificates of deposit 300,000 300,000 798,000 798,000
Total fixed maturity
investments 71,518,405 72,713,405 80,869,280 84,207,694
Equity securities 3,532,026 4,131,153 2,548,440 2,746,706
Short-term investments 1,154,750 1,154,750 200,000 200,000
Total investments $ 76,205,181 $ 77,999,308 $ 83,617,720 $ 87,154,400
The short-term investments includeU.S. Treasury bills and certificates of deposit that are all highly rated and have initial maturities between three and twelve months. Amortized costs of the short-term investments approximate their fair values. The Company is required to classify its debt securities into one of three categories: heldtomaturity, availableforsale, or trading securities. Although part of the Company's investments in fixed maturity securities is classified as availableforsale and, while 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, its investment guidelines place primary emphasis on buying and holding highquality investments to maturity. Historically, the Company's investment guidelines placed primary emphasis on buying and holding high-quality investments to maturity. It is expected the Company will sell securities to support its operations.
The Company's Board of Directors has approved investment guidelines which
reflect the Company's risk, balance sheet, and profile.
Under the Company's investment guidelines, investments may only includeU.S. Treasury notes,U.S. government agency notes, mortgage-backed securities (including pass through securities and collateralized mortgage obligations) that are backed by agency and non-agency collateral, commercial mortgage-backed securities,U.S. corporate obligations, asset backed securities (including but not limited to credit card, automobile and home equity backed securities), tax-exempt bonds, preferred stocks, common stocks, commercial paper, repurchase agreements (treasuries only), mutual funds, exchange traded funds, bank certificates of deposits and time deposits. The investment guidelines provide for certain investment limitations in each investment category. 39 Table of Contents
Unless agreed to in advance in writing by Crusader, investments in the following
types of securities are prohibited:
· Mortgage loans, except for mortgage-backed securities issued by an agency
of the U.S. government.
· Derivative mortgage-backed securities including interest only, principal
only and inverse floating rate securities.
· All fixed maturity real estate securities, except mortgage-backed
securities (including pass through securities and collateralized mortgage
obligations) that are backed by agency and non-agency collateral and
commercial mortgage-backed securities.
· Options and futures contracts.
· All non-U.S. dollar denominated securities.
· Any security that would not be in compliance with the regulations of
Crusader's state of domicile.
An independent investment advisor manages Crusader's investments. The advisor's
role currently is limited to maintaining Crusader's portfolio within the
investment guidelines and providing investment accounting services to the
Company. Through July 31, 2021 , the investments were held by
Crusader's previous custodian, Union Bank Global Custody Services ("Union
Bank "). Effective August 2, 2021 , the investments were held by Crusader's
current custodian, U.S. Bank , Institutional Trust and Custody ("U.S. Bank "), as
a result of the sale of the custodial business by Union Bank to U.S. Bank .
As of December 31, 2021 , six securities were held as collateral with Comerica
Bank & Trust , N. A. ("Comerica"), pursuant to the reinsurance trust agreement
among Crusader, USIC and Comerica to secure payment of Crusader's liabilities
and performance of its obligations under the reinsurance arrangement with USIC.
The estimated fair value and amortized cost of those securities was $8,243,758
and $8,162,053 on December 31, 2021 , respectively. As of December 31, 2020 , one
corporate security, included in available-for-sale fixed maturities, was held as
collateral with Comerica, pursuant to the reinsurance trust agreement among
Crusader, USIC and Comerica to secure payment of Crusader's liabilities and
performance of its obligations under the reinsurance arrangement with USIC. The
estimated fair value and amortized cost of that security was $824,500 and
$787,653 on December 31, 2020 , respectively.
On August 10, 2020 , the Board authorized a share repurchase program (the "2020
Program") for up to $5,000,000 of the currently outstanding shares of the
Company's common stock. The 2020 Program was effective immediately and replaced
the Company's existing share repurchase program that was adopted by the Board on
December 19, 2008 (the "2008 Program") to acquire from time to time up to an
aggregate of 500,000 shares of the Company's common stock. The purchases under
the 2020 Program may be made from time to time in the open market, through block
trades, 10b5-1 trading plans, privately negotiated transactions or otherwise and
in accordance with applicable laws, rules and regulations. The timing and actual
number of the shares repurchased under the 2020 Program will depend on a variety
of factors including price, market conditions and corporate and regulatory
requirements. The Company intends to fund the share repurchases under the 2020
Program from cash on hand. The 2020 Program does not commit the Company to
repurchase shares of its common stock and it may be amended, suspended or
discontinued at any time. The Company repurchased its shares under the 2020
Program and 2008 Program in unsolicited transactions as follows:
December 31 December 31
2021 2020
2020 Program
Number of shares repurchased 22 857
Cost of shares repurchased
Allocated to retained earnings $ 91
Allocated to capital
10 422
Total cost of shares repurchased $ 101
2008 Program Number of shares repurchased - 978 Cost of shares repurchased Allocated to retained earnings -$ 5,760 Allocated to capital - 480 Total cost of shares repurchased $ -$ 6,240 The Company has remaining authority under the 2020 Program to repurchase up to$4,995,406 of the currently outstanding shares of the Company's common stock as ofDecember 31, 2021 . The Company has retired or will retire all stock repurchased under the 2020 Program and 2008 Program. EffectiveJanuary 2022 , the Company suspended the 2020 Program and ceased any further repurchases of its shares from stockholders of the Company. The Company reported$7,510,147 net cash used by operating activities for the year endedDecember 31, 2021 , compared to$2,436,399 net cash used by operating activities for the year endedDecember 31, 2020 . Fluctuations in cash flows from operating activities relate to changes in loss and loss adjustment expense payments, unearned premium holdings, and the timing of the collection and the payment of insurance-related receivables and payables. The variability of the Company's loss and loss adjustment expenses is due primarily to its small population of claims, which may result in greater fluctuations in claim frequency and/or severity. 40 Table of Contents Crusader's statutory capital and surplus as ofDecember 31, 2021 , was$22,494,454 , a decrease of$4,399,061 (-16%) fromDecember 31, 2020 surplus of$26,893,515 . The decrease is a result of Crusader being put into runoff and the cessation of writing new policies inAugust 2021 and renewal policies onDecember 8, 2021 . On each ofSeptember 14, 2020 , andMay 20, 2020 , Crusader paid cash dividends of$2,000,000 to Unico, its parent and sole shareholder. These two dividends totaling$4,000,000 were used primarily for general corporate purposes. The Supervision Agreement requires the CA DOI approval of all dividends effectiveSeptember 7, 2021 . No dividends were paid by Crusader to Unico in 2021 as a result of the Supervision Agreement and other action by the CA DOI. The CA DOI advised Crusader that no dividends may be paid by Crusader through December
31, 2025. During the years endedDecember 31, 2021 and 2020, no cash dividends were declared or issued by the Company to its stockholders. Declaration of future cash dividends, if any, will be subject to the Company's profitability, cash requirements, capital requirements, and general business conditions, among other factors. Because of the inability of Crusader to pay dividends to the Company for the foreseeable future, it is highly unlikely that the Company can declare and pay dividends to its stockholders for the foreseeable future. As aCalifornia insurance company, Crusader is obligated to pay a premium tax on gross written premium in all states where Crusader is admitted. Premium taxes are deferred and amortized as the related premium is earned. The premium tax is in lieu of state franchise taxes and is not included in the provision for state taxes. Results of Operations General
All comparisons made in this discussion compare the year ended
to the year ended
runoff, some of the financial metrics will not be comparable now or in the
future.
Total revenues for the year endedDecember 31, 2021 , were$36,388,384 , an increase of$3,828,273 (11.8%), compared to total revenues of$32,560,111 for the year endedDecember 31, 2020 . For the year endedDecember 31, 2021 , the Company had a loss before taxes of$5,214,334 compared to loss before taxes of$17,943,515 for the year endedDecember 31, 2020 . For the year endedDecember 31, 2021 , the Company had a net loss of$5,673,251 compared to net loss of$21,491,113 for the year endedDecember 31, 2020 . As a result of the runoff of Crusader, revenues and losses in future periods will not be comparable to past periods because Crusader ceased writing new policies inSeptember 2021 and ceased renewing policies inDecember 2021 . The increase in total revenues for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 , was due primarily to an increase in policies written in the Transportation Business which resulted in a net earned premium increase of$261,737 (1%). The decreases in loss before tax and net loss for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 were due primarily to a decrease in loss and loss adjustment expense of$8,670,080 and a decrease in salaries and employee benefits (net amount charged to operating expenses) of$2,513,602 and the realized gain of$3,693,858 on the sale of theCalabasas building, partially offset by increases in other operating expenses of$1,753,665 . During the twelve months endedDecember 31, 2020 the Company reevaluated certain assumptions used in its process for estimating loss and loss adjustment reserves due to its loss experience inCrusader's Apartments & Commercial Buildings and Transportation Business 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 losses and loss adjustment expenses of$34,642,920 recognized for the twelve months endedDecember 31, 2020 . The absence of such a revaluation during 2021 was a primary contributor to the decrease in losses and loss adjustment expenses for the twelve months endedDecember 31, 2021 . The decrease in salaries and employee benefits (net amount charged to operating expenses) during the twelve months endedDecember 31, 2021 , of$2,513,602 from$6,364,170 to$3,850,568 was due primarily to savings in salaries and reductions in compensated absences resulting from workforce reductions. These workforce reductions were to align staffing with the reduction in premium revenue associated with operations being in runoff. The increase in other operating expenses of$1,753,665 during the twelve months endedDecember 31, 2021 , was due primarily to increases in attorney fees, paid rent associated with the lease back of a portion of the previously soldCalabasas building, and increased fees for accounting services. The decrease in income tax expense of$3,088,681 during the twelve months endedDecember 31, 2021 , was due primarily to an increase in the valuation allowance related to deferred tax assets on federal net operating losses. 41 Table of Contents
The effect of inflation on the Company for the year endedDecember 31, 2021 was significant. As our Company's portfolio securities are primarily comprised of fixed income instruments, the fair value of these fixed income instruments will typically decrease in an inflationary environment as yields increase. Also, employee salary and employee benefits expense increases tend to be higher than normal in inflationary times. Revenues Crusader Premium
Crusader's primary lines of business are CMP policies. These policies
represented approximately 99.7% and 99.6% of Crusader's total written premium
for the years ended
Gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties) reported on Crusader's statutory financial statements decreased$376,194 (-1%) to$36,266,636 for the year endedDecember 31, 2021 , compared to$36,642,830 for the year endedDecember 31, 2020 . As a result of the runoff of Crusader, Crusader will not generate significant levels of written premium in the future. Crusader was obligated by regulatory requirements to offer renewal policies to those policyholders who could not be issued non-renewal notices immediately after the commencement of the runoff of Crusader inSeptember 2021 for, policies with policy renewal dates of 60 days or less from the date Crusader went into runoff. Accordingly, Crusader ceased generating any renewal premium inDecember 2021 .
Written premium
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 a required statutory reporting measure. 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 increased$3,858,792 (11%) to$40,123,661 for the year endedDecember 31, 2021 , compared to$36,264,869 for the year endedDecember 31, 2020 . Historically and prior to Crusader being placed into runoff, all policies were written on an annual basis. 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. This increase was the result of a successful marketing campaign during early 2021. As a result of the runoff of Crusader, the gross earned premium will gradually decrease over time. Crusader does not expect any gross earned premium in 2023. Ceded earned premium Ceded earned premium (premium ceded to reinsurers under reinsurance treaties) increased$3,597,055 (44%) to$11,693,756 for the year endedDecember 31, 2021 , compared to$8,096,701 for the year endedDecember 31, 2020 . Ceded earned premium as a percentage of gross earned premium was 29% for the year endedDecember 31, 2021 , and 22% for the year endedDecember 31, 2020 . The increase in the ceded earned premium as a percentage of gross earned premium for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 , was due primarily to the hardening reinsurance market and the Company's recent underwriting performance.
Ceded earned premium is based on gross earned premium. As a result of the runoff
of Crusader, the ceded earned premium will gradually decrease over
time. Crusader does not expect any ceded earned premium in 2023.
Crusader's primary excess of loss reinsurance agreements, or treaties, during the years endedDecember 31, 2021 and 2020, are withRenaissance Reinsurance U.S. Inc. & Hannover Ruck SE, both A+ rated. In calendar years 2021 and 2020, Crusader retained a 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 clash layer (reinsured losses between$4,000,000 and$8,000,000 ). Crusader's retention on losses is$500,000 under these contracts. Crusader also has catastrophe ("CAT") reinsurance treaties from various highly ratedCalifornia authorized andCalifornia 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 2021 and 2020, 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's retention on losses is$1,000,000 under these contracts. In 2022 the catastrophe excess of loss reinsurance treaties was reduced to$16,000,000 with 0% participation and a$1,000,000 retention. Also, Crusader has not had a single CAT claim since 1992. Crusader also has facultative reinsurance treaties from a highly ratedCalifornia authorized reinsurance company. Unlike the excess of loss treaties which cover all risks underwritten by Crusader, the facultative reinsurance treaties cover specific risks for properties with total insured values in excess of$4,000,000 , (the property coverage limit of the excess of loss treaties). In calendar year 2020 and during the first five months of 2021, the facultative reinsurance treaties provided coverage for reinsured losses between$4,000,000 and$8,000,000 . FromJune 2021 , the facultative reinsurance treaties had two sections which provide coverage for reinsured losses between$4,000,000 and$9,000,000 (Section A) and$4,000,000 and$15,000,000 (Section B) depending
on
location of the insured risk
42
Table of Contents
Crusader evaluates each of its ceded reinsurance contracts at its inception to determine if there is a sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting literature. As ofDecember 31, 2021 , all such ceded contracts are accounted for as risk transfer reinsurance. A tabular presentation of Crusader's direct, assumed, ceded and net earned premium is as follows: Year ended December 31 2021 2020 Direct earned premium$ 38,278,730 $ 36,108,230 Assumed earned premium 1,844,931 156,639 Ceded earned premium (11,693,756 ) (8,096,701 ) Net earned premium$ 28,429,905 $ 28,168,168
Ratio of ceded earned premium to gross earned premium
(direct and assumed earned premium)
29 % 22 %
Net Investment Income, Net Realized Investment Gains and Losses, and Net
Investment Income, Net Realized Investment Gains and Losses, and Net Unrealized
Investment Gains on
Net investment income decreased$55,250 (-3%) to$1,932,993 for the year endedDecember 31, 2021 , compared to$1,988,243 for the year endedDecember 31, 2020 . This decrease in net investment income was due primarily to a decrease in average invested assets, specifically sales ofU.S. Treasury Bonds. The Company had net realized investment gains of$259,912 and net unrealized investment gains on equity securities of$400,862 , for the year endedDecember 31, 2021 , compared to net realized investment gains of$97,771 and net unrealized investment gains on equity securities of$198,266 for the year endedDecember 31, 2020 . Average yields on the Company's average invested assets and investment income, excluding net realized investment gain and losses, and net unrealized investment losses on equity securities are as follows: Year endedDecember 31 2021 2020
Average invested assets (1) - at amortized cost
Net investment income from: Invested assets (2)$ 1,932,538 $ 1,984,548 Cash equivalents 455 3,695 Total investment income$ 1,932,993 $ 1,988,243
Average yield on average invested assets (3) 2.4 %
2.4 %
(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 insurance company operations included
investment expense for the year ended
for the year ended
(3) Annualized yield on average invested assets did not include the investment
income from cash equivalents. As a result of Crusader entering into runoff, Crusader will need to liquidate some of its investment holdings to support its operations. Accordingly, the size of Crusader's investment portfolio and investment income are expected
to
decrease.
43
Table of Contents
The amortized cost, estimated fair value (adjusted for YTD unrealized gains and losses) and weighted average yield of fixed maturity investments by contractual maturity are as follows:
Maturities by Year atDecember 31 , Amortized
Weighted 2021 Cost Fair Value Average Yield Due in one year$ 15,758,755 $ 15,875,423 2.21 %
Due after one year through five years 19,349,200 19,681,599 1.80 % Due after five years through ten years 19,335,034 19,832,093 2.39 % Due after ten years and beyond 17,075,416 17,324,290
2.35 % Total$ 71,518,405 $ 72,713,405 2.18 %
Maturities by Year atDecember 31 , Amortized
Weighted 2020 Cost Fair Value Average Yield Due in one year$ 11,064,202 $ 11,169,232 2.57 %
Due after one year through five years 30,090,910 31,260,694 2.59 % Due after five years through ten years 18,476,051 19,806,444 2.51 % Due after ten years and beyond 21,238,117 21,971,324
2.63 % Total$ 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 6.7
years as of
As ofDecember 31, 2021 , all of the Company's investments are inU.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, 2021 December 31, 2020 Amortized Fair Amortized Fair Type of Security Cost Value Cost Value Available-for-sale fixed maturity investments: U.S. Treasury securities$ 6,278,764 $ 6,309,805 $ 10,596,808 $ 10,832,181 Corporate securities 44,370,193 45,249,973 44,159,926 46,451,905 Agency mortgage-backed securities 20,569,448 20,853,627 25,314,546 26,125,608 Held-to-maturity fixed maturity investments: Certificates of deposit 300,000 300,000 798,000 798,000 Total fixed maturity investments 71,518,405 72,713,405 80,869,280 84,207,694 Equity securities 3,532,026 4,131,153 2,548,440 2,746,706 Short-term investments: Short-term bonds 954,750 954,750 - - Certificates of deposit 200,000 200,000 200,000 200,000 Short-term investments 1,154,750 1,154,750 200,000 200,000 Total investments$ 76,205,181 $ 77,999,308 $ 83,617,720 $ 87,154,400
A summary of estimated fair value, gross unrealized losses, and number of
securities 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
Gross Gross
Estimated Unrealized Number of Estimated Unrealized
Fair Value Losses Securities Fair Value Losses Number of Securities
December 31, 2021 U.S. Treasury securities$ 481,875 $ (15,785 ) 1$ 476,016 $ (20,690 ) 1 Corporate securities 13,152,240 (128,502 ) 15 1,179,235 (68,006 ) 1 Agency mortgage-backed securities 5,086,187 (43,019 ) 8 471,479 (25,268 ) 1 Total debt securities 18,720,302 (187,306 ) 24 2,126,730 (113,964 ) 3 Equity securities 665,100 (55,156 ) 18 76,454 (4,703 ) 3 Total$ 19,385,402 $ (242,462 ) 42$ 2,203,184 $ (118,667 ) 6 44 Table of Contents Less than 12 Months 12 Months or Longer Gross Estimated Unrealized Number of Estimated Gross Unrealized Number of Fair Value Losses Securities Fair Value Losses 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 $ - $ - -
While the fair value of Company's investment portfolio atDecember 31, 2021 has recovered from the declines recorded in first half of 2020 the effects of increasing inflation and higher market interest rates could result in increased volatility in our fixed income and equity portfolios. 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 endedDecember 31, 2021 , two fixed maturity corporate securities experienced a decline in market value; the market and book value of those securities atDecember 31, 2021 , was$2,422,354 and$2,522,241 , respectively. The unrealized losses on all securities as ofDecember 31, 2021 , andDecember 31, 2020 , were determined to be temporary.
The fixed maturity securities previously held by the Company were sold and
called prior to maturity as follows:
December 31 December 31
2021 2020
Fixed maturities securities sold
Number of securities sold 3 15
Amortized cost of sold securities
Realized gains on sales
$ 710 $ 52,053 Fixed maturities securities called Number of securities called 10 4
Amortized cost of called securities
Realized (losses) gains on calls
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$122,304 (-307%) to-$82,493 for year endedDecember 31, 2021 , compared to$39,811 for the year endedDecember 31, 2020 . The decrease in other income during the year endedDecember 31, 2021 , is due primarily to decreases in policy fee income and rental income. 45 Table of Contents Gross commissions and fees
Gross commissions and fees decreased$225,836 (-12%) to$1,601,427 for the year endedDecember 31, 2021 , compared to gross commissions and fees of$1,827,263 for the year endedDecember 31, 2020 .
The comparison of gross commission and fees for the year ended
to the year ended
Year ended December 31
2021 2020 Change
Brokerage fee income $ 820,558 $ 1,006,505 $ (185,947 )
Health insurance program 732,852 727,515 5,337
Membership and fee income 48,017 93,243 (45,226 )
Gross commissions and fees $ 1,601,427 $ 1,827,263 $ (225,836 )
Unifax used to sell and continues to service insurance policies for Crusader and
did the same for USIC, until its contract with USIC ended on August 31, 2021 .
For these brokerage services, Unifax received 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, 2021 ,
decreased $185,947 (-19%) as compared to the year ended December 31, 2020 . This
decrease in brokerage fee income in 2021 compared to 2020 was primarily the
result of a 2,125 (-39%) decrease in the number of policies issued of 3,276
during 2021 compared to 5,401 policies issued during 2020. As a result of the
runoff of Crusader, the brokerage fee income will gradually decrease over time.
The Company does not expect any brokerage fee income in 2023.
AIB markets health insurance inCalifornia through non-affiliated insurance companies for individuals and groups. For these services, AIB receives commissions based on the premium that it writes. Commission income for the year endedDecember 31, 2021 , increased$5,337 (1%) compared to the year endedDecember 31, 2020 . The increase in commission income is primarily a result of an increase in a few individual policies. In 2021, approximately 26% and 58% of the commission income from health insurance sales was fromGuardian Life Insurance Company of America dental and group life plan programs and theBlue Shield Care Trust health and life insurance programs, respectively. In 2020, approximately 30% and 56% of the commission income from health insurance sales was fromGuardian Life Insurance Company of America dental and group life plan programs and theBlue 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 endedDecember 31, 2021 , decreased$45,226 (-49%) compared to the year endedDecember 31, 2020 . The decrease is a result of a decrease in administration fees from the loss of a large group.
Finance charges and fees earned
EffectiveAugust 8, 2021 , the Company decided to discontinue loan issuance through AAC. 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 decreased$88,669 (-37%) to$151,920 for the year endedDecember 31, 2021 , compared to$240,589 for the year endedDecember 31, 2020 , due primarily to the decision inAugust 2021 to discontinue AAC's premium operations. During the year endedDecember 31, 2021 , AAC issued 539 loans and had 360 loans outstanding as ofDecember 31, 2021 . During the year endedDecember 31, 2020 , AAC issued 1,111 loans and had 821 loans outstanding as ofDecember 31, 2020 . The average premium financed by AAC was$8,192 and$6 ,477in 2021 and 2020, respectively. During 2021, 66% of all Unifax generated policies were financed and 25% of those policies were financed by AAC. During 2020, 48% of all Unifax generated policies were financed and 43% of those policies were financed by AAC. AAC provided premium financing only for Crusader and USIC policies produced by Unifax inCalifornia . The number of loans issued decreased by 572 (-51%) during 2021 when compared to 2020 as a result of the decision to stop offering financing. The Company will continue servicing existing loans through their expiration inJune 2022 .
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 endedDecember 31, 2021 , and 2020 were$25,972,840 and$34,642,920 , respectively. Loss ratio, which is calculated by dividing losses and loss adjustment expenses by net earned premium, was 92% for the year endedDecember 31, 2021 , compared to 123% for the year endedDecember 31, 2020 . 46 Table of Contents
Losses and loss adjustment expenses and loss ratios are as follows:
Year ended December 31
2021 2021 Loss Ratio 2020 2020 Loss Ratio Change
Net earned
premium $ 28,429,905 $ 28,168,168 $ 261,737
Losses and
loss
adjustment
expenses:
Provision
for insured
events of
current
year 26,097,435 91 % 26,683,872 95 % (586,437 )
Development
of insured -
events of
prior years (124,595 ) % 7,959,048 28 % (8,083,643 )
Total
losses and
loss
adjustment
expenses $ 25,972,840 91 % $ 34,642,920 123 % $ (8,670,080 )
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 favorable development of insured events of prior years in the
amount of $124,595 which Crusader experienced in 2021. Loss and loss adjustment
expenses decreased by $8,670,080 from $34,642,920 recognized for the twelve
months ended December 31, 2020 , to $25,972,840 recognized for the twelve months
ended December 31, 2021 . 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 $124,595 favorable development in 2021 for insured events of prior years for
the year ended December 31, 2021 , was an improvement. There is an $8,083,643
difference compared to the $7,959,048 adverse development of insured events of
prior year for the year ended December 31, 2020 , due primarily to increases
during the year ended December 31, 2020 , in 2018 and 2019 accident year IBNR
reserves associated with the Apartments & Commercial Buildings and
Transportation Business. The 2020 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 a number of COVID-19 related business interruption claims.
With the exception of one claim for which the investigation is still ongoing,
all such claims were denied after the individual circumstances of each claim
were reviewed to determine whether insurance coverage applied. Like many
companies in the property casualty insurance industry, Crusader was named as
defendant in lawsuits seeking insurance coverage under the policies issued by
Crusader for alleged economic losses resulting from the shutdown or suspension
of their businesses due to COVID-19. Although the allegations vary, the
plaintiffs generally seek a declaration of insurance coverage, damages for
breach of contract in unspecified amounts for claim denials, interest, and
attorney fees. Some of the lawsuits also allege that the insurance claims were
denied in bad faith or otherwise in violation of state laws and seek
extra-contractual or punitive damages.
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Table of Contents
Crusader has received seven claims related to civil unrest throughJuly 8, 2022 . One claim remains open for potential subrogation. 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 of insured events
of prior years by accident year is as follows:
Year ended December 31
2021 2020
Adverse Adverse
(Favorable) (Favorable)
Accident Year Development % Of Total Development % Of Total
Prior to 2012 $ (14,558 ) 12 % (6,000 ) -
2012 30,545 (25 %) (27,901 ) -
2013 52,781 (42 %) (56,367 ) (1 )%
2014 (82,656 ) 66 % 149,181 2 %
2015 879,441 (706 %) 1,559,422 20 %
2016 742,832 (596 %) 663,546 8 %
2017 1,093,186 (877 %) 1,201,175 15 %
2018 (1,419,426 ) 1,139 % 2,539,483 32 %
2019 (408,601 ) 328 % 1,872,313 24 %
2020 (998,139 ) 801 % - -
Total prior accident years $ (124,595 ) 100 % $ 7,894,852 100 %
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 Business and growth in Crusader's Transportation Business, a product
which is generally known for its difficulty to be underwritten profitably,
coupled with changes in the market conditions 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 . 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 December 31, 2020 . The increase in the
ultimate incurred losses and loss adjustment expenses manifested primarily
through higher IBNR reserves for 2018, 2019, and 2020 accident year claims
pertaining to Apartments & Commercial Buildings and Transportation liability
coverages.
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.
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Table of Contents
The preparation of the Company's consolidated financial statements requires that Management make an 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. The statistics reviewed for each accident year include 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.
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
2021 2020
Gross reserves:
Case reserves $ 29,293,117 $ 26,363,695
IBNR reserves 53,199,557 48,529,814
Total gross reserves $ 82,492,674 $ 74,893,509
Reserves net of reinsurance:
Case reserves $ 23,057,464 $ 21,027,703
IBNR reserves 32,319,167 31,612,164
Total net reserves $ 55,376,631 $ 52,639,867
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 2021 2020
CMP $ 81,303,803 98.5 % $ 73,545,182 98.2 %
Other liability 1,122,823 1.4 % 1,283,174 1.7 %
Other 66,048 0.1 % 65,153 0.1 %
Total $ 82,492,674 100.0 % $ 74,893,509 100.0 %
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.
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Table of Contents
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
2021 2020
Reserve for unpaid losses and loss adjustment expenses
at beginning of year - net of reinsurance
$ 52,639,867 $
40,340,625
Incurred losses and loss adjustment expenses: Provision for insured events of current year 26,097,435
26,683,872
Provision for insured events of prior years (124,595 )
7,959,048
Total incurred losses and loss adjustment expenses 25,972,840 34,642,920
Payments:
Losses and loss adjustment expenses attributable to insured events of the current year 8,007,546
8,285,021
Losses and loss adjustment expenses attributable to
insured events of prior years
15,228,530
14,058,657
Total payments 23,236,076
22,343,678
Reserve for unpaid losses and loss adjustment expenses
at end of year - net of reinsurance
55,376,631
52,639,867
Reinsurance recoverable on unpaid losses and loss adjustment expenses at end of year 27,116,043
22,253,642
Reserve for unpaid losses and loss adjustment expenses
at end of year per balance sheet, gross of reinsurance
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 2021 net reserve,$2,768,832 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 2021 net reserve,$5,537,663 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 increased$543,838 (11%) to$5,442,645 for the year endedDecember 31, 2021 , compared to$4,898,807 for the year endedDecember 31, 2020 . Policy acquisition costs consist of commissions, premium taxes, inspection fees, and certain other underwriting costs that are directly related to and vary with the successful production of Crusader insurance policies. These costs include both Crusader expenses and the allocated expenses of other Unico subsidiaries. Crusader's reinsurers pay Crusader a ceding commission, which is primarily a reimbursement of the acquisition cost related to the ceded premium. No ceding commission is received on facultative or catastrophe ceded premium. Policy acquisition costs, net of ceding commission, are deferred and amortized as the related premiums are earned. The Company annually reevaluates its acquisition costs to determine that costs related to successful policy acquisition are capitalized and deferred. Policy acquisition costs and the ratio to net earned premium are as follows: Year ended December 31 2021 2020 Policy acquisition costs$ 5,442,645 $ 4,898,807 Ratio to net earned premium (GAAP ratio) 19 % 17 % Policy acquisition costs increased in the year endedDecember 31, 2021 due to an increase in ceded commissions. The Company recognized an allowance against its deferred acquisition costs of$1,409,654 and$0 for the years endedDecember 31, 2021 and 2020, respectively. As a result of Crusader being placed into runoff, policy acquisition costs, which are related to production of Crusader insurance policies, are expected to gradually decrease over time. The Company does not expect any policy acquisition costs in 2023. 50 Table of Contents
Salaries and Employee Benefits
Total salaries and employee benefits incurred decreased$2,953,583 (-29.4%) to$7,104,953 for the year endedDecember 31, 2021 , compared to$10,058,536 for the year endedDecember 31, 2020 .
Net amount charged to operating expenses decreased
the year ended
Salaries and employee benefits incurred and charged to operating expenses are as
follows:
Year ended December 31
2021 2020 Change
Total salaries and employee benefits
incurred $ 7,104,953 $ 10,058,536 $ (2,953,583 )
Less: charged to losses and loss
adjustment expenses (2,118,176 ) (2,027,978 ) (90,198 )
Less: capitalized to policy acquisition
costs (967,892 ) (1,383,315 )
415,423
Less: capitalized to IT system upgrade (168,317 ) (283,073 )
114,756
Net amount charged to operating expenses
$ (2,513,602 ) The decrease in the total salaries and employee benefits incurred for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 , was due primarily to workforce reductions during 2021 and costs associated with a termination of an employment agreement with an executive during 2020. As a result of Crusader being placed into runoff, salaries and employee benefits are expected to decrease over time as the Company reduces its employee headcount to adequately support the diminished operations. The decrease in salaries and employee benefits is expected to be partially offset by costs of severance paid to terminated employees and retention bonuses paid to remaining employees.
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$14,729 (-15%) to$80,586 for the year endedDecember 31, 2021 , as compared to$95,315 for the year endedDecember 31, 2020 . 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$1,753,665 (39%) to$6,256,079 for the year endedDecember 31, 2021 , compared to$4,502,414 for the year endedDecember 31, 2020 . The increase in other operating expenses for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 , was due primarily to increases in legal fees. Income Tax Expense/Benefit
Income tax expense was$458,917 (-9% of pre-tax loss) for the twelve months endedDecember 31, 2021 , and income tax expense was$3,547,598 (-20% of pre-tax loss) for the twelve months endedDecember 31, 2020 . The fluctuation in the income tax rate as a percentage of pre-tax loss for the twelve months endedDecember 31, 2021 , when compared to the twelve months endedDecember 31, 2020 , is primarily due to an increase in the valuation allowance. As ofDecember 31, 2021 , the Company had deferred tax assets of$8,584,487 generated from$40,878,510 of federal net operating loss carryforwards that will begin to expire in 2035 and deferred tax assets of$2,509,115 generated from state net operating loss carryforwards which expire between 2028 and 2040. In light of the net losses that were generated in recent years, for the twelve months endedDecember 31, 2021 , 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$11,939,459 that, in management's judgment, are not more-likely-than-not to be realized. For the year endedDecember 31, 2020 , the Company carried a valuation allowance on deferred tax assets generated from federal and state net operating losses and other temporary differences in the amount of$10,557,080 .
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:
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Table of Contents
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. Prior to Crusader being placed into runoff, Crusader historically underwrote three statutory annual statement lines of business: (1) CMP, (2) liability other than automobile and products, and (3) fire. CMP policies comprised 99.7% and 99.6% of Crusader's 2021 and 2020 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, program 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.
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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 Business and growth in Crusader's
Transportation Business, prior to Crusader's business being placed into runoff,
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 2021, Crusader had 492 open claim files. During 2021, 741 new claim files were opened, and 657 claim files were closed, leaving 576 open claim files at the end of 2021. 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 estimate proves 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 atDecember 31, 2021 , after the reevaluation, adverse or (favorable) development may emerge
in
the future.
Year ended December 31
2021 2020
Net reserves for unpaid losses and loss adjustment
expenses at beginning of year
$ 52,639,867 $
40,340,625
(Favorable) adverse development of insured events of prior years$ (124,595 ) $
7,959,048
Percentage of adverse development to beginning
reserves - % 20 %
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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 were due primarily to increases in IBNR reserves associated
with the Apartments & Commercial Buildings and Transportation Business resulting
from higher estimates for expected claims frequency, claims severity and
ultimate incurred losses and loss adjustment expenses during the reevaluation 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. The company applied the same judgment in 2021 that it did
in 2020 on estimated subrogation.
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 treaties 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. AtDecember 31, 2021 and 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
2021 2020
Ceded losses and loss adjustment expenses recoverable
on excess of loss treaties:
Ceded case loss and loss adjustment expense reserves recoverable$ 6,234,878 $
5,335,992
Ceded IBNR loss and loss adjustment expense reserves recoverable 20,881,165
16,917,650
Total ceded loss and loss adjustment expense reserves recoverable$ 27,116,043 $ 22,253,642
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
2021 2020
Direct earned premium $ 38,278,730 $ 36,108,230
Assumed earned premium 1,844,931 156,639
Ceded earned premium (11,693,756 ) (8,096,701 )
Net premium earned $ 28,429,905 $ 28,168,168
Ratio of ceded earned premium to gross earned premium
(direct and assumed earned premium)
29 % 22 %
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The effect of reinsurance on losses and loss adjustment expenses is as follows:
Year ended December 31
2021 2020
Direct losses and loss adjustment expenses incurred
Assumed losses and loss adjustment expenses incurred 836,622
89,204
Ceded losses and loss adjustment expenses incurred
on excess of loss treaties:
Ceded paid losses and loss adjustment expenses (5,219,509 )
(6,889,668 ) Change in ceded case reserves (898,885 ) 199,742 Change in ceded IBNR reserves (3,963,515 ) (7,727,530 ) Total ceded losses and loss adjustment expenses incurred (10,081,909 )
(14,417,456 )
Net losses and loss adjustment expenses incurred
Ceded premium and ceded losses and loss adjustment expenses are as follows:
Year ended December 31
2021 2020
Ceded earned premium $ 11,693,756 $ 8,096,701
Ceded losses and loss adjustment expenses incurred (10,081,909 ) (14,417,456 ) Ceded earned premium less ceded losses and loss adjustment expenses incurred$ 1,611,847 $ (6,320,755 ) 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 2021 2020
Change in reinsurance recoverable on ceded paid and
unpaid losses and loss adjustment expenses
$ (5,152,660 ) $ (7,463,253 )
There were no losses subject to catastrophe reinsurance treaties coverage
incurred during the years ended
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
respectively, of its business in the state 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. Available-for-sale fixed maturity investments are stated at fair value and held-to-maturity investments are stated at amortized cost. Although part of the Company's investments is classified as availableforsale and 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, its investment guidelines place primary emphasis on buying and holding highquality investments to maturity. Shortterm investments are carried at cost, which approximates fair value. 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 are 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.
55
Table of Contents
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 light of the net losses that were generated in recent years, for
the twelve months ended December 31, 2021 , 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 $11,939,459
that, in management's judgment, are not more-likely-than-not to be realized. For
the year ended December 31, 2020 , the Company carried a valuation allowance on
deferred tax assets generated from federal and state net operating losses and
other temporary differences in the amount of $10,557,080 .
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.
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