Repeated and sustained underwriting losses in Crusader’s Apartments & Commercial Buildings vertical and growth in the Transportation vertical, a product which is generally known for its difficulty to be underwritten profitably, coupled with changes in market conditions, caused Crusader’s management to reevaluate the assumptions used in its process for estimating loss and loss adjustment expense reserves. This reevaluation resulted in a $9,399,547 increase in Crusader’s IBNR reserves, net of reinsurance, which was a primary contributor to the $12,066,793 increase in losses and loss adjustment expenses of $34,642,920 recognized for the twelve months ended December 31, 2020 compared to $22,576,127 recognized for the twelve months ended December 31, 2019.
On November 24, 2020, USIC and Unifax entered into a Surplus Line Broker Agreement, effective April 1, 2020 (the “Broker Agreement”), pursuant to which, and subject to the terms, conditions and limitations set forth therein, USIC authorized Unifax to act as its broker and agent for the purpose of producing and administering certain specified classes of insurance policies, which are the subject of the New Reinsurance Agreement. Under the Broker Agreement, Unifax is entitled to retain a commission for policies produced based on a percentage of the premiums on business placed with USIC. Unifax has agreed to indemnify and hold USIC harmless from any losses relating to the Broker Agreement. The Broker Agreement may be terminated in specified events, including by any party upon 90 days written notice to the other parties and automatically upon cancellation or termination of the New Reinsurance Agreement.
As of December 31, 2020, all of the Company’s investments are in U.S. Treasury securities, FDIC insured certificates of deposit, corporate fixed maturity securities, agency mortgage-backed securities, equity securities and short-term investments. All of the Company’s investments except for the certificates of deposit, are readily marketable.
Net investment income decreased $109,699 (5%) to $1,988,243 for the year ended December 31, 2020, compared to $2,097,942 for the year ended December 31, 2019. This decrease in net investment income was due primarily to a decrease in average invested assets. The Company had net realized investment gains of $97,771 and net unrealized investment gains on equity securities of $198,266, for the year ended December 31, 2020, compared to net realized investment losses of $12,661 and no net unrealized investment gains on equity securities for the year ended December 31, 2019.
Although the Company does not intend to sell its fixed maturity investments prior to maturity, the Company may sell investment securities from time to time in response to cash flow requirements, economic, regulatory, and/or market conditions or investment securities may be called by their issuers prior to the securities’ maturity. The fixed maturity securities previously held by the Company were sold and called prior to maturity as follows:
The comparison of gross commission and fees for the year ended December 31, 2020, to the year ended December 31, 2019, is as follows:
Crusader has received seven claims related to the recent civil unrest through December 31, 2020. Crusader has sufficient excess of loss and catastrophe reinsurance treaties to protect from exposure of such claims. The Company believes the losses and loss adjustment expenses associated with those claims will not exceed Crusader’s $500,000 excess of loss reinsurance treaty retention.
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.
If future development ultimately differs by five percent from Crusader’s 2020 net reserve, $2,631,993 would be reflected in future periods as an increase or decrease in the development of insured events of prior years and would be recognized in the Company’s Consolidated Statements of Operations in future periods. If future development ultimately differs by ten percent from Crusader’s 2020 net reserve, $5,263,987 would be reflected in future periods as an increase or decrease in the development of insured events of prior years and would be recognized in the Company’s Consolidated Statements of Operations in future periods.
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.
Available-for-sale fixed securities, equity securities, and short-term investments - Fair values are obtained from widely accepted third party vendors.
Although the Company does not intend to sell its fixed maturity investments prior to maturity, the Company may sell investment securities from time to time in response to cash flow requirements, economic and/or market conditions or investment securities may be called by their issuers prior to the securities’ maturity.
The $7,959,048 adverse development of insured events of prior years for the year ended December 31, 2020, was $4,767,863 higher than the $3,191,185 adverse development of insured events of prior year for the year ended December 31, 2019, due primarily to increases in 2018 and 2019 accident year IBNR reserves associated with the Apartments & Commercial Buildings and Transportation verticals. The increases in IBNR were due to higher actuarially developed ultimate incurred losses and loss adjustment expenses primarily as a result of elevated expected claims severity.
On February 12, 2021, the Standard-Multi Tenant Office Lease - Net, dated January 28, 2021 (the “Lease”), by and between Crusader and Mureau Road became effective in connection with the completion of the Sale. The Company has agreed to a one-year lease with Alliant for the second floor of the Property with an initial base rent of approximately $52,637 per month, where the Company will continue to operate its corporate headquarters.