fee income from the premium finance operations, and investment income from cash generated primarily from the insurance company operation. The insurance company operation generates approximately 89% of the Company's total revenue. The Company's remaining operations constitute a variety of specialty insurance services, each with unique characteristics and individually not material to consolidated revenues.
Crusader's statutory capital and surplus as of December 31, 2006, was $50,023,768, an increase of $13,437,327 (37%) from December 31, 2005. Crusader's statutory capital and surplus as of December 31, 2005, was $36,586,441, an increase of $7,150,098 (24%) from December 31, 2004.
Although material capital expenditures may also be funded through borrowings, the Company believes that its cash and short-term investments at year end, net of trust restriction of $933,053, statutory deposits of $700,000, and California insurance company statutory dividend restrictions applicable to Crusader plus the cash to be generated from operations, should be sufficient to meet its operating requirements during the next twelve months without the necessity of borrowing funds.
Premiums -------- For the year ended December 31, 2006, gross written premium decreased by $8,354,817 (14%) over 2005. For the year ended December 31, 2005, gross written premium decreased by $8,603,237 (12%) over 2004. The decrease in written premium in both 2006 and 2005 reflected heightened competition and management's continued emphasis on rate adequacy and underwriting discipline. The Company cannot determine how long the existing market condition will continue, nor in which direction it might change.
policy acquisition costs to net premiums earned (expense ratio). The following table shows the loss ratios, expense ratios, and combined ratios of Crusader as derived from data prepared in accordance with GAAP.
As reflected in the above table, the increase in the favorable development for the year ended December 31, 2006 is primarily due to a substantial decrease in the provision for losses and loss adjustment expenses for accident year 2004 during the calendar year 2006. This favorable development arose from the lower than expected emergence of losses during 2006 relative to expectations used to establish our loss reserves at the end of 2005 and 2004. The severity of late reported property and casualty claims that emerged during 2006 was lower than expected and case development on previously reported claims was better than expected. During the fourth quarter of 2006 the Company determined that the favorable development of accident year 2004, which developed during 2006, was sufficient to warrant a reduction in the ultimate expected losses and loss adjustment expenses for that accident year. During the first three quarters of 2006, the Company determined that the development during that period was not sufficient to warrant reducing accident year 2004 reserves further than previously recorded. Because the incidence of the CMP losses is subject to a considerable element of fortuity, reserve estimates for this line are based on an analysis of past loss experience on average over a period of years. As a result, the favorable development recognized in 2006 had a minimal effect on our determination of carried CMP loss reserves at December 31, 2006. The adjustment of prior accident year reserves discussed above is not necessarily indicative of the results that may be expected in future periods.
Membership and fee income for the year ended December 31, 2006, decreased $17,822 (6%), compared to the year ended December 31, 2005. Membership and fee income for the year ended December 31, 2004, decreased $15,121 (5%), compared to the year ended December 31, 2004. In May 2006, CIGNA HealthCare began offering new small group medical insurance policies in the state of California. Currently, all new CIGNA small group medical insurance policies are written through AIB and all CIGNA small group medical insurance policyholders are members of AAQHC. The new programs are competitively priced and are being actively marketed.
period that elapses between the occurrence of a claim and its final disposition and the difficulty of estimating the settlement value of the claim. The Company'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 the Company, such as workers' compensation, professional liability, umbrella liability, and medical malpractice, the Company's liability claims tend to be settled relatively quicker.
At each quarterly review, actual claims costs that emerge are compared with the claims costs that were expected to emerge during that development period. Sometimes the previous claims costs estimates prove to have been too high; sometimes they prove to have been too low. In the case of the Company, the estimates proved to be too high in each of the past three years. The favorable development in 2004 through 2006 underscores the inherent uncertainty in insurance claims costs, especially for a very small insurer.
Basis of Presentation - --------------------- The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP). As described in Note 13, the Company's insurance subsidiary also files financial statements with regulatory agencies prepared on a statutory basis of accounting that differs from GAAP.
A.M. Best Amount Name of Reinsurer Rating Recoverable - ----------------- ------ ----------- Platinum Reinsurance A $12,899,390 Partners Reinsurance of the U.S. A+ 2,812,356 Hannover Ruckversicherungs AG A 6,670,345 General Reinsurance Corporation A++ 744,005 QBE Reinsurance Corporation A 661,946 ---------- Total $23,788,042 ==========
NOTE 11 - REINSURANCE ----------- A reinsurance transaction occurs when an insurance company transfers (cedes) a portion of its exposure on policies written by it to a reinsurer that assumes that risk for a premium (ceded premium). Reinsurance does not legally discharge the Company from primary liability under its policies. If the reinsurer fails to meet its obligations, the Company must nonetheless pay its policy obligations.