The property and casualty insurance industry is characterized by periods of soft market conditions, in which premium rates are stable or falling and insurance is readily available, and by periods of hard market conditions, in which premium rates rise, coverage may be more difficult to find, and insurers’ profits increase. The Company believes that the California property and casualty insurance market continues to be a “soft market.” The Company cannot determine how long the existing market conditions will continue nor in which direction they might change. Despite the increased competition in the property and casualty marketplace, the Company believes that rate adequacy is more important than premium growth and that underwriting profit is its primary goal. Nonetheless, Crusader believes that it can grow its sales and profitability by continuing to focus upon three key areas of its operations: (1) product development, (2) improved service to retail brokers, and (3) appointment of captive and independent retail agents.
Premium written (before reinsurance) is a non-GAAP financial measure which is defined, under statutory accounting, as the contractually determined amount charged by the 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. Premiums written is a required statutory measure designed to determine written premium production levels. Premium earned, the most directly comparable GAAP measure, represents the portion of premiums written 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. For the year ended December 31, 2010, gross written premium as reported on the Company’s statutory statement was $32,697,971 compared to $38,900,176, for the year ended December 31, 2009, a decrease of $6,202,205 (16%). For the year ended December 31, 2009, gross written premium was $38,900,176 compared to $39,940,270 for the year ended December 31, 2008, a decrease of $1,040,094 (3%). The decrease in written premium in both 2010 and 2009 reflected heightened competition, weak economic growth and management’s continued emphasis on rate adequacy and underwriting discipline. In addition to the increased competition in the market place and the effects of the slow economic recovery in California, the Company took corrective action in 2010 on two of its problematic programs that were contributing higher than expected losses. This action resulted in reducing the number of brokers authorized to write that particular program from 85 to 15. These two programs accounted for approximately 32% of the $6,202,205 decrease in written premium before reinsurance in the current year. This action reinforces the Company’s belief that rate adequacy is more important than premium growth and that underwriting profit is its primary goal.
The insurance marketplace continues to be intensely competitive as more insurers are competing for the same customers. The Company believes that California’s commercial property and casualty marketplace continues to be in a “soft market.” The Company cannot determine how long the existing market condition will continue, nor in which direction it might change. While Crusader attempts to meet such competition with competitive prices, its emphasis is on service, promotion, and distribution. Crusader believes that rate adequacy is more important than premium growth and that underwriting profit is its primary goal. Nonetheless, Crusader believes that it can grow its sales and profitability by continuing to focus upon three key areas of its operations: (1) product development, (2) improved service to retail brokers, and (3) appointment of captive and independent retail agents. During 2010, Crusader continued to introduce product changes such as to its rates, eligibility guidelines, rules and coverage forms. Improved service is primarily focused upon transacting business through the internet, as well as providing more options to make the agents’ and brokers’ time more efficiently spent with Crusader (i.e., as opposed to spending time with Crusader’s competitors). As of December 31, 2010, Crusader had appointed 16 retail agents. Presently, it is expected that each such retail agent should be able to reach an annual sales volume of approximately one to two million dollars of Crusader’s products within three to five years of their appointment by Crusader. However, Crusader does not intend to substantially increase its number of retail agents appointed until the Company implements a new policy administration software system.
Development patterns generally do not tend to change materially over time. Generally, the Company has very little property claim development subsequent to the end of an accident year. Although liability claims may take 10 or more years to fully develop, most of the development occurs in the first 5 to 6 years subsequent to the end of the accident year. However, liability claims are substantially developed by 2 years subsequent to the end of the accident year. The Company’s reserving methodology assumptions have not changed in the years presented. The effect of losses and loss adjustment expenses on the Company’s financial statements has primarily resulted from estimated costs being adjusted as actual costs emerge. The estimate of the total ultimate loss and loss adjustment expense for a given accident year is revised over time as actual costs emerge. This is not, however a revision of the Company’s estimates, but a gradual replacement over time of the prior cost estimates with actual cost estimates with actual costs as they emerge. This is normal unfolding of loss development process, not a revision of cost estimates.
Cash and short-term investments - The carrying amounts reported at cost in the balance sheet approximate their fair values given the short term nature of these instruments.
In 2010 and 2009, 100% of Crusader’s gross premium written was derived from California. In 2010, approximately 61% of the $1,933,288 commission and fee income from the Company’s health insurance program was from CIGNA HealthCare (CIGNA) medical and dental plan programs. In 2009, approximately 76% of the $2,526,772 commission and fee income from the Company’s health insurance program was from CIGNA medical and dental plan programs.
The insurance company operation records a liability for advance premium that represents the written premium on policies that have been submitted to the Company and are bound, billed, and recorded prior to their effective date of coverage. These advance premiums are not included in written premium or in the liability for unearned premium.
Premiums and notes receivable are substantially secured by unearned premiums and funds held as security for performance. Premium finance notes receivable represent the balance due to the Company's premium finance subsidiary from policyholders who elected to finance their premiums over a nine-month term. These notes are net of unearned finance charges and credit loss reserves.
In the quarter ended September 30, 2010, the Company recorded an immaterial adjustment to its deferred income tax liability to correct a prior period error in recording the decrease in the percentage of undistributed dividends of its insurance company subsidiary that is subject to California franchise tax. The effect of this adjustment reduced the Company’s deferred tax liability and corresponding income tax expense by approximately $143,000 in the year ended December 31, 2010. The Company concluded that the error was immaterial to all periods impacted.
The Company and its wholly owned subsidiaries file consolidated federal and state income tax returns. Pursuant to the tax allocation agreement, Crusader Insurance Company and American Acceptance Corporation are allocated taxes or tax credits in the case of losses, at current corporate rates based on their own taxable income or loss. The Company files income tax returns under U.S. federal and various state jurisdictions. The Company is subject to examination by U.S. federal income tax authorities for tax returns filed starting at taxable year 2007 and California state income tax authorities for tax returns filed starting at taxable year 2006. There are no ongoing examinations of income tax returns by federal or state tax authorities.