Reinsurance

12 Months Ended

Dec. 31, 2020

Notes to Financial Statements

Reinsurance

NOTE 12 – REINSURANCE

A reinsurance transaction occurs when an insurance company transfers (cedes) a portion of its exposure on policies written 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.

Crusader’s primary excess of loss reinsurance agreements during the years ended December 31, 2020 and 2019 are as follows:

Loss Year		Reinsurers	A.M. Best Rating	Retention
	2020	Renaissance Reinsurance U.S. Inc. & Hannover Ruck SE	A+ A+	$	500,000
	2019	Renaissance Reinsurance U.S. Inc. & Hannover Ruck SE	A+ A+	$	500,000

Reinsurance treaties are generally structured in layers, with different negotiated economic terms and retention of participation, or liability, in each layer. In calendar years 2020 and 2019, Crusader retained a participation in its excess of loss reinsurance treaties of 0% in its 1^st layer (reinsured losses between $500,000 and $1,000,000), 0% in its 2^nd layer (reinsured losses between $1,000,000 and $4,000,000), and 0% in its property and casualty clash treaty.

Crusader also has catastrophe reinsurance treaties from various highly rated California authorized and California unauthorized reinsurance companies. These reinsurance treaties help protect Crusader against losses in excess of certain retentions from catastrophic events that may occur on property risks which Crusader insures. In calendar years 2020 and 2019, Crusader retained a participation in its catastrophe excess of loss reinsurance treaties of 5% in its 1^st layer (reinsured losses between $1,000,000 and $10,000,000) and 0% in its 2^nd layer (reinsured losses between $10,000,000 and $46,000,000).

On April 1, 2020, Crusader and Unifax Insurance Systems, Inc. (“Unifax”), a subsidiary of the Company, entered into a reinsurance arrangement with United Specialty Insurance Company (“USIC”), pursuant to which USIC would underwrite property and casualty insurance policies by and through Unifax and such policies would be reinsured by Crusader. On September 2, 2020, the Company placed a moratorium on placing any new risks with USIC by Unifax pending negotiations among Crusader, Unifax, and USIC pursuant to the issues raised by the DOI regarding the structure of the reinsurance arrangement and its compliance with the California Insurance Holding Company System Act (the “Insurance Act”).

On November 24, 2020, as a result of such negotiations with the DOI, Crusader, Unifax and USIC agreed to rescind certain agreements by and among USIC, Crusader and Unifax. The effect of such rescissions was that the rescinded agreements were deemed never to have existed and no insurance policies were deemed issued, and no premium deemed written, collected or reported with respect to those agreements. Further, on November 24, 2020, the parties entered into various restructured arrangements in order to address the issues raised by the DOI with respect to California insurance laws. In particular, the parties eliminated all intercompany duties so that the arrangement would not require prior approval by the DOI under the Insurance Act. Details of the restructured arrangements with USIC include the following:

• On November 24, 2020, USIC and Crusader entered into a new Quota Share Reinsurance Agreement, effective April 1, 2020, (the “New Reinsurance Agreement”), pursuant to which Crusader will reinsure all of USIC’s liability for policies issued by USIC and produced by Unifax for property, general liability, CMP property, CMP liability and other miscellaneous coverages, subject to certain maximum policy limits. Policies placed with USIC by Unifax and reinsured with Crusader prior to November 24, 2020 remain in place without interruption or change and are subject to the New Reinsurance Agreement.

• 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.

• On November 24, 2020, USIC and U.S. Risk Managers, Inc. (“U.S. Risk”), a subsidiary of the Company, entered into a Claims Administration Agreement, effective as of April 1, 2020 (the “Claims Administration Agreement”). Pursuant to the Claims Administration Agreement, USIC appointed U.S. Risk, which is a licensed claims adjuster in the state of California, to adjust and settle claims on its behalf in connection with the surplus lines policies issued by USIC in connection with the New Reinsurance Agreement. U.S. Risk will be paid a fee by Unifax on behalf of USIC based on a percentage of earned premium. U.S. Risk will establish an account for payment of claims by U.S. Risk (the “Loss Fund Account”) pursuant to the Claims Administration Agreement. Pursuant to the terms of the New Reinsurance Agreement, Crusader will fund the Loss Fund Account provided for in the Claims Administration Agreement on behalf of USIC.U.S. Risk has agreed to indemnify and hold USIC harmless from any losses relating to the Claims Administration Agreement. The Claims Administration 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 Broker Agreement.

Crusader has no reinsurance recoverable balances in dispute.

On most of the premium that Crusader cedes to the reinsurer, the reinsurer pays a commission to Crusader that includes a reimbursement of the cost of acquiring the portion of the premium that is ceded. Crusader intends to continue obtaining reinsurance although the availability and cost may vary from time to time. The unpaid losses and loss adjustment expenses ceded to the reinsurer are recorded as an asset on the Consolidated Balance Sheets.

The effect of reinsurance on written premium, earned premium, and incurred losses and loss adjustment expenses is as follows:

	Year ended December 31
	2020			2019
Written premium:
Direct	$	36,338,800		$	35,803,950
Assumed		304,030			—
Ceded		(8,078,748	)		(7,153,130	)
Net written premium	$	28,564,082		$	28,650,820
Earned premium:
Direct	$	36,108,230		$	33,958,202
Assumed		156,639			—
Ceded		(8,096,701	)		(7,220,734	)
Net earned premium	$	28,168,168		$	26,737,468
Incurred losses and loss adjustment expenses:
Direct	$	48,971,172		$	36,712,252
Assumed		89,204			—
Ceded		(14,417,456	)		(14,136,125	)
Net incurred losses and loss adjustment expenses	$	34,642,920		$	22,576,127

Ceded earned premium as a percentage of gross earned premium (direct and assumed earned premium) was 22% in 2020 and 21% in 2019.