UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

[X]       Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2020 or

 

[ ]       Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____ to ____.

 

Commission File No. 000-03978

 

UNICO AMERICAN CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

                                        Nevada 95-2583928
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
   
26050 Mureau Road, Calabasas, California 91302
(Address of Principal Executive Offices) (Zip Code)

 

Registrant's telephone number, including area code: (818) 591-9800

 

No Change

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol Name of each exchange on which registered
Common Stock, No Par Value UNAM Nasdaq Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No __ 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No__ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer," "accelerated filer," "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.  

 

Large accelerated filer __ Accelerated filer __

 

Non-accelerated filer __ Smaller reporting company X Emerging growth company __

(Do not check if a smaller reporting company)

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. __

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class Outstanding at November 13, 2020
Common Stock, no par value per share 5,305,112

 

 

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UNICO AMERICAN CORPORATION

INDEX TO FORM 10-Q

 

    Page No.
Cautionary Note Regarding Forward-Looking Statements     3  
Part I - Financial Information     5  
Item 1. Financial Statements     5  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations     19  
Item 3. Quantitative and Qualitative Disclosures About Market Risk     36  
Item 4. Controls and Procedures     36  
Part II - Other Information     37  
Item 1. Legal Proceedings     37  
Item 1A. Risk Factors     37  
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds     39  
Item 3. Defaults Upon Senior Securities     39  
Item 4. Mine Safety Disclosures     39  
Item 5. Other Information     39  
Item 6. Exhibits     39  
Signatures     40  

 

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Form 10-Q, and the documents incorporated by reference in this document, the Company’s press releases and oral statements made from time to time by the Company or on the Company’s behalf, may contain “forward-looking statements” within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended (or “the Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (or “the Exchange Act”). In this context, forward-looking statements are not historical facts and include statements about the Company’s plans, objectives, beliefs and expectations. Forward-looking statements include statements preceded by, followed by, or that include the words “believes,” “expects,” “anticipates,” “seeks,” “plans,” “estimates,” “intends,” “projects,” “targets,” “should,” “could,” “may,” “will,” “can,” “can have,” “likely,” the negatives thereof or similar words and expressions. These forward-looking statements are contained throughout this Form 10-Q, including, but not limited to, statements found in Part I – Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Forward-looking statements are only predictions and are not guarantees of future performance. These statements are based on current expectations and assumptions involving judgments about, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the Company’s control. These predictions are also affected by known and unknown risks, uncertainties and other factors that may cause the Company’s actual results to be materially different from those expressed or implied by any forward-looking statement. Many of these factors are beyond the Company’s ability to control or predict. The Company’s actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors. Such factors include, but are not limited to, the following:

 

· failure to meet minimum capital and surplus requirements;

· vulnerability to significant catastrophic property loss;

· the impact of the coronavirus (COVID-19) pandemic;

· changes in accounting standards issued by the Financial Accounting Standards Board;

· ability to adjust claims accurately;

· insufficiency of loss and loss adjustment expense reserves to cover future losses;

· changes in federal or state tax laws;

· ability to realize deferred tax assets;

· ability to accurately underwrite risks and charge adequate premium;

· ability to obtain reinsurance or collect from reinsurers and or losses in excess of reinsurance limits;

· extensive regulation and legislative changes;

· reliance on subsidiaries to satisfy obligations;

· downgrade in financial strength rating or long-term issuer credit rating by A.M. Best Company;

· changes in interest rates;

· investments subject to credit, prepayment and other risks;

· geographic concentration;

· reliance on independent insurance agents and brokers;

· insufficient reserve for doubtful accounts;

· litigation;

· enforceability of exclusions and limitations in policies;

· reliance on information technology systems;

· single operating location;

· ability to prevent or detect acts of fraud with disclosure controls and procedures;

· change in general economic conditions;

· dependence on key personnel;

· ability to attract, develop and retain employees and maintain appropriate staffing levels;

· insolvency, financial difficulties, or default in performance of obligations by parties with significant contracts or

relationships

· ability to effectively compete;

· maximization of long-term value and no focus on short-term earnings expectations;

· control by a small number of stockholders;

· limited trading of stock; and

· failure to maintain effective system of internal controls.

 

 

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Please see Part I - Item 1A – “Risk Factors” in the Company’s 2019 Annual Report on Form 10-K as filed with the U.S. Securities and Exchange Commission (“SEC”), as well as other documents we file with the SEC from time-to-time, for other important factors that could cause the Company’s actual results to differ materially from the Company’s current expectations and from the forward-looking statements discussed herein. Because of these and other risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. In addition, these statements speak only as of the date of this Form 10-Q and, except as may be required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

 

 

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PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    September 30   December 31
    2020     2019
      (Unaudited)          
ASSETS                
Investments                
Available-for-sale:                
Fixed maturities, at fair value (amortized cost: $78,351,555 at September 30, 2020, and $82,002,411 at December 31, 2019)   $ 81,669,234     $ 83,499,710  
Held-to-maturity:                
Fixed maturities, at amortized cost (fair value: $798,000 at September 30, 2020, and $798,000 at December 31, 2019)     798,000       798,000  
Equity securities, at fair value (cost: $1,515,228 at September 30, 2020 and $0 at December 31, 2019)     1,557,856       —    
Short-term investments, at fair value     200,000       2,196,815  
Total Investments     84,225,090       86,494,525  
Cash and cash equivalents     5,705,663       5,781,639  
Accrued investment income     456,687       397,302  
Receivables, net     3,810,210       4,019,437  
Reinsurance recoverable:                
Paid losses and loss adjustment expenses     885,987       685,841  
Unpaid losses and loss adjustment expenses     23,349,279       14,725,855  
Deferred policy acquisition costs     3,618,959       3,619,594  
Property and equipment, net     10,271,863       10,226,595  
Deferred income taxes     —         3,925,432  
Other assets     456,734       430,305  
Total Assets   $ 132,780,472     $ 130,306,525  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
                 
LIABILITIES                
Unpaid losses and loss adjustment expenses   $ 74,333,899     $ 55,066,480  
Unearned premiums     18,632,430       17,810,337  
Advance premium and premium deposits     360,074       219,083  
Accrued expenses and other liabilities     2,364,290       2,130,300  
Total Liabilities   $ 95,690,693     $ 75,226,200  
                 
Commitments and contingencies                
                 
STOCKHOLDERS'  EQUITY                
Common stock, no par value – authorized 10,000,000 shares; 5,305,112 and 5,306,720, shares issued and outstanding at September 30, 2020, and December 31, 2019, respectively   $ 3,771,879     $ 3,772,669  
Accumulated other comprehensive income     2,620,967       1,182,866  
Retained earnings     30,696,933       50,124,790  
Total Stockholders’ Equity   $ 37,089,779     $ 55,080,325  
                 
Total Liabilities and Stockholders' Equity   $ 132,780,472     $ 130,306,525  

 

 

See notes to condensed consolidated financial statements (unaudited).

 

 

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

    Three Months Ended   Nine Months Ended
    September 30   September 30
    2020   2019   2020   2019
REVENUES                
Insurance company operation:                                
Net earned premium   $ 7,124,272     $ 6,978,698     $ 20,805,517     $ 19,760,961  
Investment income     477,145       518,108       1,487,335       1,581,482  
Net realized investments gains (losses)     38,214       —         39,789       (12,661 )
Net unrealized investments gains on equity securities     19,670       —         42,629       —    
Other income     74,784       114,531       278,544       22,660  
Total Insurance Company Operation     7,734,085       7,611,337       22,653,814       21,352,442  
                                 
Other insurance operations:                                
Gross commissions and fees     461,540       581,100       1,388,494       1,656,371  
Finance charges and fees earned     56,985       66,526       191,690       169,896  
Other income     7,076       3       7,096       10,830  
Total Revenues     8,259,686       8,258,966       24,241,094       23,189,539  
                                 
EXPENSES                                
Losses and loss adjustment expenses     17,320,051       5,137,974       28,086,342       15,351,368  
Policy acquisition costs     1,279,703       1,194,870       3,626,154       3,571,065  
Salaries and employee benefits     2,584,478       1,021,597       4,958,900       3,062,251  
Commissions to agents/brokers     23,235       40,946       73,190       132,144  
Other operating expenses     1,398,135       532,853       3,372,483       1,896,386  
Total Expenses     22,605,602       7,928,240       40,117,069       24,013,214  
                                 
Income (loss) before taxes     (14,345,916 )     330,726       (15,875,975 )     (823,675 )
Income tax expense (benefit)     3,594,572       118,259       3,543,153       (88,391 )
Net Income (loss)   $ (17,940,488 )   $ 212,467     $ (19,419,128 )   $ (735,284 )
                                 
                                 
                                 
PER SHARE DATA:                                
Basic                                
Earnings (loss) per share   $ (3.38 )   $ 0.04     $ (3.66 )   $ (0.14 )
Weighted average shares     5,305,742       5,306,747       5,306,068       5,306,929  
Diluted                                
Earnings (loss) per share   $ (3.38 )   $ 0.04     $ (3.66 )   $ (0.14 )
Weighted average shares     5,305,742       5,306,747       5,306,068       5,306,929  

 

  

See notes to condensed consolidated financial statements (unaudited).

 

 

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

 

 

    Three Months Ended   Nine Months Ended
    September 30   September 30
        2020   2019   2020   2019
                 
                 
Net income (loss)   $ (17,940,488 )   $ 212,467     $ (19,419,128 )   $ (735,284 )
Changes in unrealized gains on securities classified as available-for-sale arising during the period, net of income tax     35,792       359,110       1,438,101       2,299,133  
Comprehensive Income (Loss)   $ (17,904,696 )   $ 571,577     $ (17,981,027 )   $ 1,563,849  

 

 

See notes to condensed consolidated financial statements (unaudited).

 

 

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

 

                 
        Accumulated        
     Common Shares        Other        
    Issued and       Comprehensive   Retained    
    Outstanding   Amount   Income (Loss)   Earnings   Total
                     
Balance – December 31, 2018     5,307,103     $ 3,772,857     $ (1,100,036 )   $ 53,242,601     $ 55,915,422  
                                         
Shares repurchased     (356 )     (175 )     —         (1,946 )     (2,121 )
Change in comprehensive income, net of deferred income tax     —         —         1,940,023       —         1,940,023  
Net loss     —         —         —         (947,751 )     (947,751 )
Balance – June 30, 2019     5,306,747     $ 3,772,682     $ 839,987     $ 52,292,904     $ 56,905,573  
                                         
Shares repurchased     —         —         —         —         —    
Change in comprehensive income, net of deferred income tax     —         —         359,110       —         359,110  
Net income     —         —         —         212,467       212,467  
Balance – September  30, 2019     5,306,747     $ 3,772,682     $ 1,199,097     $ 52,505,371     $ 57,477,150  

 

 

 

                 
        Accumulated        
    Common Shares        Other        
    Issued and       Comprehensive   Retained    
    Outstanding   Amount   Income   Earnings   Total
                     
Balance – December 31, 2019     5,306,720     $ 3,772,669     $ 1,182,866     $ 50,124,790     $ 55,080,325  
                                         
Shares repurchased     (978 )     (480 )     —         (5,760 )     (6,240 )
Change in comprehensive income, net of deferred income tax     —         —         1,402,309       —         1,402,309  
Net loss     —         —         —         (1,478,640 )     (1,478,640 )
Balance – June 30, 2020     5,305,742     $ 3,772,189     $ 2,585,175     $ 48,640,390     $ 54,997,754  
                                         
Shares repurchased     (630 )     (310 )     —         (2,969 )     (3,279 )
Change in comprehensive income, net of deferred income tax     —         —         35,792       —         35,792  
Net loss     —         —         —         (17,940,488 )     (17,940,488 )
Balance – September 30, 2020     5,305,112     $ 3,771,879     $ 2,620,967     $ 30,696,933     $ 37,089,779  

 

 

See notes to condensed consolidated financial statements (unaudited).

 

 

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

    Nine Months Ended
    September 30
    2020   2019
Cash flows from operating activities:                
Net loss   $ (19,419,128 )   $ (735,284 )
Adjustments to reconcile net loss to net cash from operations:                
      Depreciation and amortization     567,639       402,769  
      Bond amortization, net     (16,989 )     24,192  
      Bad debt expense     7,139       (20,766 )
      Net realized investment (gains) losses     (31,635 )     12,661  
      Net unrealized investment gains on equity securities     (42,629 )     —    
Changes in assets and liabilities:                
      Net receivables and accrued investment income     142,703       (576,294 )
      Reinsurance recoverable     (8,823,570 )     (5,616,860 )
      Deferred policy acquisition costs     635       (308,780 )
      Other assets     (26,428 )     265,208  
      Unpaid losses and loss adjustment expenses     19,267,419       (1,162 )
      Unearned premiums     822,093       2,422,025  
      Advance premium and premium deposits     140,991       176,897  
      Accrued expenses and other liabilities     233,990       433,351  
      Income taxes current/deferred     3,543,153       (111,000 )
Net Cash Used by Operating Activities     (3,634,617 )     (3,633,043 )
                 
Cash flows from investing activities:                
Purchase of fixed maturity investments     (14,757,414 )     (8,286,568 )
Purchase of equity securities     (1,515,228 )     —    
Proceeds from maturity of fixed maturity investments     12,318,203       7,313,548  
Proceeds from sale or call of fixed maturity investments     6,138,690       3,472,794  
Net decrease in short-term investments     1,996,815       4,490,954  
Additions to property and equipment     (612,907 )     (745,389 )
Net Cash Provided by Investing Activities     3,568,159       6,245,339  
                 
Cash flows from financing activities:                
Repurchase of common stock     (9,518 )     (2,121 )
Net Cash Used by Financing Activities     (9,518 )     (2,121 )
                 
Net (decrease) increase in cash and cash equivalents     (75,976 )     2,610,175  
Cash and cash equivalents at beginning of period     5,781,639       4,917,762  
Cash and Cash Equivalents at End of Period   $ 5,705,663     $ 7,527,937  
                 
Supplemental cash flow information                
Cash paid during the period for:                
Interest     —         —    
Income taxes   $ 8,800     $ 8,800  

 

 

 

See notes to condensed consolidated financial statements (unaudited).

 


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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2020

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Unico American Corporation is an insurance holding company that underwrites property and casualty insurance through its insurance company subsidiary; provides property, casualty, and health insurance through its agency subsidiaries; and provides insurance premium financing and membership association services through its other subsidiaries. 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.

 

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Unico American Corporation and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X for smaller reporting companies. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. Quarterly condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes in the Company’s 2019 Annual Report on Form 10-K as filed with the Securities and Exchange Commission. Certain reclassifications have been made to prior period amounts to conform to current quarter presentation.

 

Use of Estimates in the Preparation of the Financial Statements

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect its reported amounts of assets and liabilities and its disclosure of any contingent assets and liabilities at the date of its financial statements, as well as its reported amounts of revenues and expenses during the reporting period. The most significant assumptions in the preparation of these condensed consolidated financial statements relate to losses and loss adjustment expenses. While every effort is made to ensure the integrity of such estimates, actual results may differ.

 

Fair Value of Financial Instruments

The Company employs a fair value hierarchy that prioritizes the inputs for valuation techniques used to measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Financial assets and financial liabilities recorded on the Condensed Consolidated Balance Sheets at fair value are categorized based on the reliability of inputs for the valuation techniques. (See Note 7.)

 

The Company has used the following methods and assumptions in estimating its fair value disclosures for instruments carried at fair value:

 

  • Investment securities, excluding long-term certificates of deposit, and short-term investments – Fair values are obtained from widely accepted third party vendors.

The Company has used the following methods and assumptions for estimating fair value for other financial instruments not carried at fair value:

 

  • Cash and cash equivalents– The carrying amounts reported in the Condensed Consolidated Balance Sheets approximate their fair values given the short-term nature of these instruments.

  • Long-term certificates of deposit – The carrying amounts reported in the Condensed Consolidated Balance Sheets for these instruments are at amortized cost which approximates their fair value.

 

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  • Receivables, net – The carrying amounts reported in the Condensed Consolidated Balance Sheets approximate their fair values given the short-term nature of these instruments.

  • Accrued expenses and other liabilities – The carrying amounts reported in the Condensed Consolidated Balance Sheets approximate the fair values given the short-term nature of these instruments.

Cash Equivalents

Cash equivalents are comprised of highly liquid investments with initial maturity of 90 days or less. Cash equivalents include, but not limited to, custodial trust, bank money market and savings accounts. 

 

NOTE 2 – REPURCHASE OF COMMON STOCK – EFFECTS ON STOCKHOLDERS’ EQUITY

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 is effective immediately and replaces the Company’s existing share repurchase program that was adopted by the Board of Directors 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:

 

    Three Months Ended
September 30
  Nine Months Ended
September 30
    2020   2019   2020   2019
                 
2020 Program                                
Number of shares repurchased     630       —         630       —    
Cost of shares repurchased                                
   Allocated to retained earnings   $ 2,969     $       $ 2,969   $        
   Allocated to capital     310       —         310       —    
      Total cost of shares repurchased   $ 3,279     $ —       $ 3,279     $ —    
                                 
2008 Program                                
Number of shares repurchased     —         —         978       356  
Cost of shares repurchased                                
   Allocated to retained earnings   $           $       $ 5,760   $ 1,946  
   Allocated to capital     —         —         480       175  
      Total cost of shares repurchased   $ —       $ —       $ 6,240     $ 2,121  

 

The Company has remaining authority under the 2020 Program to repurchase up to $4,996,721 of the currently outstanding shares of the Company’s common stock as of September 30, 2020. The Company has retired or will retire all stock repurchased under the 2020 Program and 2008 Program.

 

NOTE 3 – LOSS PER SHARE

The following table represents the reconciliation of the Company's basic loss per share and diluted loss per share computations reported on the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019:

 

    Three Months Ended   Nine Months Ended
    September 30   September 30
    2020   2019   2020 2019

Basic Earnings (Loss) Per Share

               
Net income (loss)   $ (17,940,488 )   $ 212,467     $ (19,419,128 )   $ (735,284 )
                                 
Weighted average shares outstanding     5,305,742       5,306,747       5,306,068       5,306,929  
                                 
Basic earnings (loss) per share   $ (3.38 )   $ 0.04     $ (3.66 )   $ (0.14 )
                                 
Diluted Earnings (Loss) Per Share                                
Net income (loss)   $ (17,940,488 )   $ 212,467     $ (19,419,128 )   $ (735,284 )
                                 
Weighted average shares outstanding     5,305,742       5,306,747       5,306,068       5,306,929  
Diluted shares outstanding     5,305,742       5,306,747       5,306,068       5,306,929  
                                 
Diluted earnings (loss) per share   $ (3.38 )   $ 0.04     $ (3.66 )   $ (0.14 )

 

 

 

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Basic earnings per share exclude the impact of common share equivalents and are based upon the weighted average common shares outstanding. Diluted earnings per share utilize the average market price per share when applying the treasury stock method in determining common share dilution. When outstanding stock options are dilutive, they are treated as common share equivalents for purposes of computing diluted earnings per share and represent the difference between basic and diluted weighted average shares outstanding. In loss periods, stock options are excluded from the calculation of diluted loss per share, as the inclusion of stock options would have an anti-dilutive effect.

 

NOTE 4 – RECENTLY ISSUED ACCOUNTING STANDARDS

 

Recently adopted standards

In February 2016, the FASB issued ASU 2016-02 “Leases.” ASU 2016-02 requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by all leases, including those historically accounted for as operating leases. The Company adopted ASU 2016-02 effective January 1, 2019. The adoption of ASU 2016-02 did not have a material impact to the Condensed Consolidated Statements of Operations and the Condensed Consolidated Balance Sheets.

 

In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements for assets and liabilities measured at fair value. The amendments in this ASU require certain existing disclosure requirements to be modified or removed, and certain new disclosure requirements to be added. In addition, this ASU allows entities to exercise more discretion when considering fair value measurement disclosures. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. The Company adopted ASU 2018-13 effective January 1, 2020. The adoption of ASU 2018-13 did not have a material impact to the Company’s disclosures.

 

Standards not yet adopted

In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 replaces the current incurred loss methodology for recognizing credit losses with a current expected credit loss model, which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 also requires enhanced disclosures for better understanding of significant estimates and judgments used in estimating credit losses. The Company is currently evaluating the effect ASU 2016-13 will have on the Company's consolidated financial statements, but expects the primary changes to be (i) the use of the expected credit loss model for its premium receivables and reinsurance recoverables and (ii) the presentation of credit losses within the available-for-sale fixed maturities portfolio through an allowance method rather than as a direct write-down. ASU 2016-13 will primarily impact the Company’s available-for-sale fixed maturities portfolio and reinsurance recoverables. In November 2019, the FASB issued ASU 2019-10 “Financial Instruments – Credit Losses, Derivatives and Hedging, and Leases.” ASU 2019-10 updated the effective date for implementing ASU 2016-13 for smaller reporting entities, and that effective date will be for fiscal years beginning after December 15, 2022. Since the Company’s fixed income portfolio is invested primarily in higher rated bonds and the reinsurance is purchased from financially strong reinsurers, the Company believes the adoption of ASU 2016-13 will not have a material impact to the Condensed Consolidated Statements of Operations and the Condensed Consolidated Balance Sheets.

NOTE 5 – ACCOUNTING FOR TAXES

The Company and its wholly owned subsidiaries file consolidated federal and state income tax returns. Pursuant to a tax allocation agreement, the Company’s subsidiaries, Crusader Insurance Company (“Crusader”) and American Acceptance Corporation (“AAC”), 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 2016 and California state income tax authorities for tax returns filed starting at taxable year 2015. There are no ongoing examinations of income tax returns by federal or state tax authorities.

 

 

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As of September 30, 2020, and December 31, 2019, the Company had no unrecognized tax benefits or liabilities and, therefore, had not accrued interest and penalties related to unrecognized tax benefits or liabilities. However, if interest and penalties would need to be accrued related to unrecognized tax benefits or liabilities, such amounts would be recognized as a component of federal income tax expense.

 

The fluctuation in the income tax rate as a percentage of pre-tax loss for the three and nine months ended September 30, 2020, when compared to the three and nine months ended September 30, 2019, is primarily due to an increase in the valuation allowance related to deferred tax assets on federal net operating losses discussed below.

 

As of September 30, 2020, the Company had deferred tax assets of $7,318,041 generated from $34,847,822 of federal net operating loss carryforwards that will begin to expire in 2035 and deferred tax assets of $2,286,564 generated from state net operating loss carryforwards which expire between 2028 and 2040. In connection with preparation of its financial statements, the Company periodically performs an analysis of future income projections to determine the adequacy of the valuation allowance. In light of the net losses that were generated in recent years, for the nine months ended September 30, 2020, 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 $9,849,484 that, in management’s judgment, are not more likely than not to be realized. For the year ended December 31, 2019, the Company carried a valuation allowance on deferred tax assets generated from federal and state net operating losses in the amount of $600,000 and $1,931,665, respectively.

 

As a California based insurance company, Crusader is obligated to pay a premium tax on gross premiums written in all states that Crusader is admitted. Premium taxes are deferred and amortized as the related premiums are earned. The premium tax is in lieu of state franchise taxes and is not included in the provision for state taxes.

 

NOTE 6 – PROPERTY AND EQUIPMENT, NET

Property and equipment consist of the following:

    September 30   December 31
    2020   2019
         
Real estate held for sale located in Calabasas,  California,  net of accumulated depreciation and amortization   $ 8,335,017     $ 8,535,464  
Furniture, fixtures, and equipment     2,184,752       2,110,653  
Computer software     461,900       459,899  
Accumulated depreciation and amortization     (2,317,361 )     (1,953,819 )
Computer software under development     1,607,555       1,074,398  
        Property and equipment, net   $ 10,271,863     $ 10,226,595  

 

Real estate held for sale, owned by Crusader, includes land, building, and leasehold improvements. On September 29, 2020, the real estate was listed for sale at a price of $12,999,000. Upon the listing, the Company stopped recording the depreciation expense on the Calabasas building and the leasehold improvements in the Calabasas building. The carrying value of the real estate held for sale less expected disposal costs do not present impairment issues.

 

Through the date of the real estate listing, depreciation on the Calabasas building was computed using the straight line method over 39 years. Depreciation on furniture, fixtures, and equipment in the Calabasas building is computed using the straight line method over 3 to 15 years. Through the date of the real estate listing, amortization of leasehold improvements in the Calabasas building was computed using the shorter of the useful life of the leasehold improvements or the remaining years of the lease. Depreciation and amortization expense on all property and equipment for the three and nine months ended September 30, 2020, was $190,916 and $567,639 respectively, and for the three and nine months ended September 30, 2019, was $132,664 and $402,769, respectively.

 

 

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For the three and nine months ended September 30, 2020, the Calabasas building generated rental revenue from non-affiliated tenants in the amount of $33,325 and $122,684, respectively, and for the three and nine months ended September 30, 2019, rental revenue from non-affiliated tenants in the amount of $43,158 and $125,545, respectively, which is included in “Other income” from insurance company operation in the Company’s Condensed Consolidated Statements of Operations.

 

For the three and nine months ended September 30, 2020, the Calabasas building incurred operating expenses (including depreciation) in the amount of $200,067 and $573,100, respectively, and, for the three and nine months ended September 30, 2019, it incurred operating expenses of $126,962 and $482,257, respectively, which are included in “Other operating expenses” in the Company’s Condensed Consolidated Statements of Operations.

 

The total square footage of the Calabasas building is 46,884, including common areas. As of September 30, 2020, 6,942 square feet of the Calabasas building was leased to non-affiliated entities and 7,539 square feet was vacant and available to be leased to non-affiliated entities.

 

The Company capitalizes certain computer software costs purchased from outside vendors for internal use or incurred internally to upgrade the existing systems. These costs also include configuration and customization activities, coding, testing and installation. Training costs and maintenance are expensed as incurred, while upgrade and enhancements are capitalized if it is probable that such expenditure will result in additional functionality. The capitalized costs are not depreciated until the software is placed into production.

 

NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS

In determining the fair value of its financial instruments, the Company employs a fair value hierarchy that prioritizes the inputs for the valuation techniques used to measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Financial assets and financial liabilities recorded on the Condensed Consolidated Balance Sheets at fair value are categorized based on the reliability of inputs for the valuation techniques as follows:

 

Level 1 – Financial assets and financial liabilities whose values are based on unadjusted quoted prices in active markets for identical assets or liabilities as of the reporting date.

 

Level 2 – Financial assets and financial liabilities whose values are based on quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in non-active markets; or valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability as of the reporting date.

 

Level 3 – Financial assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the financial assets and financial liabilities as of the reporting date.

 

The hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) or unobservable (Level 3). The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

The following table presents information about the Company’s financial instruments and their estimated fair values, which are measured on a recurring basis, and are allocated among the three levels within the fair value hierarchy as of September 30, 2020, and December 31, 2019:

 

 

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    Level 1   Level 2   Level 3   Total
September 30, 2020                
Financial instruments:                                
Available-for-sale fixed maturities:                                
U.S. Treasury securities   $ 10,376,994     $ —       $ —       $ 10,376,994  
Corporate securities     —         47,946,647       —         47,946,647  
Agency mortgage backed securities     —         23,345,593       —         23,345,593  
Equity securities     1,557,856       —         —         1,557,856  
Short-term investments     200,000       —         —         200,000  
Total financial instruments at fair value   $ 12,134,850     $ 71,292,240     $ —       $ 83,427,090  

 

    Level 1   Level 2   Level 3   Total
December 31, 2019                
Financial instruments:                                
Available-for-sale fixed maturities:                                
U.S. Treasury securities   $ 15,235,332     $ —       $ —       $ 15,235,332  
Corporate securities     —         43,029,333       —         43,029,333  
Agency mortgage backed securities     —         25,235,045       —         25,235,045  
Short-term investments     2,196,815       —         —         2,196,815  
Total financial instruments at fair value   $ 17,432,147     $ 68,264,378     $ —       $ 85,696,525  

 

Fair value measurements are not adjusted for transaction costs. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer. The Company did not have any transfers between Levels 1, 2, and 3 of the fair value hierarchy during the three and nine months ended September 30, 2020 and 2019.

 

As a result of the spread of the ongoing coronavirus (COVID-19) pandemic, economic uncertainties have arisen which are likely to 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 likely that the fair value of its investment portfolio will be adversely affected by the volatility in the capital markets, as well as general economic conditions as a result of the coronavirus and governmental responses to the pandemic. The financial impact of these uncertainties is unknown at this time.

 

NOTE 8 – INVESTMENTS

A summary of investment income, net of investment expenses, is as follows:

    Three Months Ended September 30   Nine Months Ended September 30
        2020       2019       2020       2019
                 
Fixed maturities   $ 499,649     $ 532,307     $ 1,551,380     $ 1,626,843  
Equity securities     5,888       —         12,220       —    
Short-term investments and cash equivalents     4,582       16,808       24,496       53,266  
Gross investment income     510,119       549,115       1,588,096       1,680,109  
Less: investment expenses     (32,974 )     (31,007 )     (100,761 )     (98,627 )
Net investment income     477,145       518,108       1,487,335       1,581,482  
Net realized investment gains (losses)     38,214       —         39,789       (12,661 )
Net unrealized investment gains on equity securities     19,670       —         42,629       —    
Net investment income, realized investment gains (losses) and unrealized investment gains on equity securities   $ 535,029     $ 518,108     $ 1,569,753     $ 1,568,821  

 

 

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The amortized cost and estimated fair values of investments in fixed maturities by category are as follows:

 

   

 

Amortized Cost

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

Estimated Fair Value

September 30, 2020                
Available-for-sale fixed maturities:                                
U.S. Treasury securities   $ 10,090,505     $ 286,489     $ —       $ 10,376,994  
Corporate securities     45,799,041       2,351,571       (203,965 )     47,946,647  
Agency mortgage-backed securities     22,462,009       887,506       (3,922 )     23,345,593  
Held-to-maturity fixed securities:                                
Certificates of deposits     798,000       —         —         798,000  
Total fixed maturities   $ 79,149,555     $ 3,525,566     $ (207,887 )   $ 82,467,234  

 

   

 

Amortized Cost

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

Estimated Fair Value

December 31, 2019                
Available-for-sale fixed maturities:                                
U.S. Treasury securities   $ 15,105,795     $ 130,564     $ (1,027 )   $ 15,235,332  
Corporate securities     41,953,378       1,076,012       (57 )     43,029,333  
Agency mortgage-backed securities     24,943,238       293,757       (1,950 )     25,235,045  
Held-to-maturity fixed securities:                                
Certificates of deposits     798,000       —         —         798,000  
Total fixed maturities   $ 82,800,411     $ 1,500,333     $ (3,034 )   $ 84,297,710  

 

As of September 30, 2020, one corporate security, included in available-for-sale fixed maturities, was held as collateral with Comerica Bank & Trust, N. A. (“Comerica”), pursuant to the reinsurance trust agreement among Crusader, United Specialty Insurance Company (“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 $723,625 and $688,147 on September 30, 2020, respectively.

 

A summary of the unrealized gains (losses) on investments in fixed maturities carried at fair value and the applicable deferred federal income taxes are shown below:

    September 30   December 31
    2020   2019
         
Gross unrealized gains on fixed maturities   $ 3,525,566     $ 1,500,333  
Gross unrealized losses on fixed maturities     (207,887 )     (3,034 )
Net unrealized gains on fixed maturities     3,317,679       1,497,299  
Deferred federal tax expense     (696,712 )     (314,433 )
Net unrealized gains, net of deferred income taxes   $ 2,620,967     $ 1,182,866  

 

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
   

Estimated Fair Value

 

Gross Unrealized Losses

 

Number of Securities

 

Estimated Fair Value

 

Gross Unrealized Losses

 

Number of Securities

September 30, 2020                        
Corporate securities   $ 3,431,312     $ (203,965 )     6     $ —       $ —         —    
Agency mortgage-backed securities     1,215,171       (3,922 )     2       —         —         —    
Total   $ 4,646,483     $ (207,887 )     8     $ —       $ —         —    

 

 

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    Less than 12 Months   12 Months or Longer
   

Estimated Fair Value

 

Gross Unrealized Losses

 

Number of Securities

 

Estimated Fair Value

 

Gross Unrealized Losses

 

Number of Securities

December 31, 2019                        
U.S. Treasury securities   $ 1,996,562     $ (252 )     1     $ 1,002,031     $ (775 )     1  
Corporate securities     999,818       (57 )     1       —         —         —    
Agency mortgage-backed securities     750,058       (1,950 )     2       —         —         —    
Total   $ 3,746,438     $ (2,259 )     4     $ 1,002,031     $ (775 )     1  

 

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 Condensed 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 three and nine months ended September 30, 2020, one fixed maturity corporate security experienced a significant decline in market value; the market and book value of that security at September 30, 2020, was $744,750 and $911,492, respectively. The unrealized losses on all securities as of September 30, 2020, and December 31, 2019, were determined to be temporary.

 

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:

 

    Three Months Ended
September 30
  Nine Months Ended
September 30
    2020   2019   2020   2019
                 
Fixed maturities securities sold                                
Number of securities sold     6       —         7       3  
Amortized cost of sold securities   $ 2,923,386     $ —       $ 3,524,702     $ 2,997,098  
Realized gains (losses) on sales   $ 30,057     $ —       $ 31,171     $ (12,679 )
                                 
Fixed maturities securities called                                
Number of securities called     1       —         3       1  
Amortized cost of called securities   $ 249,998     $ —       $ 1,949,536     $ 999,982  
Realized gains on calls   $ 2     $ —       $ 464   $ 18  

 

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.

 

The Company started investing in common stock equity securities during the three months ended March 31, 2020. The Company’s equity securities allocation is intended to enhance the return of and provide diversification for the total investment portfolio. A summary of equity securities is shown below:

    September 30   December 31
    2020   2019
         
Cost   $ 1,515,227     $ —    
Unrealized gain     42,629       —    
Fair market value of equity securities   $ 1,557,856     $ —    

 

The primary cause for the increase in fair value of the Company’s equity securities portfolio for the nine months ended September 30, 2020 was the overall increase in equity markets during the period.

 

The Company’s investment in certificates of deposit included $598,000 of brokered certificates of deposit as of September 30, 2020 and December 31, 2019.

 

 

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The following securities from three different banks represent statutory deposits that are assigned to and held by the California State Treasurer and the Insurance Commissioner of the State of Nevada. These deposits are required for writing certain lines of business in California and for admission to transact insurance business in the state of Nevada.

 

    September 30   December 31
    2020   2019
         
Certificates of deposit   $ 200,000     $ 200,000  
Short-term investments     200,000       200,000  
Total state held deposits   $ 400,000     $ 400,000  

 

All the Company’s brokered and non-brokered certificates of deposit are within the FDIC insured permissible limits. Due to nature of the Company’s business, certain bank accounts may exceed FDIC insured permissible limits.

 

Short-term investments have an initial maturity of one year or less and consist of the following:

    September 30   December 31
    2020   2019
U.S. Treasury bills   $ —       $ 1,996,815  
Certificates of deposit     200,000       200,000  
Total short-term investments   $ 200,000     $ 2,196,815  

 

NOTE 9 – UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

The following table provides an analysis of Crusader’s loss and loss adjustment expense reserves, including a reconciliation of the beginning and ending balance sheet liability for the periods indicated:

 

    Nine  Months Ended September 30
    2020   2019
         
Reserve for unpaid losses and loss adjustment expenses at January 1 – gross of reinsurance   $ 55,066,480     $ 51,657,155  
Less reinsurance recoverable on unpaid losses and loss adjustment expenses     14,725,855       9,531,602  
Reserve for unpaid losses and loss adjustment expenses at January 1 – net of reinsurance     40,340,625       42,125,553  
                 
Incurred losses and loss adjustment expenses:                
   Provision for insured events of current year     19,925,024       13,984,532  
   Development of insured events of prior years     8,161,318       1,366,836  
Total incurred losses and loss adjustment expenses     28,086,342       15,351,368  
                 
Loss and loss adjustment expense payments:                
   Attributable to insured events of the current year     5,685,642       4,531,844  
   Attributable to insured events of prior years     11,756,705       15,088,952  
Total payments     17,442,347       19,620,796  
                 
Reserve for unpaid losses and loss adjustment expenses at September 30 – net of reinsurance     50,984,620       37,856,125  
Reinsurance recoverable on unpaid losses and loss adjustment expenses     23,349,279       13,799,868  
Reserve for unpaid losses and loss adjustment expenses at September 30 – gross of reinsurance   $ 74,333,899     $ 51,655,993  

 

 

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.

 

 

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NOTE 10 – CONTINGENCIES

The Company, by virtue of the nature of the business conducted by it, becomes involved in numerous legal proceedings as either plaintiff or defendant. From time to time, the Company is required to resort to legal proceedings against vendors providing services to the Company or against customers or their agents to enforce collection of premiums, commissions, or fees. These routine items of litigation do not materially affect the Company and are handled on a routine basis by the Company through its counsel.

 

Crusader is also subject to regulatory and governmental examinations, requests for information, inquiries, investigations, and threatened legal actions and proceedings by state regulators and others. Crusader receives numerous requests, orders for documents, and information in connection with various aspects of its regulated activities. Regulatory and governmental requests for information, inquires, certain examinations and investigations are routinely handed by Crusader. Crusader may involve outside counsel in regulatory matters depending on the nature of the matter.

 

The Company establishes reserves for lawsuits, regulatory actions, and other contingencies for which the Company is able to estimate its potential exposure and believes a loss is probable. For loss contingencies believed to be reasonably possible, the Company discloses the nature of the loss contingency, an estimate of the possible loss, a range of loss, or a statement that such an estimate cannot be made.

 

Likewise, the Company is sometimes named as a cross-defendant in litigation, which is principally directed against an insured who was issued a policy of insurance directly or indirectly through Crusader. Incidental actions related to disputes concerning the issuance or non-issuance of individual policies are sometimes brought by customers or others. These items are also handled on a routine basis by counsel, and they do not generally affect the operations of the Company. Management is confident that the ultimate outcome of pending litigation should not have an adverse effect on the Company's consolidated results of operations or financial position. The Company vigorously defends itself unless a reasonable settlement appears appropriate.

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

General

Unico American Corporation, referred to herein as the "Company” or “Unico," is an insurance holding company. Currently, the Company’s subsidiary Crusader Insurance Company (“Crusader”) underwrites commercial property and casualty insurance, the Company’s subsidiaries Unifax Insurance Systems, Inc. (“Unifax”) and American Insurance Brokers, Inc. (“AIB”) provide marketing and various underwriting support services related to property, casualty, health and life insurance, the Company’s subsidiary American Acceptance Company (“AAC”) provides insurance premium financing, and the Company’s subsidiary Insurance Club, Inc., dba AAQHC (“AAQHC”), an Administrator provides membership association services.

 

Total revenues for the three months ended September 30, 2020, were $8,259,686 compared to $8,258,966 for the three months ended September 30, 2019, an increase of $720 (0%). Total revenues for the nine months ended September 30, 2020, were $24,241,094 compared to $23,189,539 for the nine months ended September 30, 2019, an increase of $1,051,555 (5%). The Company had net loss of $17,940,488 for the three months ended September 30, 2020, compared to net income of $212,467 for the three months ended September 30, 2019. The Company had net loss of $19,419,128 for the nine months ended September 30, 2020, compared to net loss of $735,284 for the nine months ended September 30, 2019.

 

Repeated and sustained underwriting losses in Crusader’s Apartments & Commercial Buildings vertical and growth in Crusader’s Transportation vertical, 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. This reevaluation and the use of updated assumptions led to significantly more conservative estimates for expected claims frequency, claims severity and ultimate incurred losses and loss adjustment expenses during the quarterly re-evaluation of the loss and loss adjustment expense reserves as of September 30, 2020. The reevaluation resulted in a $10,308,150 increase in Crusader’s incurred but not reported (“IBNR”) reserves from June 30, 2020, to September 30, 2020, which was a primary contributor to the $17,320,051 losses and loss adjustment expenses recognized for the three months ended September 30, 2020.

 

 

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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 management discussion and analysis, the Company's consolidated financial statements and notes thereto, and all other items contained within the Company’s 2019 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

 

As a result of the ongoing coronavirus (COVID-19) pandemic, economic uncertainties have arisen, which negatively impacted and may continue to negatively impact the fair value of investments, day to day administration of the Company’s business and the Company’s results of operations, financial condition and prospects.

 

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 nine months ended September 30, 2020, and the economic uncertainty caused by the pandemic may lead to further investment valuation volatility. In addition, the recent decline in investment yields resulted in lower reinvestment rates, compared to the 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.

 

Although the COVID-19 pandemic did not have a material impact on Crusader’s overall gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties) during the three and nine months ended September 30, 2020, Crusader has experienced a decrease in new business submissions and renewals related to the pandemic in its Bars/Taverns market sector niche as a result of government regulations, such as shelter-in-place orders and in-door dining limitations, which has adversely impacted the gross written premium for that niche.

 

Crusader has received a number of coronavirus-related business interruption claims. While the Company does not believe it is exposed to substantial risk from those claims under the insurance policies written by Crusader, the individual circumstances of each such claim are reviewed to fulfill Crusader’s obligation to its policyholders if coverage applies. Further, there may be impacts to the timing of loss emergence and ultimate loss ratios for certain Crusader’s products due to postponements of civil court cases, extensions of various statutes of limitations, changes in settlement trends and other new legislative, regulatory or judicial developments which could result in loss reserve deficiencies and negative impact on results of operations.

 

The Company’s financial results for the three and nine months ended September 30, 2020, do not fully reflect the potential adverse impacts that the ongoing coronavirus pandemic has had or will have on its business due to a high degree of uncertainty around this relatively new and continuously evolving environment. The financial impact of these uncertainties is unknown at this time but could result in a material adverse effect on the Company’s business, results of operations, financial condition and prospects.

 

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 will follow governmental safety guidelines in determining on when to remove the coronavirus-related business restrictions and on when to allow the employees working from their homes to return to their workplaces; at this point, the Company does not have an estimate on when these changes will occur. 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.

 

The Company’s financial performance suffered in recent years, reporting net losses for each fiscal year beginning with the year ended December 31, 2015. While losses in recent years have been driven primarily by losses from Crusader’s policies and their high loss ratios, management believes that other contributing factors include (1) the growth of some of the Company’s non-routine expenses relative to flat or declining revenues, (2) the failure to have replaced or upgraded the Company’s legacy IT system in order to process Crusader’s smaller premium accounts more efficiently, and (3) the failure to have shifted focus to larger premium accounts and fee-for-service operations.

 

In light of the challenges faced and operational results, the Company has taken several steps to improve. To improve Crusader's loss ratios, beginning in January 2017, the Company made significant changes in its staffing and in its pricing and risk selection practices. To improve revenues the Company is working to improve its sales in the markets that it has historically served, to gain access to markets that it has not previously served, and to generate new sources of revenue on a fee-for-service basis. For example, the Company also re-activated its US Risk Managers, Inc. subsidiary so that it can provide claims adjustment services to non-affiliated insurers and to self-insurers on a fee-for-service basis (i.e., where Crusader will not be underwriting the risk), providing the potential for an alternative revenue source to the Company.

 

 

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The Company previously announced an arrangement, executed on April 6, 2020, with United Specialty Insurance Company (“USIC”), a non-admitted and non-affiliated insurer. The arrangement provided Crusader with the ability to issue USIC policies which are rated “A” by A.M. Best Company and which provide pricing and coverage flexibility previously unavailable through Crusader policies. The agreements with USIC were entered into by Crusader and Unifax, an affiliate of Crusader, prior to obtaining approval of the transactions by the California Department of Insurance (the “DOI”) as required by the California Insurance Holding Company System Act for transactions that include affiliates. On September 2, 2020, the Company placed a moratorium on placing any new risks with USIC by Unifax pending resolutions of issues relating to the structure of the transactions. Crusader and Unifax are in negotiations with USIC to determine whether and how the transactions can be restructured in order to address issues raised by the DOI. There can be no assurance that such efforts will be successful. If the transactions are not restructured, the agreements with USIC may need to be terminated. If the agreements with USIC are terminated, such termination could result in significant financial expenses regarding such termination and the Company’s reputation could be adversely affected.

 

In 2018, the Company determined that the cost to replace its legacy IT system would be between $4,000,000 and $8,000,000, and the installation of such a system would take between two to four years. After weighing the time and expense involved against the anticipated benefit from such an investment, the Company opted for what it then perceived to be a less expensive upgrade to its legacy system, an upgrade that then seemed to offer more incremental benefits in a shorter timeframe. While initially expected to be completed by the end of 2019, at a cost of approximately $300,000, excluding costs of Unico’s employees involved in the upgrade, the system upgrade is now expected to be completed at a cost of approximately $1,300,000, excluding costs of Unico’s employees involved in the upgrade, due to unexpected technical challenges. The expected completion of the upgrade was moved from end of 2020 to end of first quarter of 2021 due to personnel changes. In light of the significant delays and increases in cost associated with its legacy upgrade project, the Company has deployed additional resources toward the management of this project and has renegotiated the relationship that it has with the non-affiliated vendor working on this project.

 

Revenue and Income Generation

The Company receives 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. The insurance company operation generated approximately 94% of consolidated revenues for the three and nine months ended September 30, 2020, compared to 92% of consolidated revenues for the three and nine months ended September 30, 2019. None of the Company’s other operations is individually material to consolidated revenues.

 

Insurance Company Operation

As of September 30, 2020, Crusader was licensed as an admitted insurance carrier in the states of Arizona, California, Nevada, Oregon, and Washington. From 2004 until September 2014, all of Crusader’s business was written in the state of California. Crusader’s business remains concentrated in California (99.9% of gross written premium during the three and nine months ended September 30, 2020 and 99.8% of gross written premium during the three and nine months ended September 30, 2019).

 

Crusader’s total gross written premium, as reported on Crusader’s statutory financial statements, was produced geographically as follows:

    Three Months Ended September 30   Nine Months Ended September 30
   

2020

 

2019

 

Change

 

2020

 

2019

 

Change

                         
California   $ 9,653,326     $ 9,444,753     $ 208,573     $ 27,619,957     $ 27,397,892     $ 222,065  
Arizona     3,435       —         3,435       24,817       31,593       (6,776 )
Washington     —         —         —         —         (1,149 )     1,149  
Total gross written premium   $ 9,656,761     $ 9,444,753     $ 212,008     $ 27,644,774     $ 27,428,336     $ 216,438  

 

 

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Crusader believes that it can grow its sales and profitability through improved specialization and sales incentives. Crusader currently focuses in four underwriting verticals: (1) Transportation, (2) Food, Beverage & Entertainment, (3) Garage & Mercantile, and (4) Apartments & Commercial Buildings. Crusader is also evaluating the possibility of expanding its operations geographically, on an admitted or non-admitted basis, so as to offer similar products in other states, but the timing of any such expansion is not yet determined.

 

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 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 to net earned premium (after premium ceded to reinsurers under reinsurance treaties):

    Three Months Ended
September 30
  Nine Months Ended
September 30
    2020   2019   2020   2019
                 
Gross written premium   $ 9,656,761     $ 9,444,753     $ 27,644,774     $ 27,428,336  
Less: written premium ceded to
reinsurers
    (2,021,261 )     (1,788,682 )     (6,003,698 )     (5,205,210 )
Net written premium     7,635,500       7,656,071       21,641,076       22,223,126  
   Change in gross unearned premium     (504,769 )     (660,216 )     (822,093 )     (2,422,025 )
   Change in ceded unearned premiums     (6,459 )     (17,157 )     (13,466 )     (40,140 )
      Net earned premium   $ 7,124,272     $ 6,978,698     $ 20,805,517     $ 19,760,961  

 

The insurance company operation underwriting profitability is defined by pre-tax underwriting gain, which is calculated as net earned premium less losses and loss adjustment expenses and policy acquisition costs.

 

Crusader’s underwriting gain before income taxes is as follows:

    Three Months Ended September 30   Nine Months Ended September 30
       2020      2019   Change      2020      2019   Change
                         
Net written premium   $ 7,635,500     $ 7,656,071     $ (20,571 )   $ 21,641,076     $ 22,223,126     $ (582,050 )
Change in net unearned premium     (511,228 )     (677,373 )     166,145       (835,559 )     (2,462,165 )     1,626,606  
   Net earned premium     7,124,272       6,978,698       145,574       20,805,517       19,760,961       1,044,556  
Less:                                                
Losses and loss adjustment expenses     17,320,051       5,137,974       12,182,077       28,086,342       15,351,368       12,734,974  
Policy acquisition costs     1,279,703       1,194,870       84,833       3,626,154       3,571,065       55,089  
Total underwriting expenses     18,599,754       6,332,844       12,266,910       31,712,496       18,922,433       12,790,063  
Underwriting gain (loss) before income taxes   $ (11,475,482 )   $ 645,854     $ (12,121,336 )   $ (10,906,979 )   $ 838,528     $ (11,745,507 )

 

 

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 insurance company operations profitability. Each of these captions is presented in the Condensed Consolidated Statements of Operations but is not subtotaled.

 

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The following is a reconciliation of Crusader’s underwriting gain (loss) before income taxes to the Company’s loss before taxes:

 

    Three Months Ended September 30   Nine Months Ended   September 30
    2020   2019   2020   2019
                 
Underwriting gain (loss) before income taxes   $ (11,475,482 )   $ 645,854     $ (10,906,979 )   $ 838,528  
Insurance company operation revenues:                                
   Investment income     477,145       518,108       1,487,335       1,581,482  
   Net realized investment gains (losses)     38,214       —         39,789       (12,661 )
   Net unrealized investment gains on                                
   equity securities     19,670       —         42,629       —    
   Other income     74,784       114,531       278,544       22,660  
Other insurance operations revenues:                                
   Gross commissions and fees     461,540       581,100       1,388,494       1,656,371  
   Finance charges and fees earned     56,985       66,526       191,690       169,896  
   Other income     7,076       3       7,096       10,830  
Less expenses:                                
   Salaries and employee benefits     2,584,478       1,021,597       4,958,900       3,062,251  
   Commissions to agents/brokers     23,235       40,946       73,190       132,144  
   Other operating expenses     1,398,135       532,853       3,372,483       1,896,386  
      Income (loss) before taxes   $ (14,345,916 )   $ 330,726     $ (15,875,975 )   $ (823,675 )

 

 

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 a premium deficiency of $100,000 and $0 as of September 30, 2020 and 2019, respectively. The premium deficiency was recorded as a reduction in deferred policy acquisition costs.

 

The following table provides an analysis of losses and loss adjustment expenses:

 

    Three Months Ended September 30   Nine Months Ended September 30
    2020   2019   Change   2020   2019   Change
                         
Losses and loss adjustment expenses:                                                
Provision for insured events of current year   $ 9,385,389     $ 4,299,018     $ 5,086,371     $ 19,925,024     $ 13,984,532     $ 5,940,492  
Development of insured events of prior years     7,934,662       838,956       7,095,706       8,161,318       1,366,836       6,794,482  
Total losses and loss adjustment expenses   $ 17,320,051     $ 5,137,974     $ 12,182,077     $ 28,086,342     $ 15,351,368     $ 12,734,974  

 

 

Losses and loss adjustment expenses were 243% and 135% of net earned premium for the three and nine months ended September 30, 2020, respectively, compared to 74% and 78% of net earned premium for the three and nine months ended September 30, 2019, respectively. For further analysis, refer to “Results of Operations.”

 

Repeated and sustained underwriting losses in Crusader’s Apartments & Commercial Buildings vertical and growth in Crusader’s Transportation vertical, 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. This reevaluation and the use of updated assumptions led to significantly more conservative estimates for expected claims frequency, claims severity and ultimate incurred losses and loss adjustment expenses during the quarterly re-evaluation of the loss and loss adjustment expense reserves as of September 30, 2020. The reevaluation resulted in a $10,308,150 increase in Crusader’s IBNR reserves from June 30, 2020, to September 30, 2020, which was a primary contributor to the $17,320,051 losses and loss adjustment expenses recognized for the three months ended September 30, 2020.

 

 

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On January 17, 2019, A.M. Best downgraded Crusader’s Financial Strength Rating (“FSR”) to “B++” (Good) from “A-“ (Excellent) and its Long-Term Issuer Credit Rating (“Long-Term ICR”) to “bbb+” from “a-“. The outlook of the FSR was revised at that time to stable from negative while the outlook of the Long-Term ICR remained negative.  The rating downgrades reflected a revision in A.M. Best’s assessment of Crusader’s operating performance to adequate from strong.

 

On January 30, 2020, A.M. Best affirmed Crusader’s FSR of “B++” (Good) and further downgraded Crusader’s Long-Term ICR to “bbb” from “bbb+”. The outlook of the FSR of Crusader remains stable while the outlook of the Long-Term ICR of Crusader was revised to stable from negative.  Also on January 30, 2020, A.M Best downgraded the Long-Term ICR of Unico to “bb” from “bb+”. The outlook of the Long-Term ICR of Unico was revised to stable from negative. 

 

The January 30, 2020, ratings reflect Crusader’s balance sheet strength, which A.M. Best categorizes as very strong, as well as its marginal operating performance, limited business profile and marginal enterprise risk management.  The downgrade of the Long-Term ICR reflects a revision in A.M. Best’s assessment of Crusader‘s operating performance to marginal from adequate.  According to A.M. Best, (i) the downgrades consider a material decline in Crusader’s operating performance, resulting from sub-par underwriting results in a relatively compact time frame, (ii) Crusader’s adverse performance has been amplified by increased frequency and severity of apartment building insurance related claims, (iii) multiple operating metrics of Crusader trail the commercial casualty composite on a five-year and 10-year basis, and (iv) the consequential business changes being implemented to address these conditions lead to significant execution risk in returning Crusader’s operational results to historical levels. 

 

Some of Crusader’s policyholders, or the lenders, landlords or clients of Crusader’s policyholders, require insurance from a company that has an A.M. Best FSR of “A-” or higher, and the A.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 may have a negative impact on the Company’s revenue and results of operations. The Company cannot quantify the impact that the rating changes have had or will have on its revenue and results of operations, and the Company cannot determine if or when Crusader might regain the “A-” FSR from A.M. Best.

 

The reinsurance arrangement with USIC allows Unifax to offer its customers policies written on USIC paper, which has A.M. Best FSR of “A,” when such rating is required. On September 2, 2020, the Company placed a moratorium on placing any new risks with USIC.

 

The property and casualty insurance business is cyclical in nature. The conditions of a “soft market” include premium rates that are stable or falling and insurance is readily available. Contrarily, “hard market” conditions occur during periods in which premium rates rise and coverage may be more difficult to find. The Company believes that the California property and casualty insurance market is relatively mature and intensely competitive, with different products in different stages of the soft/hard market cycle at any given time.

 

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 6% of total revenues in the three and nine months ended September 30, 2020, compared to approximately 8% of total revenues in the three and nine months ended September 30, 2019, respectively.

 

Investments

The Company generated revenues from its total invested assets of $80,864,783 (fixed maturities at amortized cost and equity securities at cost) and $83,091,961 (fixed maturities at amortized cost) as of September 30, 2020 and 2019, respectively.

 

Net investment income (net of investment expenses) decreased $40,963 (8%) and $94,147 (6%) to $477,145 and $1,487,335 for the three and nine months ended September 30, 2020, respectively, compared to $518,108 and $1,581,482 for the three and nine months ended September 30, 2019, respectively. This decrease in net investment income was due primarily to decrease in the average invested assets.

 

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 of September 30, 2020, all of the Company’s investments are in U.S. Treasury securities, corporate fixed maturity securities, agency mortgage-backed securities, equity securities, Federal Deposit Insurance Corporation (“FDIC”) insured certificates of deposit, money market funds, and a savings account. All of the Company’s investments, except for the certificates of deposit, are readily marketable.

 

 

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As of September 30, 2020, the weighted average maturity of the Company’s investments was approximately 8.0 years, and the effective duration for available-for-sale investments (investments managed under the investment guidelines) was 3.16 years.

 

LIQUIDITY AND CAPITAL RESOURCES

The most significant liquidity risk faced by the Company is adverse development of the insurance company’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 there are no current liquidity issues.  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, 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 without the need to liquidate its investments. Cash, cash equivalents, and investments (at amortized cost) of the Company at September 30, 2020, were $86,570,446 compared to $90,778,865 at December 31, 2019. Crusader's cash, cash equivalents, and investments was 98% of the total cash and investments (at amortized cost) held by the Company as of September 30, 2020, and December 31, 2019.

 

As of September 30, 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.

 

The Company’s investments, fixed maturities and short-term bonds at amortized cost, and equities and other short-term investments at cost, were as follows:

 

    September 30   December 31
    2020   2019
         
Fixed maturities:                
U.S. Treasury securities   $ 10,090,505     $ 15,105,795  
Corporate securities     45,799,041       41,953,378  
Agency mortgage-backed securities     22,462,009       24,943,238  
Certificates of deposit     798,000       798,000  
Total fixed maturities     79,149,555       82,800,411  
Equity securities     1,515,228       —    
Short-term investments     200,000       2,196,815  
Total investments   $ 80,864,783     $ 84,997,226  

 

As of September 30, 2020, one corporate security, included in available-for-sale fixed maturities, was 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 that security was $723,625 and $688,147 on September 30, 2020, respectively.

 

The short-term investments include U.S. Treasury bills and certificates of deposit that are all highly rated and have initial maturity between three and twelve months. Amortized costs of the short-term investments approximate their fair values.

 

The Company is required to classify its investment securities into one of three categories: held-to-maturity, available-for-sale, or trading securities. Although part of the Company's investments in fixed maturity securities is classified as available-for-sale and, while the Company may sell investment securities from time to time in response to economic, regulatory, and market conditions, its investment guidelines place primary emphasis on buying and holding high-quality investments to maturity.

 

The Company’s Board of Directors approved investment guidelines are similar to what the Company believes are general investment guidelines used by Crusader’s peers.

 

 

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Under the Company’s investment guidelines, investments may only include U.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.

 

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.  The investments continue to be held by Crusader’s current custodian, Union Bank Global Custody Services.

 

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 is effective immediately and replaces the Company’s existing share repurchase program that was adopted by the Board of Directors 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:

 

    Three Months Ended
September 30
  Nine Months Ended
September 30
    2020   2019   2020   2019
                 
2020 Program                                
Number of shares repurchased     630       —         630       —    
Cost of shares repurchased                                
   Allocated to retained earnings   $ 2,969     $       $ 2,969   $        
   Allocated to capital     310       —         310       —    
      Total cost of shares repurchased   $ 3,279     $ —       $ 3,279     $ —    
                                 
2008 Program                                
Number of shares repurchased     —         —         978       356  
Cost of shares repurchased                                
   Allocated to retained earnings   $           $       $ 5,760   $ 1,946  
   Allocated to capital     —         —         480       175  
      Total cost of shares repurchased   $ —       $ —       $ 6,240     $ 2,121  

 

The Company has remaining authority under the 2020 Program to repurchase up to $4,996,721 of the currently outstanding shares of the Company’s common stock as of September 30, 2020. The Company has retired or will retire all stock repurchased under the 2020 Program and 2008 Program.

 

 

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The Company reported $3,634,617 net cash used by operating activities for the nine months ended September 30, 2020, compared to $3,633,043 net cash used by operating activities for the nine months ended September 30, 2019. 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. Although the Condensed Consolidated Statements of Cash Flows reflect net cash used by operating activities, the Company does not anticipate future liquidity problems, and the Company believes it continues to be well capitalized and adequately reserved. 

 

On September 14, 2020, and May 20, 2020, Crusader paid cash dividends of $2,000,000 to Unico, its parent and sole shareholder. These two dividends totaling $4,000,000 are intended to be used primarily for general corporate purposes. Based on Crusader’s statutory surplus for the year ended December 31, 2019, the maximum aggregate dividend that could be made by Crusader to Unico without prior regulatory approval in 2020 is $4,649,896.

 

While material capital expenditures may be funded through borrowings, the Company believes that its cash and short-term investments at September 30, 2020, net of statutory deposits of $710,000 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 12 months without the necessity of borrowing funds.

 

RESULTS OF OPERATIONS

All comparisons made in this discussion are comparing the three and nine months ended September 30, 2020, to the three and nine months ended September 30, 2019, unless otherwise indicated.

 

For the three and nine months ended September 30, 2020, total revenues were $8,259,686, an increase of $720 (0%) and $24,241,094, an increase of $1,051,555 (5%) compared to total revenues of $8,258,966 and $23,189,539 for the three and nine months ended September 30, 2019, respectively. For the three and nine months ended September 30, 2020, the Company had loss before taxes of $14,345,916 and $15,875,975, respectively, compared to income before taxes of $330,726 and loss before taxes of $823,675 for the three and nine months ended September 30, 2019, respectively. For the three and nine months ended September 30, 2020, the Company had net loss of $17,940,488 and $19,419,127, respectively, compared to net income of $212,467 and net loss of $735,284, for the three and nine months ended September 30, 2019, respectively

 

The was a slight increase in revenues of $720 (0%) for the three months ended September 30, 2020, when compared to the three months ended September 30, 2019. The increase in revenues of 1,051,555 (5%) for the nine months ended September 30, 2020, when compared to the nine months ended September 30, 2019, was due primarily to an increase in net earned premium of $1,044,556 (5%).

 

The increase in loss before tax of $14,676,642 for the three months ended September 30, 2020, compared to the three months ended September 30, 2019, was due primarily to an increase in losses and loss adjustment expenses of $12,182,077 (237%), an increase in salaries and employee benefits of $1,562,881 (153%), and an increase in other operating expenses of $865,282 (162%).The increase in loss before tax of $15,052,300 for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, was primarily due to an increase in losses and loss adjustment expenses of $12,734,974 (83%), an increase in salaries and employee benefits of $1,896,649 (62%), an increase in other operating expenses of $1,476,097 (78%) partially offset by an increase in net earned premium of $1,044,556 (5%) and an increase in other income of $255,884 (1129%).

 

During the three months ended September 30, 2020, the Company reevaluated assumptions used in its process for estimating loss and loss adjustment reserves due to its experiences in Crusader’s Apartments & Commercial Buildings and Transportation verticals as well as changes in the market conditions. The reevaluation resulted in a $10,308,150 increase in Crusader’s IBNR reserves from June 30, 2020, to September 30, 2020, which primarily contributed to the increase of $12,182,077 in the losses and loss adjustment expenses.

 

The increase in salaries and employee benefits of $1,562,300 was due primarily to costs associated with the retirement of the Company’s former President and Chief Executive officer.

 

Written premium

Written premium is a required statutory measure. 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 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.

 

 

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Gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties) reported on Crusader’s statutory financial statements increased $212,008 (2%) and $216,438 (1%) to $9,656,761 and $27,644,774 for the three and nine months ended September 30, 2020, respectively, compared to $9,444,753 and $27,428,336 for the three and nine months ended September 30, 2019, respectively.

 

The property casualty insurance marketplace continues to be intensely competitive. While Crusader attempts to meet such competition with competitive prices, its emphasis is on service, innovation, promotion, and distribution. Crusader believes that rate adequacy is more important than premium growth and that underwriting profit (net earned premium less losses and loss adjustment expenses and policy acquisition costs) is its primary goal. The Company believes that it can grow its sales and profitability through improved specialization and sales incentives, currently focused in four underwriting verticals: (1) Transportation, (2) Food, Beverage & Entertainment, (3) Garage & Mercantile, and (4) Apartments & Commercial Buildings. The decrease in gross written premium for the three months ended September 30, 2020, is due primarily to coronavirus-related contraction in the Food, Beverage & Entertainment underwriting vertical. The increase in gross written premium for the three and nine months ended September 30, 2020, is due to growth in the Company’s Transportation underwriting vertical partially offset by declines in the other three underwriting verticals.

 

Although the ongoing coronavirus pandemic did not have a significant impact on Crusader’s overall gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties) during the three and nine months ended September 30, 2020, Crusader has experienced a decrease in new business submissions and renewals related to the pandemic in its Bars/Taverns market sector niche as a result of government regulations, such as shelter-in-place orders and in-door dining limitations, which has adversely impacted the gross written premium for that niche.

 

Crusader’s primary line of business is CMP policies. This line of business represented approximately 99.6% and 99.8% of Crusader’s total written premium for the three and nine months ended September 30, 2020, respectively. This line of business represented approximately 98.9% and 97.7% Crusader’s total written premium for the three and nine months ended September 30, 2019, respectively.

 

Gross earned premium

Gross earned premium (direct and assumed earned premium before cessions to reinsurers under reinsurance treaties) increased $367,455 (4%) to $9,151,992 and $1,816,370 (7%) to $26,822,681 for the three and nine months ended September 30, 2020, respectively, compared to $8,784,537 and $25,006,311 for the three and nine months ended September 30, 2019, respectively. The Company writes annual policies. 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. The increase in gross earned premium for the three and nine months ended September 30, 2020, was due primarily to an increase in gross written premium in 2019.

 

Ceded earned premium

Ceded earned premium (premium ceded to reinsurers under reinsurance treaties) increased $221,881 (12%) to $2,027,720 and $771,814 (15%) to $6,017,164 for the three and nine months ended September 30, 2020, compared to $1,805,839 and $5,245,350 for the three and nine months ended September 30, 2019, respectively. Ceded earned premium as a percentage of gross earned premium was 22% for the three and nine months ended September 30, 2020, and 21% for the three and nine months ended September 30, 2019. The increase in the ceded earned premium as a percentage of gross earned premium for the three and nine months ended September 30, 2020, compared to the three and nine months ended September 30, 2019, was due primarily to higher gross earned premium subject to reinsurance treaties and higher rates on excess of loss reinsurance treaties.

 

 

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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 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 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 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 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 of September 30, 2020, all such ceded contracts are accounted for as risk transfer reinsurance.

 

Investment Income, Net Realized Investment Gains and Losses, and Net Unrealized Investment Losses on Equity Securities

Investment income decreased $40,963 (8%) to $477,145 and $94,147 (6%) to $1,487,335 for the three and nine months ended September 30, 2020 respectively, compared to $518,108 and $1,581,482 for the three and nine months ended September 30, 2019, respectively. This decrease in investment income was due primarily to a decrease in average invested assets and lower market yields. The Company had net realized gains of $38,214 and $39,789 for the three and nine months ended September 30, 2020, respectively. The Company had no net realized gains or losses for the three months ended September 30, 2019. The Company had net realized investment losses of $12,661 for the nine months ended September 30, 2019. The Company had net unrealized investment gains on equity securities of $19,670 and $42,629 for the three and nine months ended September 30, 2020 compared to none for the three and nine months ended September 30, 2019. The net unrealized investment gains on equity securities for the three and nine months ended September 30, 2020 were due primarily to the increase in fair value of equity securities during the three and nine months ended September 30, 2020.

 

Average annualized 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:

 

   

Three Months Ended

September 30

 

Nine Months Ended

September 30

     2020    2019    2020    2019
                 
Average invested assets (1) - at amortized cost   $ 82,652,749     $ 84,140,699     $ 82,931,005     $ 86,605,752  
Net investment income from:                                
   Invested assets (2)   $ 477,103     $ 501,543     $ 1,483,670     $ 1,545,456  
   Cash equivalents     42       16,565       3,665       36,026  
      Total investment income   $ 477,145     $ 518,108     $ 1,487,335     $ 1,581,482  
Annualized yield on average invested assets (3)     2.3 %     2.4 %     2.4 %     2.4 %

 

(1) The average is based on the beginning and ending balance of the amortized cost of the invested assets for each respective period.

 

(2) Investment income included $32,974 and $100,761 of investment expense for the three and nine months ended September 30, 2020, compared to $31,007 and $98,627 of investment expense for the three and nine months ended September 30, 2019.

 

(3) Annualized yield on average invested assets did not include the investment income from cash equivalents.

 

The par value, amortized cost, estimated market value and weighted average yield of fixed maturity investments by contractual maturity are as follows: 

 

 

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Maturities by Year at September 30, 2020

 

Par Value

 

Amortized Cost

 

Fair Value

 

Weighted Average Yield

                 
Due in one year   $ 11,260,000     $ 11,257,239     $ 11,407,757       2.6 %
Due after one year through five years     32,480,748       32,510,017       33,719,090       2.6 %
Due after five years through ten years     16,563,091       16,684,676       17,836,383       2.5 %
Due after ten years and beyond     18,353,830       18,697,623       19,504,004       2.6 %
   Total   $ 78,657,669     $ 79,149,555     $ 82,467,234       2.6 %

 

 

Maturities by Year at December 31, 2019

 

Par Value

 

Amortized Cost

 

Fair Value

 

Weighted Average Yield

                 
Due in one year   $ 10,070,000     $ 10,063,975     $ 10,087,478       2.3 %
Due after one year through five years     42,936,754       42,944,463       43,654,657       2.6 %
Due after five years through ten years     9,982,374       9,996,830       10,529,528       3.3 %
Due after ten years and beyond     19,336,385       19,795,143       20,026,047       2.8 %
   Total   $ 82,325,513     $ 82,800,411     $ 84,297,710       2.7 %

 

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 fixed maturity investments was 8.0 years as of September 30, 2020, and 7.2 years as of September 30, 2019.

 

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
   

Estimated Fair Value

 

Gross Unrealized Losses

 

Number of Securities

 

Estimated Fair Value

 

Gross Unrealized Losses

 

Number of Securities

September 30, 2020                        
Corporate securities   $ 3,431,312     $ (203,965 )     6     $ —       $ —         —    
Agency mortgage-backed securities     1,215,171       (3,922 )     2       —         —         —    
Total   $ 4,646,483     $ (207,887 )     8     $ —       $ —         —    

 

    Less than 12 Months   12 Months or Longer
   

Estimated Fair Value

 

Gross Unrealized Losses

 

Number of Securities

 

Estimated Fair Value

 

Gross Unrealized Losses

 

Number of Securities

December 31, 2019                        
U.S. Treasury securities   $ 1,996,562     $ (252 )     1     $ 1,002,031     $ (775 )     1  
Corporate securities     999,818       (57 )     1       —         —         —    
Agency mortgage-backed securities     750,058       (1,950 )     2       —         —         —    
Total   $ 3,746,438     $ (2,259 )     4     $ 1,002,031     $ (775 )     1  

 

While the fair value of Company’s investment portfolio at September 30, 2020, has recovered from the declines recorded for the three months ended March 31, 2020, the effects of the coronavirus pandemic were a major contributor to the variability in fair value of the Company’s fixed income and equity investments during the three months ended March 31, 2020, and September 30, 2020, and the economic uncertainty caused by the pandemic may lead to further investment valuation volatility. In addition, the recent decline in investment yields resulted in lower reinvestment rates, compared to the 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.

 

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 Condensed 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 three and nine months ended September 30, 2020, one fixed maturity corporate security experienced a significant decline in market value; the market and book value of that security at September 30, 2020, was $723,625 and $688,147, respectively. The unrealized losses on all securities as of September 30, 2020, and December 31, 2019, were determined to be temporary.

 

 

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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:

 

    Three Months Ended
September 30
  Nine Months Ended
September 30
    2020   2019   2020   2019
                 
Fixed maturities securities sold                                
Number of securities sold     6       —         7       3  
Amortized cost of sold securities   $ 2,923,386     $ —       $ 3,524,702     $ 2,997,098  
Realized gains (losses) on sales   $ 30,057     $ —       $ 31,171     $ (12,679 )
                                 
Fixed maturities securities called                                
Number of securities called     1       —         3       1  
Amortized cost of called securities   $ 249,998     $ —       $ 1,949,536     $ 999,982  
Realized gains on calls   $ 2     $ —       $ 464   $ 18  

 

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 Revenues and Other Insurance Operations decreased $32,674 (29%) to $81,860 and increased $252,150 (753%) to $285,640 for the three and nine months ended September 30, 2020, respectively, compared to $114,534 and $33,490 for the three and nine months ended September 30, 2019, respectively. The decrease in other income during the three months ended September 30, 2020, is due primarily to a $35,449 increase in Crusader’s share of California FAIR Plan equity compared to a $60,176 increase during the three months ended September 30, 2019. The increase in other income during the nine months ended September 30, 2020, is due primarily to an $83,652 increase in Crusader’s share of California FAIR Plan equity compared to a $178,640 decrease during the nine months ended September 30, 2019.

 

Gross commissions and fees

Gross commissions and fees decreased $119,560 (21%) to $461,540 and $267,877 (16%) to $1,388,494 for the three and nine months ended September 30, 2020, respectively, compared to gross commissions and fees of $581,100 and $1,656,371 for the three and nine months ended September 30, 2019, respectively.

 

The changes in gross commission and fee income for the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019, are as follows:

 

    Three Months Ended September 30     Nine Months Ended September 30
    2020   2019   Change   2020   2019   Change
                         
Brokerage fee income   $ 233,818     $ 276,047     $ (42,229 )   $ 760,486     $ 870,082     $ (109,596 )
Health insurance program     204,352       283,700       (79,348 )     557,634       717,590       (159,956 )
Membership and fee income     23,370       21,353       2,017       70,374       68,699       1,675  
Total   $ 461,540     $ 581,100     $ (119,560 )   $ 1,388,494     $ 1,656,371     $ (267,877 )

 

Unifax sells and services insurance policies for Crusader and USIC. For these brokerage services, Unifax receives 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 condensed 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 Condensed 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 condensed consolidated financial statements. Brokerage fee income decreased $42,229 (15%) and $109,596 (13%) in the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019, due primarily to reduction in policy counts.

 

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AIB markets health insurance in California through non-affiliated insurance companies for individuals and groups. For these services, AIB receives commission based on the premiums that it writes. Commission income decreased $79,348 (28%) and $159,956 (22%) in the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019. The decrease in commission income reported in the three and nine months ended September 30, 2020, when compared to the prior year period, is primarily a result of a loss of a large group account.

 

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 increased $2,017 (9%) and increased $1,675 (2%) for the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019.

 

Finance charges and fees earned

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 $9,541 (14%) to $56,985 for the three months ended September 30, 2020, compared to $66,526 in fees earned during the three months ended September 30, 2019, due primarily to a decrease in the number of issued loans. Charges and fees earned by AAC increased $21,794 (13%) to $191,690 for the nine months ended September 30, 2020, compared to $169,896 in fees earned during the nine months ended September 30, 2019, due primarily to the increase in earned finance charges as a result of the change in annual percentage rate charged on AAC new loans from a single fixed interest rate to a tiered interest rate structure effective April 1, 2019. During the three and nine months ended September 30, 2020, AAC issued 288 and 929 loans, respectively, and had 944 loans outstanding as of September 30, 2020. During the three and nine months ended September 30, 2019, AAC issued 404 and 1,267 loans, respectively, and had 1,254 loans outstanding as of September 30, 2019. AAC provides premium financing only for Crusader policies produced by Unifax in California.

 

Losses and loss adjustment expenses

Loss ratio, which is calculated by dividing losses and loss adjustment expenses by net earned premium, was 243% and 135% for the three and nine months ended September 30, 2020, compared to 74% and 78% for the three and nine months ended September 30, 2019.

Losses and loss adjustment expenses and loss ratios are as follows:

    Three Months Ended September 30
   

2020

 

2020 Loss Ratio

 

2019

 

2019 Loss Ratio

 

Change

                     
Net earned premium   $ 7,124,272             $ 6,978,698             $ 145,574  
                                         
Losses and loss adjustment expenses:                                        
Provision for insured events of current year     9,385,389       132 %     4,299,018       62 %     5,086,371  
Development of insured events of prior years     7,934,662       111 %     838,956       12 %     7,095,706  
Total losses and loss adjustment expenses   $ 17,320,051       243 %   $ 5,137,974       74 %   $ 12,182,077  

 

   

 

Nine Months Ended September 30

    2020  

2020 Loss Ratio

  2019  

2019 Loss Ratio

 

Change

                     
Net earned premium   $ 20,805,517             $ 19,760,961             $ 1,044,556  
                                         
Losses and loss adjustment expenses:                                        
Provision for insured events of current year     19,925,024       96 %     13,984,532       71 %     5,940,492  
Development of insured events of prior years     8,161,318       39 %     1,366,836       7 %     6,794,482  
Total losses and loss adjustment expenses   $ 28,086,342       135 %   $ 15,351,368       78 %   $ 12,734,974  

  

  

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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 $9,385,389 provision for insured events of current year for the three months ended September 30, 2020, was $5,086,371 higher than the $4,299,018 provision for insured events of current year for the three months ended September 30, 2019, and the $19,925,024 provision for insured events of current year for the nine months ended September 30, 2020, was $5,940,492 higher than the $13,984,532 provision for insured events of current year for the nine months ended September 30, 2019, due primarily to increases 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.

 

The $7,934,662 adverse development of insured events of prior years for the three months ended September 30, 2020, was $7,095,706 higher than the $838,956 adverse development of insured events of prior years for the three months ended September 30, 2019, and the $8,161,318 adverse development of insured events of prior years for the nine months ended September 30, 2020, was $6,794,482 higher than the $1,366,836 adverse development of insured events for the nine months ended September 30, 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.

 

Crusader has received 150 coronavirus-related business interruption claims through September 30, 2020. While the Company does not believe it is exposed to substantial risk from those claims under the insurance policies written by Crusader, the individual circumstances of each such claim are reviewed to fulfill Crusader’s obligation to its policyholders if coverage applies. Further, there may be impacts to the timing of loss emergence and ultimate loss ratios for certain Crusader’s products due to postponements of civil court cases, extensions of various statutes of limitations, changes in settlement trends and other new legislative, regulatory or judicial developments which could result in loss reserve deficiencies and negative impact on results of operations.

 

Crusader has received seven claims related to the recent civil unrest through September 30, 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.

 

The following table breaks out adverse (favorable) development from total losses and loss adjustment expenses quarterly since September 30, 2018:

   

 

Provision for Insured Events of Current Year

 

Adverse (Favorable)

Development of Insured Events of Prior Years

 

 

Total Losses and Loss Adjustment Expenses

             
  Three Months Ended:                          
  September 30, 2020     $ 9,385,389     $ 7,934,662     $ 17,320,051  
  June 30, 2020       5,378,459       (489,553 )     4,888,906  
  March 31, 2020       5,161,176       716,209       5,877,385  
  December 31, 2019       5,400,410       1,824,349       7,224,759  
  September 30, 2019       4,299,018       838,956       5,137,974  
  June 30, 2019       5,134,626       (75,675 )     5,058,951  
  March 31, 2019       4,550,888       603,555       5,154,443  
  December 31, 2018       5,134,166       53,997       5,188,163  
  September 30, 2018       4,840,242       798,378       5,638,620  

  

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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 vertical and growth in Crusader’s Transportation vertical, 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 (discussed below), caused Crusader management to reevaluate the assumptions used in its process for estimating loss and loss adjustment expense reserves. This reevaluation and the use of updated assumptions led to significantly more conservative estimates for expected claims frequency, claims severity and ultimate incurred losses and loss adjustment expenses during the quarterly re-evaluation of the loss and loss adjustment expense reserves as of September 30, 2020. The increase in the ultimate incurred losses and loss adjustment expenses manifested primarily through higher IBNR reserves as of September 30, 2020, for 2018, 2019, and 2020 accident year claims pertaining to Apartments & Commercial Buildings and Transportation liability coverages. Accordingly, the increase of Crusader’s IBNR reserves of $10,308,150, from June 30, 2020, to September 30, 2020, resulted in the provision for insured events of current year and the adverse development of insured events of prior years for the three months ended September 30, 2020 being significantly higher than the nine preceding quarters and was a primary contributor to the $17,320,051 losses and loss adjustment expenses recognized for the three months ended September 30, 2020.

 

Crusader attributes much of its quarterly adverse loss development experienced in the three most recent years ending September 30, 2020, to social inflation. Used here, social inflation is a term that encompasses a relatively new adverse trend related to society’s application of the law when it comes to insurance.  In this context, social inflation is generally described by the rising costs of insurance claims due to societal trends which results in increased litigation, broader definitions of liability and contractual interpretations, plaintiff friendly legal decisions, larger compensatory jury awards, and larger awards for non-economic damages  Crusader has experienced increased costs due to social inflation in all three of its largest market sector niches, Long-haul Transportation, Residential Apartment Buildings, and Bars/Taverns, resulting in higher-than-expected frequency and severity of third-party liability claims.

 

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.

 

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 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. 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, 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.

 

 

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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.

 

Policy acquisition costs

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:

    Three Months Ended September 30   Nine Months Ended September 30
    2020   2019   Change   2020   2019   Change
                         
Policy acquisition costs   $ 1,279,703     $ 1,194,870     $ 84,833     $ 3,626,154     $ 3,571,065     $ 55,089  
Ratio to net earned premium (GAAP ratio)     18 %     17 %             17 %     18 %        

 

Policy acquisition costs increased during the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019, due primarily to growth in net earned premium.

 

Salaries and employee benefits

Salaries and employee benefits increased $1,562,881 (153%) to $2,584,478 and $1,896,649 (62%) to $4,958,900 for the three and nine months ended September 30, 2020, respectively, compared to $1,021,597 and $3,062,251 for the three and nine months ended September 30, 2019.

 

Salaries and employee benefits incurred and charged to operating expenses are as follows:

    Three Months Ended September 30
    2020   2019   Change
             
Total salaries and employee benefits incurred   $ 3,530,182     $ 1,966,406     $ 1,563,776  
Less: charged to losses and loss adjustment expenses     (550,143 )     (530,122 )     (20,021 )
Less: capitalized to policy acquisition costs     (328,440 )     (332,568 )     4,128  
Less: charged to IT system upgrade     (67,121 )     (82,119 )     14,998  
Net amount charged to operating expenses   $ 2,584,478     $ 1,021,597     $ 1,562,881  

 

    Nine Months Ended September 30
    2020   2019   Change
             
Total salaries and employee benefits incurred   $ 7,603,460     $ 5,737,989     $ 1,865,471  
Less: charged to losses and loss adjustment expenses     (1,459,208 )     (1,532,583 )     73,375  
Less: capitalized to policy acquisition costs     (1,010,517 )     (950,032 )     (60,485 )
Less: charged to IT system upgrade     (174,835 )     (193,123 )     18,288  
Net amount charged to operating expenses   $ 4,958,900     $ 3,062,251     $ 1,896,649  

  

The increase in the total salaries and employee benefits incurred for the three and nine months ended September 30, 2020, compared to the three and nine months ended September 30, 2019, was due primarily to costs associated with a termination of an employment agreement with an executive, increases in executive compensation, increases in employee benefits due to higher medical insurance rates, and vacation accruals due to less vacation taken by the employees as a result of the ongoing coronavirus pandemic.

 

 

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Commissions to agents/brokers

Commissions to agents/brokers decreased $17,711 (43%) to $23,235 and $58,954 (45%) to $73,190 for the three and nine months ended September 30, 2020, respectively, compared to $40,946 and $132,144 for the three and nine months ended September 30, 2019. These decreases in commissions to agents/brokers were due primarily to lower commissions associated with loss of a large group account.

 

Other operating expenses

Other operating expenses increased $865,282 (162%) to $1,398,135 and $1,476,097 (78%) to $3,372,483 for the three and nine months ended September 30, 2020, respectively, compared to $532,853 and $1,896,386 for the three and nine months ended September 30, 2019. The increase in other operating expenses for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, was due to an increase in legal expense, an increase in depreciation expense, an increase in board of director fees and timing of expenses.

 

Income tax expense/benefit

Income tax expense was $3,594,573 (-25% of pre-tax loss) for the three months ended September 30, 2020, and income tax expense was $118,259 (36% of pre-tax income) for the three months ended September 30, 2019. Income tax expense was $3,543,152 (-22% of pre-tax loss) for the nine months ended September 30, 2020 and income tax benefit was $88,391 (11% of pre-tax loss) for the nine months ended September 30, 2019. The fluctuation in the income tax rate as a percentage of pre-tax loss for the three and nine months ended September 30, 2020, when compared to the three and nine months ended September 30, 2019, is primarily due to an increase in the valuation allowance related to deferred tax assets on federal net operating losses.

 

As of September 30, 2020, the Company had deferred tax assets of $7,318,041 generated from $34,847,822 of federal net operating loss carryforwards that will begin to expire in 2035 and deferred tax assets of $2,286,564 generated from state net operating loss carryforwards which expire between 2028 and 2040. In connection with preparation of its financial statements, the Company periodically performs an analysis of future income projections to determine the adequacy of the valuation allowance. In light of the net losses that were generated in recent years, for the nine months ended September 30, 2020, 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 $9,849,484 that, in management’s judgment, are not more likely than not to be realized. For the year ended December 31, 2019, the Company carried a valuation allowance on deferred tax assets generated from federal and state net operating losses in the amount of $600,000 and $1,931,665, respectively.

 

OFF-BALANCE SHEET ARRANGEMENTS

During the periods presented, there were no off-balance sheet transactions, unconditional purchase obligations or similar instruments and the Company was not a guarantor of any other entities’ debt or other financial obligations.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is currently a “smaller reporting company,” as defined in Item 10(f)(1) of Regulation S-K. The Company has elected to comply with the scaled disclosure requirements applicable to smaller reporting companies and has therefore omitted the information required under Item 305 of Regulation S-K.

 

ITEM 4. CONTROLS AND PROCEDURES

 

An evaluation was carried out by the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of September 30, 2020, as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of September 30, 2020.

  

During the period covered by this report, there has been no change in the Company's internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Securities Exchange Act of 1934 that has materially affected or is reasonably likely to materially affect the Company's internal control over financial reporting.

  

  

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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The Company and its subsidiaries are named from time to time as defendants in various legal actions that are incidental to its business, including those which arise out of or are related to the handling of claims made in connection with Crusader’s insurance policies. Crusader is also subject to regulatory and governmental examinations, requests for information, inquiries, investigations and threatened legal actions and proceedings by state regulators and others. Crusader receives numerous requests, orders for documents, and information in connection with various aspects of its regulated business.

 

In accordance with applicable accounting guidance, Crusader establishes reserves for certain claims-related lawsuits, regulatory actions and other contingencies when it believes a loss is probable and is able to estimate its potential exposure.

 

Due to the inherent difficulty of predicting the outcome of litigation, regulatory and government matters, the Company generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or the amount, if any, of eventual loss, fines or penalties related to these matters. While actual losses may differ from the amounts recorded and such matters are subject to many uncertainties and outcomes that are not predictable with assurance, on the basis of currently available information, the Company is not aware of any currently pending or threatened legal or regulatory proceedings that, either individually or in the aggregate, it anticipates will have a material adverse effect on its consolidated financial condition, results of operations or cash flows.

 

ITEM 1A. RISK FACTORS

 

Except as described below, there were no material changes from risk factors as previously disclosed in the Company’s Form 10-K for the year ended December 31, 2019, in response to Item 1A to Part I of Form 10-K and in the Company’s Form 10-Q for the quarter ended March 31, 2020, in response to Item 1A to Part II of Form 10-Q.

 

The Company’s business may be adversely affected by the ongoing coronavirus (COVID-19) pandemic.

In December 2019, a novel strain of coronavirus, SARS CoV-2 (COVID-19), emerged in China, rapidly spread to other countries, including the United States, and has been declared to be a pandemic by the World Health Organization.  The coronavirus pandemic has resulted in numerous deaths, adversely impacted global commercial activity and resulted in extensive governmental responses, including quarantines, prohibitions on travel and the closure of offices, businesses, restaurants, schools, retail stores and other public venues. The coronavirus pandemic and any preventative or protective actions that the Company, its clients, their respective suppliers, or governments may take in respect of COVID-19 may disrupt the Company’s business and the business of its clients.  If global, national or regional economies are unable to substantially reopen, or, if reopened, are forced to close again, these disruptions will be exacerbated. The Company is diligently working to ensure that it can operate with minimal disruption, and to mitigate the impact of the pandemic on its employees’ health and safety.  However, given the interconnectivity of the global economy and the possible rate of future global transmission, the full extent to which the coronavirus pandemic could affect the global economy is unknown and its impact may extend beyond the areas which are currently known to be impacted.  Any resulting financial impact will depend on future developments and cannot be reasonably estimated at this time, but may materially affect the business, financial condition and results of operations of the Company. The Company has experienced a decrease in new business submissions and renewals related to the pandemic in its Bars/Taverns market sector niche as a result of government regulations, such as shelter-in-place orders and in-door dining limitations, which has adversely impacted the gross written premium for that niche.

 

Additionally, the continued pandemic has led to severe disruption and volatility in the global capital markets, which could increase the Company’s cost of capital, and adversely affect the Company’s ability to access the capital and debt markets, and adversely affect the value of the Company’s investment portfolio. It is possible that the continued spread of the coronavirus could cause an economic slowdown or recession (which could adversely affect the demand for the Company’s insurance products and increase delinquencies and defaults by its customers) or cause other unpredictable events, each of which could adversely affect the business, results of operations or financial condition of the Company.

 

 

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Loss and loss adjustment expense reserves are based on estimates and may not be sufficient to cover future losses.

Loss and loss adjustment expense reserves represent an estimate of amounts needed to pay and administer claims with respect to insured events that have occurred, including events that have occurred but have not yet been reported to Crusader. If claims exceed the related reserves, the Company may not have sufficient funds available to satisfy all such claims, and in any event, the Company’s operating results and financial condition would be adversely affected. There is a high level of uncertainty inherent in the evaluation of the required loss and loss adjustment expense reserves for Crusader. The long-tailed nature of liability claims and the volatility of jury awards exacerbate that uncertainty. The difficulty in estimating the loss and loss adjustment expense reserves contributed to adverse development of insured events of prior years in the amount of $3,191,185 which Crusader experienced in 2019. During the three months ended September 30, 2020, the Company reevaluated certain assumptions used in its process for estimating loss and loss adjustment reserves due to its experiences in Crusader’s Apartments & Commercial Buildings and Transportation verticals as well as changes in market conditions. This reevaluation resulted in a $10,308,150 increase in Crusader’s IBNR reserves from June 30, 2020, to September 30, 2020, which was a primary contributor to the $17,320,051 losses and loss adjustment expenses recognized for the three months ended September 30, 2020. 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.

 

Any inability of the Company to realize its deferred tax assets may have a materially adverse effect on the Company’s financial condition and results of operations.

The Company recognizes deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases, and for tax credits.  The Company evaluates its deferred tax assets for recoverability based on available evidence, including assumptions about future profitability, reversal patterns of recorded deferred tax assets and deferred tax liabilities, and capital gain generation. Some or all of the Company’s deferred tax assets could expire unused if the Company is unable to generate taxable income of a sufficient nature in the future to utilize them.

 

If the Company determines it is more-likely-than-not that it would not be able to realize all or a portion of its deferred tax assets in the future, the Company would reduce the deferred tax asset through a charge to earnings in the period in which the determination is made. This charge could have a materially adverse effect on the Company’s results of operations and financial condition. For example, in light of the net losses that were generated in recent years, for the nine months ended September 30, 2020, 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 $9,849,484 that, in management’s judgment, are not more likely than not to be realized. In addition, the assumptions used to make this determination are subject to change from period to period based on changes in tax laws or variances between the Company’s projected operating performance and actual results. As a result, management’s judgment is required in assessing the possible need for a deferred tax asset valuation allowance.

 

The Company has experienced delays and cost overruns in connection with the upgrade of its legacy information technology system.

In 2018, the Company identified the need to replace or upgrade its legacy information technology system to process its smaller premium accounts more efficiently. At that time, the Company determined that the cost to replace its legacy IT system would be between $4 million and $8 million, and the installation of such a system would take between two to four years. After weighing the time and expense involved against the anticipated benefit from such an investment, the Company opted for what it then perceived to be a less expensive upgrade to its legacy system, an upgrade that then seemed to offer more incremental benefits in a shorter timeframe. While initially expected to be completed by the end of 2019, the system upgrade is now expected to be completed by the end of the first quarter of 2021, due to unexpected technical challenges and personnel changes. The Company has also experienced repeated cost overruns in connection with the system upgrade, which have adversely impacted the Company’s results of operations. The Company believes that the failure to have replaced or upgraded its legacy information technology system has contributed to its operating losses in recent years. If the Company experiences further delays or cost overruns, its results of operations may be adversely affected in future periods.

 

 

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The ability of the Company to attract, develop and retain employees and to maintain appropriate staffing levels is critical to the Company’s success.

The Company must hire and train new employees and retain current employees to handle its operations. The failure of the Company to successfully hire and retain a sufficient number of skilled employees could have an adverse effect on the Company’s business. In the third quarter of 2020, the Company’s management team underwent significant changes, including the retirement of its former Chairman of the Board, Chief Executive Officer and President, who was replaced by Ronald Closser as the Interim Chairman of the Board, Chief Executive Officer and President. If the Company is unsuccessful in hiring and retaining a permanent Chief Executive Officer and President, as well as other key employees, the resulting disruption could have a significant adverse effect on the Company’s operations.

 

The Company’s non-compliance with regulatory requirements in connection with its arrangement with United Specialty Insurance Company (“USIC”) may adversely affect the Company’s business, financial condition and results of operations.

 

On April 6, 2020, the Company previously announced an arrangement with USIC, a non-admitted, non-affiliated insurer that is rated "A" by A.M. Best Company, that would allow the Company to issue USIC policies which provide pricing and coverage flexibility previously unavailable through Crusader policies. The agreements with USIC were entered into prior to obtaining approval of the transactions by the DOI as required by the California Insurance Holding Company System Act. On September 2, 2020, the Company placed a moratorium on placing any new risks with USIC pending resolutions of issues relating to the structure of the transactions. Crusader and Unifax are in negotiations with USIC and the DOI to determine whether and how the transactions can be restructured in order to address issues raised by the DOI. There can be no assurance that such efforts will be successful. If the transactions are not restructured, the agreements with USIC may need to be terminated. If the agreements with USIC are terminated, such termination could result in significant financial expenses related to such termination and the Company’s reputation could be adversely affected. In addition, Crusader could face regulatory sanctions by the DOI for entering into the agreements without the prior approval of the DOI.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

 

31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

 

32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.

 

32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

 

 

 

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101 The following information from the Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2020, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive Loss; (iv) the Condensed Consolidated Statements of Cash Flows; and (v) the Condensed Notes to Unaudited Condensed Consolidated Financial Statements.*

 

*XBRL information is furnished and deemed not filed as part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act and otherwise is not subject to liability under these sections.

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

UNICO AMERICAN CORPORATION

 

Date: November 13, 2020 By: /s/ RONALD A. CLOSSER

Ronald A. Closser

Chairman of the Board, President and Chief

Executive Officer, (Principal Executive Officer)

 

 

Date: November 13, 2020 By: /s/ MICHAEL BUDNITSKY

Michael Budnitsky

Treasurer, Chief Financial Officer and Secretary, (Principal

Accounting and Principal Financial Officer)

 

 

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