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.
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.
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
|
|
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.
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.
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.
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.
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.
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.
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.
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:
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.
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.
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
|
|
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
|
|
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.
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.
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.