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 June 30, 2021, were $8,132,605 compared to $7,976,227 for the three months ended June 30, 2020, an increase of $156,378 (2%). Total revenues for the six months ended June 30, 2021, were $19,604,260 compared to $15,981,408 for the six months ended June 30, 2020, an increase of $3,622,852 (23%). The Company had net loss of $1,406,811 for the three months ended June 30, 2021, compared to net loss of $434,814 for the three months ended June 30, 2020, an increase in net loss of $971,997. The Company had net income of $860,893 for the six months ended June 30, 2021, compared to net loss of $1,478,640 for the six months ended June 30, 2020, an increase in net income of $2,339,533 (158%). On February 12, 2021, the Company, through Crusader, completed the sale of the Company’s headquarters at 26050 Mureau Road, Calabasas, California 91302, for approximately $12,695,000 (the “Sale”). The Company recognized a gain of $3,693,858 on the sale of the building. The increase in net income was primarily due to the realized gain on this sale.
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 2020 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.
Based on Unico's current cash and short‑term investments at June 30, 2021, and in light of its expectation that it will not receive dividends from Crusader for the foreseeable future, there is substantial doubt that Unico will have sufficient cash to meet its operating and other liquidity requirements when they become due during the next 12 months from the date of issuance of the accompanying condensed consolidated financial statements.
Crusader, Unico's principal operating subsidiary, is not itself in a position where there is substantial doubt about its ability to continue as a going concern for the next 12 months and intends to continue to operate in the ordinary course, but any negative consequences that Unico experiences may disrupt or otherwise adversely affect Crusader.
Unico needs to improve its operating results and/or raise substantial additional capital to continue to fund its operations, and to successfully execute its current operating plan. To meet its capital obligations, Unico is considering multiple alternatives, including, but not limited to, strategic financing, reevaluation of its planned operations, delaying, scaling back, or eliminating some or all of its business operations, expense reduction, reorganization, merger with another entity, or cessation of operations. There can be no assurances that capital will be available when needed or that, if available, it will be obtained on terms favorable to the Company and its stockholders, particularly in light of the effects that the COVID-19 pandemic has recently had on the capital markets and investor sentiment. In addition, equity or debt financings may have a dilutive effect on the holdings of Unico's existing stockholders, and debt financings may subject Unico to restrictive covenants, operational restrictions and security interests in Unico’s assets. If Unico becomes unable to continue as a going concern, Unico may have to dispose of or liquidate its assets, or put its operating units into runoff, and might realize significantly less than the values at which they are carried on its condensed consolidated financial statements. Additionally, Unico may have to write down some or all of its capitalized assets or liquidate some or all of its investments in gross unrealized loss position. These actions may cause Unico’s stockholders to lose all or part of their investment in Unico's common stock.
As a result of the spread of the ongoing coronavirus (“COVID-19”) pandemic, economic uncertainties have arisen which can 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 possible that the Company’s results of operations, financial condition and the fair value of its investment portfolio may be adversely affected by the general economic conditions as a result of the governmental responses to the pandemic.
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 first half of 2020, however, the investment portfolio recovered in value in subsequent quarters. The governmental response to the pandemic contributed to the recent decline in investment yields, 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.
Crusader has received a number of coronavirus-related business interruption claims. With an exception of one claim for which investigation is still ongoing, all such claims were denied after the individual circumstances of each claim were reviewed to determine whether insurance coverage applied. Like many companies in the property casualty insurance industry, Crusader was named as defendant in lawsuits seeking insurance coverage under the policies issued by Crusader for alleged economic losses resulting from the shutdown or suspension of their businesses due to the COVID-19 pandemic. Although the allegations vary, the plaintiffs generally seek a declaration of insurance coverage, damages for breach of contract in unspecified amounts for claim denials, interest and attorney fees. Some of the lawsuits also allege that the insurance claims were denied in bad faith or otherwise in violation of state laws and seek extra-contractual or punitive damages.
Crusader denies the allegations in these lawsuits and intends to continue to vigorously defend them. Although the policy terms vary in general, the claims at issue in these lawsuits were denied because the policyholder identified no direct physical loss, such as fire or water damage, to property at the insured premises, and the governmental orders that led to the complete or partial shutdown of the business were not due to the existence of any direct physical loss or damage to property in the immediate vicinity of the insured premises and did not prohibit access to the insured premises, as required by the terms of the insurance policies. Depending on the individual policy, additional policy terms and conditions may also prohibit coverage, such as exclusions for pollutants, ordinance or law, loss of use, and acts or decisions. Most of Crusader’s policies also contain an exclusion for losses caused directly or indirectly by “virus or bacteria.”
In addition to the inherent difficulty in predicting litigation outcomes, the COVID-19 pandemic business income coverage lawsuits present a number of uncertainties and contingencies that are not yet known, including how many policyholders will ultimately file claims, the number of lawsuits that will be filed, the extent to which any class may be certified, and the size and scope of any such classes. The legal theories advanced by plaintiffs vary by case. These lawsuits are in the early stages of litigation; many complaints continue to be amended; several have been dismissed voluntarily and may be refiled; and others have been dismissed by trial courts. Some early decisions on motion filings have been appealed.
On March 23, 2021, ten policyholders sued Crusader in a putative class action entitled Anchors & Whales LLC et al. v. Crusader Insurance Company, Superior Court of the State of California for the County of San Francisco (CGC-21-590999). The action alleges that Crusader wrongly denied claims for business interruption coverage made by bars and restaurants related to the COVID-19 pandemic and related government orders that limited or halted operations of bars and restaurants. The action further alleges that Crusader acted unreasonably in denying the claims, and it seeks as damages the amounts allegedly due as contract benefits under the insurance policies, attorneys’ fees and costs, punitive damages, and other unspecified damages. The lawsuit alleges a putative class of all bars and restaurants in California that were insured by Crusader for loss of business income, who made such a claim as a result of “one or more Governmental Orders and the presence of the COVID-19 virus on the property,” and whose claim was denied by Crusader. The Company intends to contest the allegations and to contest certification of any class. The Company has filed responsive pleadings and the litigation is proceeding.
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 request the employees working from their homes to return to their workplaces for several days per week; the Company estimates this will occur in the fourth quarter of 2021. 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 its results. 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.
On November 24, 2020, United Specialty Insurance Company (“USIC”) and certain Company’s subsidiaries entered into the following agreements pursuant to which USIC will underwrite property and casualty insurance policies on a surplus lines basis by and through Unifax and such policies will be reinsured by Crusader:
|
|
·
|
USIC and Crusader entered into a Quota Share Reinsurance Agreement, effective April 1, 2020, (the “Reinsurance Agreement”), pursuant to which Crusader will reinsure all of USIC’s liability for policies issued by USIC and produced by Unifax for property, general liability, CMP property, CMP liability and other miscellaneous coverages, subject to certain maximum policy limits. Policies placed with USIC by Unifax and reinsured with Crusader from April 1, 2020, to November 24, 2020, remain in place without interruption or change and are subject to the Reinsurance Agreement.
|
|
|
|
|
|
|
·
|
USIC and Unifax entered into a Surplus Line Broker Agreement, effective April 1, 2020 (the “Broker Agreement”), pursuant to which USIC authorized Unifax to act as its broker and agent for the purpose of producing and administering certain specified classes of insurance policies, which are the subject of the Reinsurance Agreement. Under the Broker Agreement, Unifax is entitled to retain a commission for policies produced based on a percentage of the premiums on business placed with USIC. Unifax has agreed to indemnify and hold USIC harmless from any losses relating to the Broker Agreement.
|
|
|
|
|
|
|
·
|
USIC and U.S. Risk Managers, Inc. (“U.S. Risk”) entered into a Claims Administration Agreement, effective as of April 1, 2020 (the “Claims Administration Agreement”). Pursuant to the Claims Administration Agreement, USIC appointed U.S. Risk, which is a licensed claims adjuster in the state of California, to adjust and settle claims on its behalf in connection with the surplus lines policies issued by USIC in connection with the Reinsurance Agreement. U.S. Risk will be paid a fee by Unifax on behalf of USIC based on a percentage of earned premium. U.S. Risk has agreed to indemnify and hold USIC harmless from any losses relating to the Claims Administration Agreement.
|
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 to an IBM platform. 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 was completed at the end of the first quarter of 2021 at a cost of approximately $1,500,000, excluding costs of Unico’s employees involved in the upgrade, due to unexpected technical challenges. As the system upgrade was completed at the end of the first quarter, the Company started depreciating the associated capitalized costs, including the costs of Unico’s employees involved in the upgrade, during the second quarter of 2021. The Company is exploring options to further modernize the system to improve its external producers’ experience and to enhance efficiency of its operations.
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, excluding the realized gain on real estate sale, generated approximately 94% of consolidated revenues for the three and six months ended June 30, 2021, compared to 93% of consolidated revenues for the three and six months ended June 30, 2020, respectively. None of the Company’s other operations is individually material to consolidated revenues.
Insurance Company Operation
As of June 30, 2021, 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 (100% of gross written premium during the three and six months ended June 30, 2021 and 99.9% of gross written premium during the three and six months ended June 30, 2020). During the three and six months ended June 30, 2021, approximately 99.8% and 99.6%, respectively of Crusader’s business was commercial multiple peril (“CMP”) policies. During the three and six months ended June 30, 2020, approximately 99.5% of Crusader’s business was commercial multiple peril (“CMP”) policies.
Crusader’s total gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties), as reported on Crusader’s statutory financial statements, was produced geographically as follows:
|
|
|
Three Months Ended June 30
|
|
|
Six Months Ended June 30
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
$
|
11,567,118
|
|
|
$
|
8,770,767
|
|
|
$
|
2,796,351
|
|
|
$
|
22,049,663
|
|
|
$
|
17,966,631
|
|
|
$
|
4,083,032
|
|
|
Arizona
|
|
|
-
|
|
|
|
10,360
|
|
|
|
(10,360
|
)
|
|
|
-
|
|
|
|
21,382
|
|
|
|
(21,382
|
)
|
|
Total gross written premium
|
|
$
|
11,567,118
|
|
|
$
|
8,781,127
|
|
|
$
|
2,785,991
|
|
|
$
|
22,049,663
|
|
|
$
|
17,988,013
|
|
|
$
|
4,061,650
|
|
Crusader believes that it can grow its sales and profitability through improved specialization and sales incentives. Crusader currently focuses in three underwriting verticals: (1) Transportation, (2) Mainstreet, and (3) Buildings. The Company reorganized its underwriting verticals for proper staffing and business focus during the first quarter of 2021. The former Food, Beverage and Entertainment and Garage and Mercantile verticals became Mainstreet, and the former Apartments & Commerical Buildings vertical was renamed Buildings. Crusader also is 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 statutory accounting principles (“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 (direct and assumed written premium before cessions to reinsurers under reinsurance treaties) to net earned premium (after premium ceded to reinsurers under reinsurance treaties):
|
|
|
Three Months Ended June 30
|
|
|
Six Months Ended June 30
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct written premium
|
|
$
|
10,781,536
|
|
|
$
|
8,596,429
|
|
|
$
|
20,958,399
|
|
|
$
|
17,803,315
|
|
|
Assumed written premium
|
|
|
785,582
|
|
|
|
184,698
|
|
|
|
1,091,264
|
|
|
|
184,698
|
|
|
Less: written premium ceded to reinsurers
|
|
|
(2,857,064
|
)
|
|
|
(2,003,311
|
)
|
|
|
(5,637,056
|
)
|
|
|
(3,982,438
|
)
|
|
Net written premium
|
|
|
8,710,054
|
|
|
|
6,777,816
|
|
|
|
16,412,607
|
|
|
|
14,005,575
|
|
|
Change in direct unearned premium
|
|
|
(1,109,381
|
)
|
|
|
147,389
|
|
|
|
(1,993,075
|
)
|
|
|
(149,672
|
)
|
|
Change in assumed unearned premium
|
|
|
(583,254
|
)
|
|
|
(167,652
|
)
|
|
|
(794,470
|
)
|
|
|
(167,652
|
)
|
|
Change in ceded unearned premiums
|
|
|
(49,671
|
)
|
|
|
12,558
|
|
|
|
(53,554
|
)
|
|
|
(7,006
|
)
|
|
Net earned premium
|
|
$
|
6,967,748
|
|
|
$
|
6,770,111
|
|
|
$
|
13,571,508
|
|
|
$
|
13,681,245
|
|
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 loss before income taxes is as follows:
|
|
|
Three Months Ended June 30
|
|
|
Six Months Ended June 30
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premium
|
|
$
|
8,710,054
|
|
|
$
|
6,777,816
|
|
|
$
|
1,932,238
|
|
|
$
|
16,412,607
|
|
|
$
|
14,005,575
|
|
|
$
|
2,407,032
|
|
|
Change in net unearned premium
|
|
|
(1,742,306
|
)
|
|
|
(7,705
|
)
|
|
|
(1,734,601
|
)
|
|
|
(2,841,099
|
)
|
|
|
(324,330
|
)
|
|
|
(2,516,769
|
)
|
|
Net earned premium
|
|
|
6,967,748
|
|
|
|
6,770,111
|
|
|
|
197,637
|
|
|
|
13,571,508
|
|
|
|
13,681,245
|
|
|
|
(109,737
|
)
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
6,084,707
|
|
|
|
4,888,906
|
|
|
|
1,195,801
|
|
|
|
11,669,920
|
|
|
|
10,766,291
|
|
|
|
903,629
|
|
|
Policy acquisition costs
|
|
|
1,105,545
|
|
|
|
1,202,026
|
|
|
|
(96,481
|
)
|
|
|
2,127,510
|
|
|
|
2,346,451
|
|
|
|
(218,941
|
)
|
|
Total underwriting expenses
|
|
|
7,190,252
|
|
|
|
6,090,932
|
|
|
|
1,099,320
|
|
|
|
13,797,430
|
|
|
|
13,112,742
|
|
|
|
684,688
|
|
|
Underwriting gain (loss) before income taxes
|
|
$
|
(222,504
|
)
|
|
$
|
679,179
|
|
|
$
|
(901,683
|
)
|
|
$
|
(225,922
|
)
|
|
$
|
568,503
|
|
|
$
|
(794,425
|
)
|
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 loss before income taxes to the Company’s income (loss) before taxes:
|
|
|
Three Months Ended June 30
|
|
|
Six Months Ended June 30
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting gain (loss) before income taxes
|
|
$
|
(222,504
|
)
|
|
$
|
679,179
|
|
|
$
|
(225,922
|
)
|
|
$
|
568,503
|
|
|
Insurance company operation revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
528,879
|
|
|
|
489,498
|
|
|
|
1,043,602
|
|
|
|
1,010,190
|
|
|
Net realized investment gains
|
|
|
106,410
|
|
|
|
461
|
|
|
|
161,809
|
|
|
|
1,575
|
|
|
Net realized gains on real estate sale
|
|
|
-
|
|
|
|
-
|
|
|
|
3,693,858
|
|
|
|
-
|
|
|
Net unrealized investment gains on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity securities
|
|
|
14,615
|
|
|
|
67,759
|
|
|
|
166,281
|
|
|
|
22,959
|
|
|
Other income
|
|
|
54,465
|
|
|
|
122,822
|
|
|
|
27,714
|
|
|
|
203,759
|
|
|
Other insurance operations revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross commissions and fees
|
|
|
415,711
|
|
|
|
457,886
|
|
|
|
849,172
|
|
|
|
926,955
|
|
|
Finance charges and fees earned
|
|
|
44,772
|
|
|
|
67,686
|
|
|
|
89,770
|
|
|
|
134,705
|
|
|
Other income
|
|
|
5
|
|
|
|
4
|
|
|
|
546
|
|
|
|
20
|
|
|
Less expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
1,205,630
|
|
|
|
1,251,922
|
|
|
|
2,333,721
|
|
|
|
2,374,421
|
|
|
Commissions to agents/brokers
|
|
|
20,434
|
|
|
|
24,000
|
|
|
|
41,002
|
|
|
|
49,954
|
|
|
Other operating expenses
|
|
|
1,147,124
|
|
|
|
993,935
|
|
|
|
2,320,602
|
|
|
|
1,974,351
|
|
|
(Loss) income before taxes
|
|
$
|
(1,430,835
|
)
|
|
$
|
(384,562
|
)
|
|
$
|
1,111,505
|
|
|
$
|
(1,530,060
|
)
|
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 $50,000 as of June 30, 2021. The Company did not carry a premium deficiency reserve as of June 30, 2020. The premium deficiency was recorded as a reduction in deferred policy acquisition costs.
The following table shows the loss ratios, expense ratios, and combined ratios of Crusader:
|
|
|
Three Months Ended June 30
|
|
|
Six Months Ended June 30
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio (1)
|
|
|
87
|
%
|
|
|
72
|
%
|
|
|
86
|
%
|
|
|
79
|
%
|
|
Expense ratio (2)
|
|
|
33
|
%
|
|
|
27
|
%
|
|
|
32
|
%
|
|
|
32
|
%
|
|
Combined ratio (3)
|
|
|
120
|
%
|
|
|
99
|
%
|
|
|
118
|
%
|
|
|
111
|
%
|
(1) Loss ratio is defined as losses and loss adjustment expenses divided by net earned premium.
(2) Expense ratio is defined as a sum of policy acquisition costs and portions of indirect salaries and employee benefits and other operating expenses allocation to the insurance company operations, reduced by allocation of gross commissions and fees and other income, divided by net earned premium. The calculation of this expense ratio is different from the one used for computing the statutory accounting basis combined ratio.
(3) Combined ratio is defined as a sum of loss ratio and expense ratio. This combined ratio is different from the statutory accounting basis combined ratio.
The following table provides an analysis of losses and loss adjustment expenses:
|
|
|
Three Months Ended June 30
|
|
|
Six Months Ended June 30
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for insured events of current year
|
|
$
|
5,754,482
|
|
|
$
|
5,378,459
|
|
|
$
|
376,023
|
|
|
$
|
12,512,046
|
|
|
$
|
10,539,635
|
|
|
$
|
1,972,411
|
|
|
Development of insured events of prior years
|
|
|
330,225
|
|
|
|
(489,553
|
)
|
|
|
819,778
|
|
|
|
(842,126
|
)
|
|
|
226,656
|
|
|
|
(1,068,782
|
)
|
|
Total losses and loss adjustment expenses
|
|
$
|
6,084,707
|
|
|
$
|
4,888,906
|
|
|
$
|
1,195,801
|
|
|
$
|
11,669,920
|
|
|
$
|
10,766,291
|
|
|
$
|
903,629
|
|
For further analysis of losses and loss adjustment expenses, refer to “Results of Operations”.
On February 5, 2021, A.M. Best Company revised the outlooks to negative from stable and affirmed Crusader’s Financial Strength Rating (“FSR”) of B++ (Good) and Long-Term Issuer Credit Rating (“Long-Term ICR”) of “bbb”. Additionally, A.M. Best has revised the outlook to negative from stable and affirmed the Long-Term ICR of “bb” of the Company. Crusader is a wholly owned subsidiary of the Company.
The negative outlooks capture A.M. Best’s concerns with Crusader’s declining underwriting performance, the Company’s overall capitalization and the execution risk associated with implementing strategic operating changes to address these conditions.
The Long-Term ICRs 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.
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. In light of the liquidity concerns being experienced by the Company and further deterioration of Crusader policyholder surplus during the first six months of 2021, it is possible that A.M. Best may further downgrade the FSR and Long-Term ICR of the Company and/or Crusader, or negatively revise its outlooks for such ratings.
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.
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.
Crusader’s ability to successfully operate its insurance operation is dependent upon its ability to charge premium rates to its policyholders that are adequate and thereby permit it to cover its anticipated losses and expenses and achieve a fair and reasonable return on its capital. To the extent that Crusader’s existing premium rates do not meet this threshold, Crusader may seek to increase or otherwise modify such rates. Crusader’s ability to successfully operate its insurance operation is also dependent upon its ability to utilize appropriate policy forms. However, as an insurance company, Crusader is subject extensive statutes, regulations, administrative directives and common law that limit modifications of its premium rates or policy forms. Accordingly, Crusader’s ability to implement rate increases or modifications to its policy forms are dependent upon regulatory approval, which Crusader may not receive. Furthermore, the ability of insurers to obtain regulatory approval of premium rate increases and modifications to policy forms is subject to additional uncertainty during the COVID-19 pandemic.
Revenues from Other Insurance Operations
The Company’s revenues from other insurance operations consist of commissions, fees and other income. These operations accounted for approximately 6% of total revenues, excluding the realized gain on real estate sale, in the three and six months ended June 30, 2021, compared to approximately 7% of total revenues in the three and six months ended June 30, 2020, respectively.
Investments
The Company generated revenues from its total invested assets of $94,823,821 (fixed maturities at amortized cost, equity securities at cost and short-term investments at fair value) and $84,440,715 (fixed maturities at amortized cost, equity securities at cost and short-term investments at fair value) as of June 30, 2021 and 2020, respectively.
Investment income (net of investment expenses) increased $39,381 (8%) and $33,412 (3%) to $528,879 and $1,043,602 for the three and six months ended June 30, 2021, respectively, compared to $489,498 and $1,010,190 for the three and six months ended June 30, 2020, respectively. This increase in investment income was due primarily to the increase in 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 June 30, 2021, all of the Company’s investments are in U.S. Treasury securities, corporate fixed maturity securities, agency mortgage-backed securities, common stock, Federal Deposit Insurance Corporation (“FDIC”) insured certificates of deposit, money market funds, and a savings account. The Company’s investments in U.S. treasury securities, corporate fixed maturity securities, agency mortgage-backed securities, common stock and money market funds are readily marketable. As of June 30, 2021, the weighted average maturity of the Company’s investments was approximately 7.8 years, and the effective duration for available-for-sale investments (investments managed under the investment guidelines) was 2.6 years.
LIQUIDITY AND CAPITAL RESOURCES
The Company prepared the accompanying condensed consolidated financial statements on a going concern basis, which assumes that it will realize its assets and satisfy its liabilities in the normal course of business. Unico has a history of recurring losses from operations, negative cash flows from its operating activities which may continue in the future, and, as a holding company, is dependent on dividends from Crusader and its other subsidiaries to fund its operations and expenses. Unico does not expect that it will receive dividends from Crusader to fund its operations and expenses for the foreseeable future due to Crusader's decreased policyholder surplus caused by additional underwriting losses during 2021, and the need to preserve policyholder surplus at Crusader. These circumstances raise substantial doubt about Unico's ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and reclassification of assets or the amounts and classifications of liabilities that may result from the outcome of the uncertainty of our ability to remain a going concern.
No assurance can be given that the Company’s estimate of ultimate loss and loss adjustment expense reserves will be sufficient, but 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 for Crusader. However, as an insurance holding company, the Company does not independently generate significant revenue and is dependent on dividends from Crusader and its other subsidiaries to fund its operations and expenses. As discussed below, the Company does not expect to receive such dividends for the foreseeable future, and accordingly, its financial position and ability to pay operating expenses will be adversely impacted.
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 Crusader. Those payments are monitored and projected to ensure that Crusader has liquidity to cover those payments without the need to liquidate investments. Cash, cash equivalents, and investments (at amortized cost) of Crusader at June 30, 2021, were $96,702,377 compared to $87,575,700 at December 31, 2020. Crusader's cash, cash equivalents, and investments were 99% and 98% of the total cash and investments (at amortized cost) held by the Company as of June 30, 2021, and December 31, 2020, respectively.
As disclosed in the Company’s 2020 Annual Report on Form 10-K, a Company Action Level Event of Crusader was deemed to have occurred as of December 31, 2020. On March 24, 2021, Crusader submitted a Risk Based Capital Plan (the “RBC Plan”) to the CA DOI to address the actions that Crusader will take to correct the conditions that resulted in the Company Action Level Event. On July 2, 2021, Crusader submitted a revised RBC Plan which addressed questions raised by the CA DOI. The CA DOI has not accepted the revised RBC Plan. The CA DOI may request additional changes to the revised RBC Plan to address various corrective actions that Crusader and/or the Company will take, including, without limitation, increasing the capital of Crusader. Depending on the scope and nature of any such requests from the CA DOI, the Company and Crusader may not be able to take certain of such corrective actions, including the potential infusion of capital to Crusader.
Unico generally receives dividends annually from Crusader to fund its operations and expenses. However, due to Crusader's decreased policyholder surplus caused by additional underwriting losses during 2021, and the need to preserve policyholder surplus at Crusader, Unico does not expect that Crusader will declare any such dividends for the foreseeable future because of its capital position. It is also possible that the CA DOI may request or direct that Crusader not make any dividend payments (or impose limits on the amount of dividends that Crusader can make) to Unico for a period of time. Such action could occur because of the current amount of policyholder surplus of Crusader and the continued losses being sustained by Crusader, which have the effect of further reducing its policyholder surplus. In 2021, the policyholder surplus of Crusader decreased because Crusader experienced net losses for the quarters ended March 31, 2021 and June 30, 2021. The possible action by the CA DOI regarding the payment of dividends may occur in connection with the review of the revised RBC Plan submitted by Crusader.
As of June 30, 2021 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, common stock and short-term investments. All of the Company’s investments, except for the certificates of deposit, are readily marketable.
The composition of Company’s investment portfolio is as follows:
|
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
7,262,854
|
|
|
$
|
7,371,434
|
|
|
$
|
10,596,808
|
|
|
$
|
10,832,181
|
|
|
Corporate securities
|
|
|
50,551,597
|
|
|
|
52,073,814
|
|
|
|
44,159,926
|
|
|
|
46,451,905
|
|
|
Agency mortgage-backed securities
|
|
|
26,787,187
|
|
|
|
27,301,413
|
|
|
|
25,314,546
|
|
|
|
26,125,608
|
|
|
Certificates of deposit
|
|
|
548,000
|
|
|
|
548,000
|
|
|
|
798,000
|
|
|
|
798,000
|
|
|
Total fixed maturity investments
|
|
|
85,149,638
|
|
|
|
87,294,661
|
|
|
|
80,869,280
|
|
|
|
84,207,694
|
|
|
Equity securities
|
|
|
3,205,869
|
|
|
|
3,570,416
|
|
|
|
2,548,440
|
|
|
|
2,746,706
|
|
|
Short-term investments
|
|
|
6,468,314
|
|
|
|
6,468,314
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
Total investments
|
|
$
|
94,823,821
|
|
|
$
|
97,333,391
|
|
|
$
|
83,617,720
|
|
|
$
|
87,154,400
|
|
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 which reflect the Company’s risk, balance sheet, and profile.
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. Through July 31, 2021, the investments were held by Crusader’s previous custodian, Union Bank Global Custody Services (“Union Bank”). Effective the following business day, August 2, 2021, the investments are held by Crusader’s current custodian, U.S Bank, Institutional Trust and Custody (“U.S. Bank”) as a result of sale of the custodial business by Union Bank to U.S. Bank.
As of June 30, 2021, 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 $2,045,000 and $1,974,534 on June 30, 2021, respectively.
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 was effective immediately and replaced 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
June 30
|
|
|
Six Months Ended
June 30
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 Program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares repurchased
|
|
|
22
|
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
Cost of shares repurchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated to retained earnings
|
|
$
|
91
|
|
|
$
|
-
|
|
|
$
|
91
|
|
|
$
|
-
|
|
|
Allocated to capital
|
|
|
10
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
Total cost of shares repurchased
|
|
$
|
101
|
|
|
$
|
-
|
|
|
$
|
101
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares repurchased
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
978
|
|
|
Cost of shares repurchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated to retained earnings
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,760
|
|
|
Allocated to capital
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
480
|
|
|
Total cost of shares repurchased
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,240
|
|
The Company has remaining authority under the 2020 Program to repurchase up to $4,995,406 of the currently outstanding shares of the Company’s common stock as of June 30, 2021. The Company has retired or will retire all stock repurchased under the 2020 Program and 2008 Program.
The Company reported $2,926,226 net cash used by operating activities for the six months ended June 30, 2021, compared to $1,507,637 net cash used by operating activities for the six months ended June 30, 2020. 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. The variability of the Company’s losses and loss adjustment expenses is due primarily to its small population of claims which may result in greater fluctuations in claim frequency and/or severity. 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.
RESULTS OF OPERATIONS
All comparisons made in this discussion are comparing the three and six months ended June 30, 2021, to the three and six months ended June 30, 2020, unless otherwise indicated.
For the three and six months ended June 30, 2021, total revenues were $8,132,605, an increase of $156,378 (2%) and $19,604,260, an increase of $3,622,852 (23%) compared to total revenues of $7,976,227 and $15,981,408 for the three and six months ended June 30, 2020, respectively. For the three and six months ended June 30, 2021, the Company had loss before taxes of $1,430,835 and income before tax of $1,111,505, respectively, compared to loss before taxes of $384,562 and $1,530,060 for the three and six months ended June 30, 2020, respectively. For the three and six months ended June 30, 2021, the Company had net loss of $1,406,811 and net income of $860,893, respectively, compared to net loss of $434,814 and $1,478,640, for the three and six months ended June 30, 2020, respectively
The increase in revenues of $156,378 for the three months ended June 30, 2021, when compared to the three months ended June 30, 2020, was primarily due to an increase in net earned premium of $197,637 (3%). The increase in revenues of $3,622,852 for the six months ended June 30, 2021, when compared to the six months ended June 30, 2020, was primarily due to the realized gain of $3,693,858 on the sale of the Calabasas Building.
The loss before tax of $1,430,835 for the three months ended June 30, 2021, compared to loss before taxes of $384,582 for the three months ended June 30, 2020, was due primarily to an increase in losses and loss adjustment expenses of $1,195,801 (24%) and an increase in other operating expenses of $153,188 (15%). The income before tax of $1,111,505 for the six months ended June 30, 2021, compared to loss before taxes of $1,530,060 for the six months ended June 30, 2020, was due primarily to the realized gain of $3,693,858 on the sale of the Calabasas Building, a decrease in policy acquisition costs of $218,941 (9%), offset by an increase in losses and loss adjustment expenses of $903,629 (8%) and an increase in other operating expenses of $346,251 (18%).
Crusader premium
Crusader’s primary lines of business are written on Commercial Multi Peril policies. These policies represented approximately 99.6% and 99.5% of Crusader’s total written premium for the years ended June 30, 2021 and 2020, respectively.
Gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties) reported on Crusader’s statutory financial statements increased $2,785,991 (32%) and $4,061,650 (23%) to $11,567,118 and $22,049,663 for the three and six months ended June 30, 2021, respectively, compared to $8,781,127 and $17,988,013 for the three and six months ended June 30, 2020, respectively.
The increase in gross written premium for the three and six months ended June 30, 2021, was due primarily to growth in the Company’s Transportation vertical. The Transportation vertical transacts insurance primarily for long-haul trucking operations that are domiciled in California. The growth in the Company’s Transportation vertical was partially offset by the decrease in the Buildings vertical.
As part of its periodic performance reviews, Crusader analyzed the adequacy of its existing premium rates and policy forms. This analysis revealed that certain of Crusader’s products have approved rates and policy forms that are expected to yield premium revenue that is insufficient to cover Crusader’s anticipated losses and expenses and provide Crusader with a fair and reasonable rate of return. Accordingly, Crusader filed applications seeking rate increases and policy form revisions, which the CA DOI declined to approve. Due to the inability to obtain approval of rate increases or changes to its policy forms designed to exclude habitability related perils needed in the Company’s view to profitably underwrite its Building program policies, the Company stopped renewing its existing policies on Crusader’s paper and is now offering this product on USIC paper.
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 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 earned premium
Gross earned premium increased $1,113,619 (13%) to $9,874,483 and $1,591,429 (9%) to $19,262,118 for the three and six months ended June 30, 2021, respectively, compared to $8,760,864 and $17,670,689 for the three and six months ended June 30, 2020, respectively. All policies are written on annual basis. Earned premium represents a portion of written premium that is recognized as income in the consolidated 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 was due primarily to an increase in gross written premium in 2020 and 2021.
Ceded earned premium
Ceded earned premium (premium ceded to reinsurers under reinsurance treaties) increased $915,982 (46%) to $2,906,735 and $1,701,165 (43%) to $5,690,609 for the three and six months ended June 30, 2021, compared to $1,990,753 and $3,989,444 for the three and six months ended June 30, 2020, respectively. Ceded earned premium as a percentage of gross earned premium was 29% and 30% for the three and six months ended June 30, 2021, respectively, and 23% for the three and six months ended June 30, 2020. The increase in the ceded earned premium as a percentage of gross earned premium for the three and six months ended June 30, 2021, compared to the three and six months ended June 30, 2020, was due primarily to higher rates on the excess of loss reinsurance treaty.
Reinsurance treaties are generally structured in layers, with different negotiated economic terms and retention of participation, or liability, in each layer. In calendar years 2021 and 2020, 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 2021 and 2020, 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 June 30, 2021, all such ceded contracts are accounted for as risk transfer reinsurance.
A tabular presentation of Crusader’s direct, assumed, ceded and net earned premium is as follows:
|
|
|
Three Months Ended June 30
|
|
|
Six Months Ended June 30
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct earned premium
|
|
$
|
9,672,155
|
|
|
$
|
8,743,818
|
|
|
$
|
18,965,324
|
|
|
$
|
17,653,643
|
|
|
Assumed earned premium
|
|
|
202,328
|
|
|
|
17,046
|
|
|
|
296,794
|
|
|
|
17,046
|
|
|
Ceded earned premium
|
|
|
(2,906,735
|
)
|
|
|
(1,990,753
|
)
|
|
|
(5,690,609
|
)
|
|
|
(3,989,444
|
)
|
|
Net earned premium
|
|
$
|
6,967,748
|
|
|
$
|
6,770,111
|
|
|
$
|
13,571,508
|
|
|
$
|
13,681,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of ceded earned premium to gross earned premium (direct and assumed earned premium)
|
|
|
29%
|
|
|
|
23%
|
|
|
|
30%
|
|
|
|
23%
|
|
Net Investment Income, Net Realized Investment Gains and Losses, and Net Unrealized Investment Losses on Equity Securities
Investment income increased $39,381 (8%) to $528,879 and $33,412 (3%) to $1,043,602 for the three and six months ended June 30, 2021, respectively, compared to $489,498 and $1,010,190 for the three and six months ended June 30, 2020, respectively. This increase in investment income was due primarily to an increase in average invested assets. The Company had net realized investment gains of $106,410 and $161,809 for the three and six months ended June 30, 2021, respectively, compared to net realized investment gains of $461 and $1,575 for the three and six months ended June 30, 2020, respectively. The Company had net unrealized investment gains on equity securities of $14,615 and $166,281 for the three and six months ended June 30, 2021 compared to $67,759 and $22,959 for the three and six months ended June 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
June 30
|
|
|
Six Months Ended
June 30
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average invested assets (1) - at amortized cost
|
|
$
|
93,962,767
|
|
|
$
|
84,876,803
|
|
|
$
|
89,220,771
|
|
|
$
|
84,718,971
|
|
|
Net investment income from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested Assets (2)
|
|
$
|
528,791
|
|
|
$
|
489,387
|
|
|
$
|
1,043,183
|
|
|
$
|
1,006,567
|
|
|
Cash Equivalents
|
|
|
88
|
|
|
|
111
|
|
|
|
419
|
|
|
|
3,623
|
|
|
Total investment income
|
|
$
|
528,879
|
|
|
$
|
489,498
|
|
|
$
|
1,043,602
|
|
|
$
|
1,010,190
|
|
|
Annualized yield on average invested assets (3)
|
|
|
2.3%
|
|
|
|
2.3%
|
|
|
|
2.3%
|
|
|
|
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 from insurance company operation included $37,453 and $72,032 of investment expense for the three and six months ended June 30, 2021, compared to $32,909 and $67,787 of investment expense for the three and six months ended June 30, 2020.
|
|
|
|
|
(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 June 30, 2021
|
|
Par
Value
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
Weighted
Average Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year
|
|
$
|
16,170,000
|
|
|
$
|
16,185,243
|
|
|
$
|
16,386,079
|
|
|
|
2.31
|
%
|
|
Due after one year through five years
|
|
|
26,521,012
|
|
|
|
26,682,135
|
|
|
|
27,372,028
|
|
|
|
1.87
|
%
|
|
Due after five years through ten years
|
|
|
19,424,414
|
|
|
|
19,506,193
|
|
|
|
20,317,069
|
|
|
|
2.41
|
%
|
|
Due after ten years and beyond
|
|
|
22,237,762
|
|
|
|
22,776,067
|
|
|
|
23,219,485
|
|
|
|
2.37
|
%
|
|
Total
|
|
$
|
84,353,188
|
|
|
$
|
85,149,638
|
|
|
$
|
87,294,661
|
|
|
|
2.21
|
%
|
|
Maturities by Year at December 31, 2020
|
|
Par
Value
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
Weighted
Average Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year
|
|
$
|
11,070,641
|
|
|
$
|
11,064,202
|
|
|
$
|
11,169,232
|
|
|
|
2.57
|
%
|
|
Due after one year through five years
|
|
|
30,065,671
|
|
|
|
30,090,910
|
|
|
|
31,260,694
|
|
|
|
2.59
|
%
|
|
Due after five years through ten years
|
|
|
18,363,570
|
|
|
|
18,476,051
|
|
|
|
19,806,444
|
|
|
|
2.51
|
%
|
|
Due after ten years and beyond
|
|
|
20,927,571
|
|
|
|
21,238,117
|
|
|
|
21,971,324
|
|
|
|
2.63
|
%
|
|
Total
|
|
$
|
80,427,453
|
|
|
$
|
80,869,280
|
|
|
$
|
84,207,694
|
|
|
|
2.58
|
%
|
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 7.8 years as of June 30, 2021, and 8.3 years as of June 30, 2020.
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
|
|
|
June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
4,762,045
|
|
|
$
|
(31,661
|
)
|
|
|
3
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
Corporate securities
|
|
|
14,419,743
|
|
|
|
(124,412
|
)
|
|
|
18
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Agency mortgage-backed securities
|
|
|
6,465,163
|
|
|
|
(52,073
|
)
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total debt securities
|
|
|
25,646,951
|
|
|
|
(208,146
|
)
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Equity securities
|
|
|
787,071
|
|
|
|
(40,703
|
)
|
|
|
38
|
|
|
|
54
|
|
|
|
(3
|
)
|
|
|
1
|
|
|
Total
|
|
$
|
26,434,022
|
|
|
$
|
(248,850
|
)
|
|
|
67
|
|
|
$
|
54
|
|
|
$
|
(3
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities
|
|
|
2,101,986
|
|
|
|
(55,847
|
)
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Agency mortgage-backed securities
|
|
|
3,223,329
|
|
|
|
(22,274
|
)
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total debt securities
|
|
|
5,325,315
|
|
|
|
(78,121
|
)
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Equity securities
|
|
|
723,346
|
|
|
|
(37,357
|
)
|
|
|
25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
6,048,661
|
|
|
$
|
(115,478
|
)
|
|
|
39
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
While the fair value of Company’s investment portfolio at June 30, 2021, has recovered from the declines recorded in the first half of 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 six months ended June 30, 2021, 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. The unrealized losses on all securities as of June 30, 2021, and December 31, 2020, 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
June 30
|
|
|
Six Months Ended
June 30
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities securities sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities sold
|
|
|
2
|
|
|
|
-
|
|
|
|
3
|
|
|
|
1
|
|
|
Amortized cost of sold securities
|
|
$
|
1,943,398
|
|
|
$
|
-
|
|
|
$
|
2,193,393
|
|
|
$
|
601,316
|
|
|
Realized gains on sales
|
|
$
|
707
|
|
|
$
|
-
|
|
|
$
|
710
|
|
|
$
|
1,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities securities called
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities called
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
|
|
2
|
|
|
Amortized cost of called securities
|
|
$
|
1,018,877
|
|
|
$
|
1,699,539
|
|
|
$
|
2,393,778
|
|
|
$
|
1,699,539
|
|
|
Realized (losses) gains on calls
|
|
$
|
(18,877
|
)
|
|
$
|
461
|
|
|
$
|
(18,778
|
)
|
|
$
|
461
|
|
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 was $54,470 and $28,260 for the three and six months ended June 30, 2021, respectively, compared to $122,826 and $203,779 for the three and six months ended June 30, 2020, respectively. The decreases in other income during the three and six months ended June 30, 2021, are due primarily to a decrease in rental income as a result of the sale of the building owned by Crusader and timing of certain receipts.
Gross commissions and fees
Gross commissions and fees decreased $42,175 (9%) to $415,711 and $77,783 (8%) to $849,172 for the three and six months ended June 30, 2021, respectively, compared to gross commissions and fees of $457,886 and $926,955 for the three and six months ended June 30, 2020, respectively.
The comparison in gross commission and fee income for the three and six months ended June 30, 2021, as compared to the three and six months ended June 30, 2020, are as follows:
|
|
|
Three Months Ended June 30
|
|
|
Six Months Ended June 30
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage fee income
|
|
$
|
205,725
|
|
|
$
|
265,763
|
|
|
$
|
(60,038
|
)
|
|
$
|
441,621
|
|
|
$
|
526,709
|
|
|
$
|
(85,088
|
)
|
|
Health insurance program
|
|
|
198,487
|
|
|
|
168,098
|
|
|
|
30,389
|
|
|
|
377,461
|
|
|
|
353,282
|
|
|
|
24,179
|
|
|
Membership and fee income
|
|
|
11,499
|
|
|
|
24,025
|
|
|
|
(12,526
|
)
|
|
|
30,090
|
|
|
|
46,964
|
|
|
|
(16,874
|
)
|
|
Gross commissions and fees
|
|
$
|
415,711
|
|
|
$
|
457,886
|
|
|
$
|
(42,175
|
)
|
|
$
|
849,172
|
|
|
$
|
926,955
|
|
|
$
|
(77,783
|
)
|
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 $60,038 (23%) and $85,088 (16%) in the three and six months ended June 30, 2021, respectively, compared to the three and six months ended June 30, 2020, 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 increased $30,389 (18%) and $24,179 (7%) in the three and six months ended June 30, 2021, respectively, compared to the three and six months ended June 30, 2020. The increases in the commission during the three and six months ended June 30, 2021, are due primarily to the increase in overall group size for existing accounts as more companies are increasing their employee counts compared to the decrease in employee counts as a result of COVID in the prior period where there was a decrease in employee counts due to COVID.
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 decreased $12,526 (52%) and $16,874 (36%) for the three and six months ended June 30, 2021, respectively, compared to the three and six months ended June 30, 2020. The decreases in the membership and fee income during the three and six months ended June 30, 2021, are due primarily to a decrease in administration fees.
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 $22,914 (34%) to $44,772 and $44,935 (33%) to $89,770 for the three and six months ended June 30, 2021, respectively, compared to $67,686 and $134,705 in fees earned during the three and six months ended June 30, 2020, respectively, due primarily to the decrease in the number of policies financed. During the three and six months ended June 30, 2021, AAC issued 201 and 432 loans, respectively, and had 670 loans outstanding as of June 30, 2021. During the three and six months ended June 30, 2020, AAC issued 296 and 641 loans, respectively, and had 1,078 loans outstanding as of June 30, 2020. AAC provides premium financing for Crusader and USIC policies produced by Unifax in California. Effective August 6, 2021, the Company decided to discontinue loan issuance through AAC. The Company will continue servicing existing loans and will continue issuing loans in the short-term until necessary operational changes are completed.
Losses and loss adjustment expenses
Loss and loss adjustment expenses are the Company’s largest expense item. Loss ratio, which is calculated by dividing losses and loss adjustment expenses by net earned premium, were 87% and 86% for the three and six months ended June 30, 2021, compared to 72% and 79% for the three and six months ended June 30, 2020.
Losses and loss adjustment expenses and loss ratios are as follows:
|
|
|
Three Months Ended June 30
|
|
|
|
|
2021
|
|
|
2021
Loss
Ratio
|
|
|
2020
|
|
|
2020
Loss
Ratio
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium
|
|
$
|
6,967,748
|
|
|
|
|
|
$
|
6,770,111
|
|
|
|
|
|
$
|
197,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for insured events of current year
|
|
|
5,754,482
|
|
|
|
82
|
%
|
|
|
5,378,459
|
|
|
|
79
|
%
|
|
|
376,023
|
|
|
Development of insured events of prior years
|
|
|
330,225
|
|
|
|
5
|
%
|
|
|
(489,553
|
)
|
|
|
(7
|
)%
|
|
|
819,778
|
|
|
Total losses and loss adjustment expenses
|
|
$
|
6,084,707
|
|
|
|
87
|
%
|
|
$
|
4,888,906
|
|
|
|
72
|
%
|
|
$
|
1,195,801
|
|
|
|
|
Six Months Ended June 30
|
|
|
|
2021
|
|
|
2021
Loss
Ratio
|
|
|
2020
|
|
|
2020
Loss
Ratio
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium
|
|
$
|
13,571,508
|
|
|
|
|
|
|
$
|
13,681,245
|
|
|
|
|
|
|
$
|
(109,737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for insured events of current year
|
|
|
12,512,046
|
|
|
|
92
|
%
|
|
|
10,539,635
|
|
|
|
77
|
%
|
|
|
1,972,411
|
|
|
Development of insured events of prior years
|
|
|
(842,126
|
)
|
|
|
(6
|
)%
|
|
|
226,656
|
|
|
|
2
|
%
|
|
|
(1,068,782
|
)
|
|
Total losses and loss adjustment expenses
|
|
$
|
11,669,920
|
|
|
|
86
|
%
|
|
$
|
10,766,291
|
|
|
|
79
|
%
|
|
$
|
903,629
|
|
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 $5,754,482 provision for insured events of current year for the three months ended June 30, 2021, was $376,023 higher than the $5,378,459 provision for insured events of current year for the three months ended June 30, 2020, due primarily to higher severity and frequency of liability claims related to the Transportation vertical. The higher severity of the Transportation liability claims was caused by several fatal accidents which involved drivers insured by Crusader.
The $330,225 adverse development of insured events of prior years for the three months ended June 30, 2021, was $819,778 higher compared to the $489,553 favorable development for the three months ended June 30, 2020, due primarily to the increase in the incurred but not reported (“IBNR”) reserves associated with the Buildings vertical and higher severity of liability claims related to the Transportation vertical during the three months ended June 30, 2021.
The $12,512,046 provision for insured events of current year for the six months ended June 30, 2021, was $1,972,411 higher than the $10,539,635 provision for insured events of current year for the six months ended June 30, 2020, due primarily to the increase in the 2021 accident year IBNR reserves associated with the Transportation vertical as a result of premium growth in the vertical. Also, contributing to the increase was a higher frequency and severity of liability claims related to the Transportation vertical. The higher severity of the Transportation liability claims was caused by several fatal accidents which involved drivers insured by Crusader.
The $842,126 favorable development of insured events of prior years for the six months ended June 30, 2021, was $1,068,782 lower compared to the $226,656 adverse development for the six months ended June 30, 2020, due primarily to reductions in the 2020 and prior accident years IBNR reserves associated with Transportation vertical as a result of positive claims emergence.
Crusader has received 152 coronavirus-related business interruption claims through June 30, 2021 of which one is open. 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 civil unrest through June 30, 2021 of which two are open. Crusader has sufficient excess of loss and catastrophe reinsurance treaties to protect against 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 June 30, 2019:
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
$
|
5,754,482
|
|
|
$
|
330,225
|
|
|
$
|
6,084,707
|
|
|
March 31, 2021
|
|
|
6,757,564
|
|
|
|
(1,172,351
|
)
|
|
|
5,585,213
|
|
|
December 31, 2020
|
|
|
6,758,848
|
|
|
|
(202,270
|
)
|
|
|
6,556,578
|
|
|
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
|
|
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 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 during the three months ended September 30, 2020. 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 December 31, 2020, for 2018, 2019, and 2020 accident year claims pertaining to Buildings and Transportation liability coverages during the three months ended September 30, 2020. During the three months ended June 30, 2021, primarily higher ultimate estimates for Building liability coverage for the 2015 accident year resulted in adverse development of insured events of prior years.
Crusader attributes much of its adverse loss development experienced in the three most recent years ending June 30, 2021, 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 result 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 programs, 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 condensed 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 June 30
|
|
|
Six Months Ended June 30
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs
|
|
$
|
1,105,545
|
|
|
$
|
1,202,026
|
|
|
$
|
(96,481
|
)
|
|
$
|
2,127,510
|
|
|
$
|
2,346,451
|
|
|
$
|
(218,941
|
)
|
|
Ratio to net earned premium (GAAP ratio)
|
|
|
16
|
%
|
|
|
18
|
%
|
|
|
|
|
|
|
16
|
%
|
|
|
17
|
%
|
|
|
|
|
Policy acquisition costs decreased during the three and six months ended June 30, 2021, as compared to the three and six months ended June 30, 2020, due primarily to increase of ceding commission that Crusader received as a result of increase in premium ceded to its reinsurers.
Salaries and employee benefits
Salaries and employee benefits decreased $46,291 (4%) to $1,205,630 and $40,700 (2%) to $2,333,721 for the three and six months ended June 30, 2021, respectively, compared to $1,251,922 and $2,374,421 for the three and six months ended June 30, 2020.
Salaries and employee benefits incurred and charged to operating expenses are as follows:
|
|
|
Three Months Ended June 30
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total salaries and employee benefits incurred
|
|
$
|
2,150,841
|
|
|
$
|
2,066,520
|
|
|
$
|
84,322
|
|
|
Less: charged to losses and loss adjustment expenses
|
|
|
(594,655
|
)
|
|
|
(392,682
|
)
|
|
|
(201,973
|
)
|
|
Less: capitalized to policy acquisition costs
|
|
|
(350,556
|
)
|
|
|
(362,029
|
)
|
|
|
11,473
|
|
|
Less: charged to IT system upgrade
|
|
|
-
|
|
|
|
(59,887
|
)
|
|
|
59,887
|
|
|
Net amount charged to operating expenses
|
|
$
|
1,205,630
|
|
|
$
|
1,251,922
|
|
|
$
|
(46,291
|
)
|
|
|
|
Six Months Ended June 30
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total salaries and employee benefits incurred
|
|
$
|
4,324,282
|
|
|
$
|
4,073,278
|
|
|
$
|
251,004
|
|
|
Less: charged to losses and loss adjustment expenses
|
|
|
(1,161,993
|
)
|
|
|
(909,065
|
)
|
|
|
(252,928
|
)
|
|
Less: capitalized to policy acquisition costs
|
|
|
(660,251
|
)
|
|
|
(682,078
|
)
|
|
|
21,827
|
|
|
Less: charged to IT system upgrade
|
|
|
(168,317
|
)
|
|
|
(107,714
|
)
|
|
|
(60,603
|
)
|
|
Net amount charged to operating expenses
|
|
$
|
2,333,721
|
|
|
$
|
2,374,421
|
|
|
$
|
(40,700
|
)
|
The decrease in the total salaries and employee benefits incurred for the three and six months ended June 30, 2021, compared to the three and six months ended June 30, 2020, was due primarily to a reduction in headcount, partially offset by increases in employee benefits costs as a result of higher medical insurance rates.
Commissions to agents/brokers
Commissions to agents/brokers decreased $3,566 (15%) to $20,434 and $8,952 (18%) to $41,002 for the three and six months ended June 30, 2021, respectively, compared to $24,000 and $49,954 for the three and six months ended June 30, 2020. 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 $153,189 (15%) to $1,147,124 and $346,251 (18%) to $2,320,602 for the three and six months ended June 30, 2021, respectively, compared to $993,935 and $1,974,351 for the three and six months ended June 30, 2020. The increases in other operating expenses for the three and six months ended June 30, 2021, compared to the six months ended June 30, 2020, were primarily due to increases in rent expense for the corporate headquarters office space leased in February 2021, fees paid under reinsurance arrangement with USIC, business insurance costs, and CA DOI financial examination of Crusader expenses, partially offset by elimination of building maintenance costs after the sale of the building owned by Crusader.
Income tax benefit
Income tax benefit was $24,024 (2% of pre-tax loss) for the three months ended June 30, 2021 and income tax expense was $50,252 (-13% of pre-tax loss) for the three months ended June 30, 2020. Income tax expense was $250,612 (23% of pre-tax income) for the six months ended June 30, 2021 and income tax benefit was $51,420 (3% of pre-tax loss) for the six months ended June 30, 2020.
As of June 30, 2021, the Company had deferred tax assets of $7,812,224 generated from $37,201,066 of federal net operating loss carryforwards that will begin to expire in 2035 and deferred tax assets of $2,617,828 generated from state net operating loss carryforwards which expire between 2028 and 2040. In connection with preparation of its consolidated 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 six months ended June 30, 2021, 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 $10,698,797 that, in management’s judgment, are not more-likely-than-not to be realized. For the year ended December 31, 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 $10,557,080.
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.