UNICO AMERICAN CORPORATION OVERVIEW
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to provide an understanding of the Company's
financial condition and results of operations by focusing on changes in certain
key measures quarter over quarter. This MD&A should be read in conjunction with
the Company's 2021 Form 10-K, plus the condensed consolidated financial
statements and notes thereto. This discussion contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those discussed elsewhere
in this Form 10-Q. The results for the three months ended March 31, 2022 are not
necessarily indicative of the results expected for the year ending December31, 2022. GeneralUnico American Corporation is an insurance holding company. Crusader, Unico's insurance company subsidiary underwrote commercial property and casualty insurance. The Company's subsidiariesUnifax Insurance Systems, Inc. ("Unifax") andAmerican Insurance Brokers, Inc. ("AIB") provided marketing and continue to provide various underwriting support services related to property, casualty, health and life insurance. The Company's subsidiary AAC provided insurance premium financing, and the Company's subsidiaryInsurance Club, Inc. , dba AAQHC, an Administrator ("AAQHC") provides membership association services. The Company's subsidiaryU.S. Risk Manager's Inc. ("U.S. Risk") provides claims adjustment services.Unico American Corporation is referred to herein as the "Company" or "Unico" and such references include both the corporation and its subsidiaries, all of which are wholly owned. Unico was incorporated under
the laws ofNevada in 1969. 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 MD&A, the Company's condensed consolidated financial statements and notes thereto, and all other items contained within the Company's 2021 Form 10-K. Total revenues for the three months endedMarch 31, 2022 , were$6,070,735 compared to$11,471,654 for the three months endedMarch 31, 2021 , a decrease of$5,400,919 (-47%). The decrease in revenue was attributable to a decrease in the net earned premium as Crusader's operations are now in runoff and$3,693,858 gain realized inFebruary 2021 on the sale of the building previously owned by Crusader. The Company had a net loss of$4,010,762 for the three months endedMarch 31, 2022 , compared to net income of$2,267,703 for the three months endedMarch 31, 2021 , a decrease in net income of$6,278,465 (-277%). The increase in net loss is mostly attributable to an approximately$10.1 million decrease
in direct written premium. In connection with the Company's previously announced review of strategic alternatives, during the quarter endedSeptember 2021 , Unico took actions to cause Crusader to enter into runoff. In connection with its runoff, Crusader began to cease writing new and renewal business and to wind down operations that support the writing of insurance policies. EffectiveSeptember 30, 2021 , Crusader ceased writing any new insurance policies and no longer renewed policies subsequent toDecember 8, 2021 . Crusader has issued notices in accordance with the CA DOI rules and regulations of non-renewal for its existing in-force policies to terminate such policies at the expiration of the current policy periods. Crusader continues to provide services to existing insurance policyholders and claimants during its runoff. Actions to wind down operations that support the writing of new insurance policies and the issuance of renewal insurance policies began immediately, and the servicing operations will be adjusted over time to support business requirements including the retention of the necessary staff. InAugust 2021 , Unico also discontinued its premium financing operations formerly conducted through AAC, which activity is reflected on the Statement of Operations under "Other insurance operations." 28 Table Of Contents Going Concern Based on Unico's current cash and shortterm investments atMarch 31, 2022 , as well as the other factors described herein, 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 twelve months from the date of issuance of the accompanying consolidated financial statements. Unico has a history of recurring losses from operations, negative cash flows from its operating activities which may continue in the future, and as an insurance holding company, Unico does not independently generate significant revenue, and is dependent on dividends and other cash distributions from Crusader and its other subsidiaries to fund its operations and expenses. Historically, Unico received dividends periodically from Crusader, but does not expect to receive any such dividends for the foreseeable future due to prohibitions on dividends imposed by the CA DOI pursuant to the Administration Supervision Agreement (the "Supervision Agreement"), dated as ofSeptember 7, 2021 , by and between Crusader and the CA DOI and other actions by the CA DOI in its review of the financial statements of Crusader. The CA DOI advised inApril 2021 , that Crusader was prohibited from paying dividends during the year 2021 and for the years 2022 through 2025. Any continued financial support from Crusader will be at the discretion of the Special Examiner appointed pursuant to the Supervision Agreement ("Special Examiner"). If the Special Examiner does not permit Crusader to continue to provide financial support to Unico, Unico will be unable to continue to fund its continued operations and expenses. The Special Examiner has recently informed Crusader that the CA DOI does not intend to continue to permit Crusader to fund certain expenses attributable to Unico's status as a public company, including certain legal and accounting expenses without an undertaking by the Company to repay payments made on its behalf by Crusader. The Company will have an account payable to Crusader and Crusader will have an intercompany account receivable due from the Company for such payments made by Crusader and authorized by the Special Examiner. The inability of Crusader to pay certain expenses of the Company will exacerbate Unico's lack of liquidity. Additionally, many of the potential strategic alternatives that the Unico Board of Directors is considering will also depend on continued financial support from Crusader to fund transaction expenses and other costs. If Crusader is not permitted to do so, Unico would be unable to pursue such alternatives, which may otherwise be in the best interests of its stockholders. These circumstances raise substantial doubt about Unico's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification 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. Unico needs to improve its consolidated operating results, continue to receive financial support from Crusader, and/or raise substantial additional capital to continue to fund its operations. Unico has taken actions to cause Crusader to enter into runoff and to wind down operations that support the writing of insurance policies. To address its liquidity concerns and meet its capital obligations, Unico has announced a review of strategic alternatives and, with the assistance of a financial advisor, is considering multiple alternatives, including, but not limited to, strategic financing, further scaling back, or eliminating some or all of its remaining business operations, expense reductions, reorganization, merger with another entity, filing for bankruptcy 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 coronavirus COVID-19 pandemic and general economic conditions have 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. Many of these potential alternatives will also depend on continued financial support from Crusader to fund transaction expenses and other costs. If Unico becomes unable to continue as a going concern, Unico may have to dispose of or liquidate its assets and might realize significantly less than the values at which they are carried on its 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 a gross unrealized loss position. These actions may cause Unico's stockholders to lose all or part of their investment in Unico's common stock. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 29 Table Of Contents Supervision Agreement
OnSeptember 10, 2021 , Crusader and the CA DOI entered into "a Supervision Agreement", dated as ofSeptember 7, 2021 , at the request of the CA DOI. The Supervision Agreement was requested by the CA DOI because of the CA DOI's concerns regarding the financial stability of Crusader and the potential effects on Crusader and Crusader'sCalifornia policyholders of any potential bankruptcy of Unico. The Supervision Agreement among other things, provides for the appointment by the CA DOI of a Special Examiner to provide supervision and regulatory oversight of Crusader. The Supervision Agreement imposes limitations on Crusader's ability to take certain actions without the prior written consent of the California Insurance Commissioner (the "Commissioner"), the Special Examiner, or the Special Examiner's appointed representative. Among the actions that Crusader is prohibited from making without such prior written consent are the following: (i) making payments, engaging in any transaction with or entering into any agreement with, any affiliated or otherwise related person or entity if the cost to Crusader is an individual payment of more than$5,000 or aggregate payments of more than$20,000 ; (ii) making payments, engaging in any transaction with or entering into any agreement with, any non-affiliated or otherwise unrelated person or entity if the cost to Crusader is an individual payment of more than$5,000 or aggregate payments of more than$20,000 ; (iii) paying any dividend of any amount; (iv) except as provided in (i) and (ii), making any payments to or on behalf of the Company in connection with any agreement entered into between Crusader and the Company; (v) making any loans to affiliates, officers, directors, stockholders or third parties; (vi) incurring any debt, obligation or liability greater than$5,000 ; (vii) entering into any new reinsurance contract or treaty or amending any existing reinsurance contract or treaty; (viii) making any material changes in management and essential staffing; (ix) increasing salaries or benefits of officers or directors or making any preferential payment of bonuses or other payments considered legally preferential; and (x) making any other material changes in its normal course of operations, including but not limited to, entering into new lines of business, making major corporate reorganizations, or redomesticating fromCalifornia . The Supervision Agreement provides that the Special Examiner will meet with Crusader to develop a list of recurring payments under items (i) and (ii) that may not require prior written approval. To date, the Special Examiner has permitted Crusader to provide significant financial support to Unico in the form of reimbursement and/or direct payment of certain operating and other expenses, but there can be no assurance that the Special Examiner will continue to permit Crusader to do so under the Supervision Agreement. If the Special Examiner does not continue to permit Crusader to financially support Unico in the future, Unico will be unable to continue to fund its ongoing operations. OnSeptember 13, 2021 , the Special Examiner advised Crusader, through its counsel, that a deficiency existed in certain funds that Unifax is required to maintain, in a fiduciary capacity, for Crusader's benefit. Pursuant to the provisions of California Insurance Code ("CIC") Sections 1733 and 1734, Unifax is required to hold premium payment funds received from policyholders as fiduciary funds in trust maintained for the benefit of Crusader. The Special Examiner informed Crusader that the CA DOI believed that the deficiency in such fiduciary funds was approximately$3,100,000 as ofSeptember 13, 2021 . InJanuary 2022 , Unico, Crusader, and Unifax agreed, with the pre-approval of the Special Examiner, to transfer a computer system, owned by Unico, to Crusader. Unico contributed the computer system at its book value of$1,991,956 to Unifax, and Unifax in turn contributed the computer system to Crusader at its book value of$1,991,956 as a direct reduction in the amount due to Crusader which resulted in a dollar-for-dollar reduction in the premium trust deficiency. The amount of such deficiency was$275,901 as ofMarch 31, 2022 , and$435,619 as of June
30, 2022. Independent Investigation
InOctober 2021 , the Audit Committee of Unico's Board of Directors retained independent outside counsel, who in turn engaged forensic accountants to work at their direction, to conduct an independent investigation and provide legal advice to the Audit Committee (the "Independent Investigation"), regarding the facts and circumstances relating to, and resulting in, the observed fiduciary funds deficiency. As a result of the Independent Investigation, the Company has determined that, over a period of multiple years, (i) Unifax did not comply with the requirements of the CIC to hold premium trust funds in separate accounts or segregate such funds in accordance with the CIC; (ii) the funds in question were improperly transferred to an operating account of Unifax and were subsequently transferred to a Unico operating account, and (iii) the funds in question were utilized by Unico and its consolidated subsidiaries for general corporate purposes. The independent investigation did not find any evidence that any of such funds had been stolen or used for non-corporate purposes. 30 Table Of Contents Work Force Reduction In connection with the runoff of Crusader, onOctober 7 andOctober 8, 2021 , the Company informed thirteen employees of the Company's determination to terminate their employment, effective as ofOctober 8, 2021 (the "October 2021 Work Force Reduction"). Additionally, onDecember 16, 2021 , andDecember 17, 2021 , the Company informed an additional twelve employees of the Company's determination to terminate their employment, effective as ofDecember 17, 2021 (the "December 2021 Work Force Reduction"). The terminated employees were primarily employed in the Company's underwriting and marketing groups. In connection with theOctober 2021 Work Force Reduction and theDecember 2021 Work Force Reduction, the Company expects to incur total pretax costs of$968,139 , consisting of severance payments under the Company's existing policy. In addition, the Company has offered retention bonuses to certain of the Company's employees that were not subject to theOctober 2021 Work Force Reduction and theDecember 2021 Work Force Reduction, in connection with which, depending on employee participation, the Company expects to incur total pretax costs of$62,269 . The Company implemented another retention bonus plan to certain employees and expects to incur total pretax costs of$193,731 related to the plan, which will be recognized ratably over the last three quarters of 2022. The Company may incur additional costs in connection with the runoff of Crusader, including additional costs associated with workforce reductions. In 2021, the Company paid$331,331 in severance payments and$0 in retention bonus payments.
In 2022, the Company has paid
COVID-19
As a result, of the ongoing 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
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, which rebounded in 2021 and has been impacted
once again in 2022 by the economic environment. The overall response to the
pandemic contributed to the recent decline in investment yields, compared to
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.
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Crusader has received a number of coronavirus-related business interruption claims. With the exception of one claim for which an 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. OnMarch 23, 2021 , ten policyholders sued Crusader in a putative class action entitledAnchors & Whales LLC et al. v.Crusader Insurance Company ,Superior Court of the State of California for the County ofSan 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 inCalifornia 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. OnOctober 1, 2021 , Crusader was granted its motions on the pleadings without leave to amend and the lawsuit was dismissed. OnDecember 15, 2021 ,Anchors & Whales LLC filed a notice of appeal withCalifornia Court of Appeals ,1st Appellate District , Division 2 (A164412). The opening brief ofAnchors & Whales LLC was filedAugust 12, 2022 , and the Company has 90 days to respond. The Company cannot predict the actions of theCourt of Appeals . 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 follows governmental safety guidelines in determining when to remove the coronavirus-related business restrictions and where and when to request the employees working from their homes return to their workplaces for a few days per week. 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.
Termination of Reinsurance Arrangement
OnAugust 31, 2021 ,Crusader and United Specialty Insurance Company ("USIC"), terminated the Quota Share Reinsurance Agreement (the "Reinsurance Agreement"), effectiveApril 1, 2020 , by and between Crusader and USIC. Pursuant to the Reinsurance Agreement, Crusader agreed to reinsure all of USIC's liability for policies issued by USIC and produced by Unifax, for property, general liability, commercial multiple peril ("CMP"), liability and other miscellaneous coverages, subject to certain maximum policy limits. Crusader's obligations under the Reinsurance Agreement continue after termination for business in force at the time of termination, for policies with effective dates prior to the termination but issued after the termination date, and for policies that must be issued or renewed as a matter of law until the expiration of the policies. 32 Table Of Contents OnAugust 31, 2021 , as a result of the termination of the Reinsurance Agreement, the Surplus Line Broker Agreement (the "Broker Agreement"), effectiveApril 1, 2020 , by and between Unifax and USIC, automatically terminated. Pursuant to the Broker Agreement, USIC authorized Unifax to act as its broker for the purpose of producing and administering certain specified classes of insurance policies, which are the subject of the Reinsurance Agreement. Unifax's obligations under the Broker Agreement continue after termination for insurance business reinsured under the Broker Agreement. Unifax's obligations include handling and servicing of all policies until their expiration. OnAugust 31, 2021 , as a result of the termination of the Broker Agreement, the Claims Administration Agreement (the "Claims Administration Agreement"), effectiveApril 1, 2020 , by and betweenU.S. Risk and USIC, automatically terminated. Pursuant to the Claims Administration Agreement, USIC appointedU.S. Risk to adjust and settle claims on its behalf in connection with the surplus lines policies issued by USIC in connection with the Reinsurance Agreement. Upon termination of the Claims Administration Agreement,U.S. Risk is obligated (unless revoked by USIC) to continue to manage claims during the runoff of
the business reinsured. The Reinsurance Agreement was mutually terminated by Crusader and USIC. There were no early termination penalties incurred as a result of the termination. The Reinsurance Agreement provides for a minimum ceding fee, and, upon termination of the Reinsurance Agreement, the minimum ceding fee was pro-rated to the date of termination unless there were policies issued after the termination of the Reinsurance Agreement. In such case, the minimum ceding fee will continue past the termination of the Reinsurance Agreement until such time as no further policies are issued. USIC waived any additional ceding fees payable under the Reinsurance Agreement under the agreement to terminate that agreement. Under the Reinsurance Agreement, Crusader was required to secure its obligations to USIC for unearned premium reserves, if any, and loss reserves (losses incurred and not reported and loss reported but unpaid) in a security fund, trust agreement or letter of credit to permit USIC to receive credit for the reinsurance ceded to Crusader by USIC. Such security was required because Crusader is not authorized to transact insurance inDelaware , the domiciliary state of USIC. Initially, the security required to be provided by Crusader was 150% of the unearned premium and loss reserves. USIC was permitted to request additional security for the unearned premium and loss reserves in the event (i) theA.M. Best rating of Crusader is at any time reduced; or (ii) theA.M. Best rating of Crusader is at any time removed or withdrawn; or (iii) there is a reduction the capital and policyholder surplus of Crusader by 10% or more in any rolling 12-month period or (iv) Crusader fails to maintain its Cat excess of loss reinsurance coverage at certain levels. As ofDecember 31, 2021 , six securities were held as collateral withComerica 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 those securities was$8,243,758 and$8,162,053 onDecember 31, 2021 , respectively. The estimated aggregate fair value and amortized cost of these securities was$7,944,916 and$7,836,756 , on March
31, 2022 respectively.
Outsourcing of Claims Processing to an Experienced Third-Party Administrator
InJanuary 2022 , Crusader engaged a Third-Party Administrator ("TPA") outside of theUnico Group of Companies to assist in the claims adjudication and settlement process. This outside TPA will supplementU.S. Risk as Crusader is in runoff and is expected increased claims activity will be outsourced to the TPA through the remainder of 2022 to manage open claims inventory. TheU.S. Risk staff adjust claims and oversee all outside claim services such as attorneys, independent or outside claim adjusters, and experts as necessary. Engagement of this TPA should allow for increased control over paid allocated loss adjustment expenses and reduction of the open claims inventory. Administration fees paid to the TPA are recoverable by our third-party reinsurers as an allocated loss adjustment expense to the extent the billed activities are allocated to a specific claim. IT System Upgrade In 2018 the Company determined it needed to upgrade or replace its legacy IT system, which it opted to upgrade because the cost was substantially less. The upgrade was completed in 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. 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. Revenue and Income Generation The Company historically received 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. However, in light of the runoff of Crusader, and the cessation of the premium finance operations provided by AAC, the Company's revenues from these sources will decline significantly in the future. The insurance company operation, generated approximately 95% of consolidated revenues for the three months endedMarch 31, 2022 , compared to 96% of consolidated revenues for the three months endedMarch 31, 2021 (94% of consolidated revenues for the three months endedMarch 31, 2021 , excluding the gain on real estate). None of the Company's other operations is individually material to consolidated revenues. Insurance Company Operation
As ofMarch 31, 2022 , the Company's subsidiary Crusader was licensed as an admitted insurance carrier in the states ofArizona ,California ,Nevada ,Oregon , andWashington . Crusader's business remains concentrated inCalifornia (100% of gross written premium during the three months endedMarch 31, 2022 , and 2021 originated inCalifornia ). During the three months endedMarch 31, 2022 , approximately 99.8% of Crusader's business was CMP policies. During the three months endedMarch 31, 2021 , approximately 99.5% of Crusader's business was
comprised of CMP policies.
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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
March 31
2022 2021 Change
California $ 55,043 $ 10,482,545 $ (10,427,502 )
Total gross written premium $ 55,043 $ 10,482,545 $ (10,427,502 ) Crusader previously focused its business in three underwriting businesses: (1) Transportation, (2) Mainstreet, and (3) Buildings. The Company reorganized its underwriting businesses for proper staffing and business focus during the first quarter of 2021. The former Food,Beverage and Entertainment and Garage and Mercantile businesses became Mainstreet, and the former Apartments & Commercial Buildings business was renamed Buildings. 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 March 31 2022 2021 Direct written premium$ 14,636 $ 10,176,863 Assumed written premium 40,407 305,682
Less: written premium ceded to reinsurers (2,122,828 ) (2,779,992 ) Net written premium
(2,067,785 ) 7,702,553
Change in direct unearned premium 6,797,489 (883,694 )
Change in assumed unearned premium 753,973 (211,216 )
Change in ceded unearned premiums (34,625 ) (3,883 )Net earned premium$ 5,449,052 $ 6,603,760 The Company's insurance operational underwriting profitability is defined by pre-tax underwriting gain (loss), which is calculated as net earned premium less losses and loss adjustment expenses and policy acquisition costs. 34 Table Of Contents
Crusader's underwriting loss before income taxes is as follows:
Three Months Ended
March 31
2022 2021 Change
Net written premium $ (2,067,785 ) $ 7,702,553 $ (9,770,338 ) Change in net unearned premium 7,516,837 (1,098,793 )
8,615,630
Net earned premium 5,449,052 6,603,760 (1,154,708 ) Less: Losses and loss adjustment expenses 6,831,504 5,585,213
1,246,291 Policy acquisition costs 285,641 1,021,965 (736,324 ) Total underwriting expenses 7,117,145 6,607,178 509,967
Underwriting loss before income taxes
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 Crusader's 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
March 31
2022 2021
Underwriting loss before income taxes$ (1,668,093 ) $ (3,418 ) Insurance company operation revenues: Net investment income 328,782
514,723
Net realized investment gains 61,733
55,399
Net realized gains on real estate sale -
3,693,858
Net unrealized investment gains (losses) on equity securities (180,069 )
151,667
Other income (loss) 89,740 (26,752 ) Other insurance operations revenues: Gross commissions and fees 313,650
433,461
Finance charges and fees earned 6,298
44,998
Other income 1,549
540
Less expenses: Salaries and employee benefits 858,404
1,128,090
Commissions to agents/brokers 19,187
20,568
Other operating expenses 1,539,460
1,173,479
Income (loss) before income taxes$ (3,463,461 )
$ 2,542,339 35 Table Of Contents 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 has not recognized a premium deficiency reserve for the three months endedMarch 31, 2022 andMarch 31, 2021 respectively. The following table shows the loss ratios, expense ratios, and combined ratios of Crusader: Three Months Ended March 31 2022 2021 Loss ratio (1) 125 % 85 % Expense ratio (2) 50 % 31 % Combined ratio (3) 175 % 116 %
(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
March 31
2022 2021 Change
Losses and loss adjustment expenses:
Provision for insured events of current
year $ 6,121,111 $ 6,757,564 $ (636,453 )
Development of insured events of prior
years 710,393 (1,172,351 ) 1,882,744
Total losses and loss adjustment expenses $ 6,831,504 $ 5,585,213 $ 1,246,291
For further analysis of losses and loss adjustment expenses, refer to "Results of Operations".
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Revenues from Other Insurance Operations
The Company's revenues from other insurance operations consist of commissions, fees, investment, and other income. These operations accounted for approximately 5% of total revenues for the three months endedMarch 31, 2022 , compared to approximately 4% of total revenues in the three months endedMarch 31, 2021 (6% of total revenues for the three months endedMarch 31, 2021 , excluding the
gain on real estate sale). Investments The Company generated revenues from its total invested assets of$72,220,146 and$93,101,712 (fixed maturities at amortized cost, equity securities at cost and short-term investments at fair value) as ofMarch 31, 2022 and 2021, respectively. Investment income (net of investment expenses) decreased$185,941 (-36%) to$328,782 for the three months endedMarch 31, 2022 , compared to$514,723 for the three months endedMarch 31, 2021 . This decrease is the result of having less investments than in the past, as Crusader is in runoff and will be using the investments to satisfy future claims and operational needs. As ofMarch 31, 2022 , all of the Company's investments are inU.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 inU.S. treasury securities, corporate fixed maturity securities, agency mortgage-backed securities, common stock and money market funds are readily marketable. As ofMarch 31, 2022 , the weighted average maturity of the Company's investments was approximately 7.0 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 condensed consolidated financial statements included elsewhere in this Form 10-Q 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, does not independently generate significant revenue and is dependent on dividends and other cash distributions from Crusader and its other subsidiaries to fund its operations and expenses. Historically, Unico received dividends periodically from Crusader, but does not expect to receive any such dividends for the foreseeable future due to prohibitions on dividends imposed by the CA DOI pursuant to the Supervision Agreement, and other actions by the CA DOI in its review of the financial statements of Crusader. The CA DOI advised inApril 2021 that Crusader was prohibited from paying dividends during the year 2021 and for the years 2022 through 2025. Any continued financial support from Crusader will be at the discretion of the Special Examiner appointed pursuant to the Supervision Agreement. If the Special Examiner does not permit Crusader to continue to provide financial support to Unico, Unico will be unable to continue to fund its continued operations and expenses. The Special Examiner has recently informed Crusader that the CA DOI does not intend to permit Crusader to fund certain expenses attributable to Unico's status as a public company, including certain legal and accounting expenses, without an undertaking by the Company to repay payments made on its behalf by Crusader. The Company will have an account payable to Crusader and Crusader will have an intercompany account receivable due from the Company for such payments made by Crusader and authorized by the Special Examiner. The inability of Crusader to pay certain expenses of the Company will exacerbate Unico's lack of liquidity. Additionally, many of the potential strategic alternatives that the Board of Directors of Unico is considering will also depend on continued financial support from Crusader to fund transaction expenses and other costs. If Crusader is not permitted to do so, Unico would be unable to pursue such alternatives, which may otherwise be in the best interests of its stockholders. These circumstances raise substantial doubt about Unico's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification 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 constraints for Crusader. However, as an insurance holding company, the Company does not independently generate significant revenue and is dependent on dividends and other cash distributions from Crusader and its other subsidiaries to fund its operations and expenses. As discussed below, the Company does not expect to receive any dividends from Crusader for the foreseeable future, and accordingly, its financial position and ability to pay operating expenses will be adversely impacted. 37 Table Of Contents As a result of Crusader being placed into runoff, Crusader is no longer able to generate any significant amounts of premium and the holdings of unearned premium reserves will be depleted over time. As a result, Crusader will need to liquidate some of its investment holdings to support its operations. Accordingly, the size of Crusader's investment portfolio and investment income are expected to decrease. As ofDecember 31, 2021 , andDecember 31, 2020 , Crusader's RBC Level was less than 300% of its Authorized Control Level RBC, and its statutory accounting basis combined ratio was in excess of 120% for the years then ended. The RBC Level when coupled with the statutory accounting basis combined ratio triggered Company Action Level Events under the RBC for the years then ended. OnMarch 24, 2021 Crusader submitted to the CA DOI a comprehensiveRisk Based Capital Plan (the "RBC Plan") to increase the adjusted capital above 300% and to address the actions that Crusader would take to correct the conditions that resulted in the Company Action Level Event. The CA DOI found the RBC Plan to be deficient and requested that a revised RBC Plan be submitted. OnJuly 2, 2021 , the Company submitted a revised RBC Plan, which addressed issues raised by the CA DOI (the "2021 Revised RBC Plan"). No action was taken by the CA DOI regarding the 2021 Revised RBC Plan. As ofDecember 31, 2021 , a second Company Action Event occurred. AtDecember 31, 2021 , Crusader's RBC Level was less than 300%, with a combined ratio greater than 130%, which resulted in another Company Action Level event (the "2022 Company Action Level Event"). As a result of the 2022 Company Action Level Event, Crusader was required to submit another comprehensive Risk Based Capital Plan ("2022 RBC Plan") to the CA DOI. Crusader submitted its 2022 RBC Plan onMay 15, 2022 . OnJune 9, 2022 , the CA DOI requested additional information regarding the 2022 RBC Plan, which information is to be submitted byJuly 24 ,August 24, 2022 . The CA DOI may accept Crusader's revised 2022 RBC Plan to correct the conditions that lead to the 2022 Company Action Event, or it may request that an additional revised plan be submitted, or it may take no action with respect to the 2022 RBC Plan. After the Plans are submitted, 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, regarding the 2022 RBC Plan the Company and Crusader may not be able to implement certain corrective actions, including the potential infusion of capital to Crusader. The Company continues to be engaged in discussions with the CA DOI on various strategic alternatives to address the RBC issues. Another liquidity risk faced by the Company is adverse development of Crusader'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 Crusader's loss and loss adjustment expense reserves are adequate to address anticipated claims. 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, restricted 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. Cash, restricted cash, and investments (at amortized cost) of Crusader atMarch 31, 2022 , were$81,690,787 compared to$91,831,832 atDecember 31, 2021 .
As of
The composition of Company's investment portfolio is as follows:
March 31, 2022 December 31, 2021
Amortized Fair Amortized Fair
Cost Value Cost Value
Fixed maturities:
U.S. Treasury securities $ 5,785,095 $ 5,692,831 $ 6,278,764 $ 6,309,805
Corporate securities 42,463,486 41,620,142 44,370,193 45,249,973
Agency mortgage-backed
securities 19,007,275 18,531,691 20,569,448 20,853,627
Certificates of deposit 300,000 300,000 300,000 300,000
Total fixed maturity
investments 67,555,856 66,144,664 71,518,405 72,713,405
Equity securities 3,613,060 4,030,888 3,532,026 4,131,153
Short-term investments 1,050,000 1,051,230 1,154,750 1,154,750
Total investments $ 72,218,916 $ 71,226,782 $ 76,205,181 $ 77,999,308 The shortterm investments includeU.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. 38 Table Of Contents The Company is required to classify its investment securities into one of three categories: heldtomaturity, availableforsale, or trading securities. Historically, the Company's investment guidelines placed primary emphasis on buying and holding highquality investments to maturity. It is expected the Company will sell securities to support its operations.
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 includeU.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 August
2, 2021 , the investments were 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 March 31, 2022 , six securities were held as collateral with 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 Trust Agreement with USIC. The estimated fair value and
amortized cost of these securities was $7,944,916 and $7,836,756 on March 31,
2022 , respectively. As of December 31, 2021 , six securities, were held as
collateral with 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 those securities was
OnAugust 10, 2020 , the Board authorized a share repurchase program (the "2020 Program") for the repurchase of 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 onDecember 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. 39 Table Of Contents
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 ofMarch 31, 2022 . The Company has retired or will retire all stock repurchased under the 2020 Program and 2008 Program. EffectiveJanuary 2022 , the Company suspended its 2020 Program and ceased any further repurchases of its shares
from stockholders of the Company.
The Company reported$10,138,678 net cash used by operating activities for the three months endedMarch 31, 2022 , compared to$1,135,389 net cash provided by operating activities for the three months endedMarch 31, 2021 . 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. Crusader's statutory capital and surplus as ofMarch 2022 was$20,156,823 . Crusader's statutory capital and surplus as ofDecember 31, 2021 , was$22,494,454 , a decrease of$4,399,061 (-16%) fromDecember 31, 2020 surplus of$26,893,515 . The decrease is a result of Crusader being put into runoff and the cessation of writing new policies inSeptember 2021 and renewal policies onDecember 8, 2021 .
No dividends were paid by Crusader to Unico in 2021 as a result of the
Supervision Agreement and other action by the CA DOI. The CA DOI advised
Crusader that no dividends may be paid by Crusader through
During the years endedDecember 31, 2021 and 2020, no cash dividends were declared or issued by the Company to its stockholders. Declaration of future cash dividends, if any, will be subject to the Company's profitability, cash requirements, capital requirements, and general business conditions, among other factors. Because of the inability of Crusader to pay dividends to the Company for the foreseeable future, it is highly unlikely that the Company can declare and pay dividends to its stockholders for the foreseeable future. As aCalifornia insurance company, Crusader is obligated to pay a premium tax on gross written premium in all states where Crusader is admitted. Premium taxes are deferred and amortized as the related premium is earned. The premium tax is in lieu of state franchise taxes and is not included in the provision for state taxes. RESULTS OF OPERATIONS All comparisons made in this discussion compare the three months endedMarch 31, 2022 , to the three months endedMarch 31, 2021 , unless otherwise indicated. Because Crusader has been placed into runoff, some of the financial metrics will not be comparable now or in the future. For the three months endedMarch 31, 2022 , total revenues were$6,070,735 , a decrease of$5,400,919 (-47%) compared to total revenues of$11,471,654 for the three months endedMarch 31, 2021 . For the three months endedMarch 31, 2022 , the Company had a loss before taxes of$3,463,461 compared to income before taxes of$2,542,339 for the three months endedMarch 31, 2021 . For the three months endedMarch 31, 2022 , the Company had a net loss of$4,010,762 compared to net income of$2,267,703 for the three months endedMarch 31, 2021 . The decrease in revenues of$5,400,919 for the three months endedMarch 31, 2022 , when compared to the three months endedMarch 31, 2021 , was primarily due to a$1,154,708 (-17%) decrease in the net earned premium as Crusader's operations are now in runoff,$3,693,858 gain realized inFebruary 2021 on the sale of the building previously owned by Crusader, and$180,069 net unrealized investment losses on equity securities during the quarter endedMarch 31, 2022 compared to$151,667 net unrealized investment gains on equity securities during the quarter endedMarch 31, 2022 . The loss before tax of$3,463,461 for the three months endedMarch 31, 2022 , compared to income before taxes of$2,542,339 for the three months endedMarch 31, 2021 , was due primarily to the$1,154,708 (-17%) decrease in the net earned premium, increase in incurred losses and loss adjustment expenses, the$3,693,858 gain realized inFebruary 2021 on the sale of the building previously owned by Crusader, and$365,981 (31%) increase in other operating expenses, and$180,069 net unrealized investment losses on equity securities during the quarter endedMarch 31, 2022 compared to$151,667 net unrealized investment gains on equity securities during the quarter endedMarch 31, 2022 , partially offset by$736,324 (-72%) decrease in the policy acquisition costs and$269,686 (-24%) decrease in employee salaries and employee benefits.
As a result of the runoff of Crusader, revenues and losses in future periods
will not be comparable to past periods because Crusader ceased writing new
policies in
The effect of inflation on the Company for the three months endedMarch 31, 2022 was significant. As our Company's portfolio securities are primarily comprised of fixed income instruments, the fair value of these fixed income instruments will typically decrease in an inflationary environment as yields increase. Also, employee salary and employee benefits expense increases tend to be higher than normal than in inflationary times. Crusader premium
Crusader's primary lines of business are CMP policies. These policies
represented approximately 99.8% and 99.5% of Crusader's total written premium
for the three months ended
Gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties) reported on Crusader's statutory financial statements decreased$10,427,502 to$55,043 , compared to$10,482,545 for the three months endedMarch 31, 2021 . The decrease in gross written premium was attributable to Crusader's operations now currently being in runoff. As a result of the runoff of Crusader, Crusader will not generate significant levels of written premium in the future. Crusader ceased writing new policies inSeptember 2021 and ceased renewing policies as ofDecember 8, 2021 as Crusader was obligated by regulatory requirements to offer renewal policies through
that
date.
40
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Written premium
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 financialresults. Gross earned premium Gross earned premium decreased$1,781,129 (-19%) to$7,606,505 for the three months endedMarch 31, 2022 , compared to$9,387,634 for the three months endedMarch 31, 2021 . Historically, and prior to Crusader being placed into runoff, all policies were written on an annual basis. Earned premium represents a portion of written premium that is recognized as income in the condensed 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 decrease in gross earned premium was due primarily to decrease in the gross written premium as a result of the Crusader runoff.
As a result of the runoff of Crusader, the gross earned premium is expected to gradually decrease over time. Crusader does not expect any gross earned premium in 2023. Ceded earned premium Ceded earned premium (premium ceded to reinsurers under reinsurance treaties) decreased$626,421 (-23%) to$2,157,453 for the three months endedMarch 31, 2022 , compared to$2,783,874 for the three months endedMarch 31, 2021 . Ceded earned premium as a percentage of gross earned premium was 28% and 30% for the three months endedMarch 31, 2022 and 2021, respectively. The decrease in the ceded earned premium as a percentage of gross earned premium for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , was due primarily to a reduction of premiums ceded to reinsurers related to the Company excess of loss treaties.
Ceded earned premium is based on gross earned premium. As a result of the runoff of Crusader, the ceded earned premium will gradually decrease over time. Crusader does not expect any ceded earned premium in 2023.
Reinsurance treaties are generally structured in layers, with different negotiated economic terms and retention of participation, or liability, in each layer. In calendar years 2022 and 2021, Crusader retained a 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 ("CAT") reinsurance treaties from various highly
rated
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 ). In 2022 the catastrophe excess of loss reinsurance treaties were reduced to$16,000,000 with a$1,000,000 retention. Also, Crusader has not had a single CAT claim
since 1992. Crusader also has facultative reinsurance treaties from a highly ratedCalifornia authorized reinsurance company. Unlike the excess of loss treaties which cover all risks underwritten by Crusader, the facultative reinsurance treaties cover specific risks for properties with total insured values in excess of$4,000,000 , or property coverage limit of the excess of loss treaties. In calendar year 2020 and during the first five months of 2021, the facultative reinsurance treaties provided coverage for reinsured losses between$4,000,000 and$8,000,000 . FromJune 2021 through 2022, the facultative reinsurance treaties had two sections which provide coverage for reinsured losses between$4,000,000 and$9,000,000 (Section A) and$4,000,000 and$15,000,000 (Section B) depending on location of the insured risk. Crusader evaluates each of its ceded reinsurance contracts at its inception to determine if there is a sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting literature. As ofMarch 31, 2022 , all such ceded contracts are accounted for as risk transfer reinsurance. 41 Table Of Contents A tabular presentation of Crusader's direct, assumed, ceded and net earned premium is as follows: Three Months Ended March 31 2022 2021 Direct earned premium$ 6,812,125 $ 9,293,168 Assumed earned premium 794,380 94,466 Ceded earned premium (2,157,453 ) (2,783,874 ) Net earned premium$ 5,449,052 $ 6,603,760
Ratio of ceded earned premium to gross earned premium (direct and assumed earned premium)
28 % 30 %
Net Investment Income, Net Realized Investment Gains and Losses, and Net
Unrealized Investment Losses on
Investment income decreased$185,941 (-36%) to$328,782 for the three months endedMarch 31, 2022 , compared to$514,723 for the three months endedMarch 31, 2021 . This decrease in investment income was due primarily to a smaller overall portfolio than in 2021 as investments were sold to pay claims and for operational uses. In 2022, our third-party investment advisor was instructed by management not to invest in matured bonds so the portfolio remains relatively liquid, which will limit net investment income. The Company had$61,733 in net realized investment gains for the three months endedMarch 31, 2022 , compared to net realized investment gains of$55,399 for the three months endedMarch 31, 2021 . The Company had net unrealized investment losses on equity securities of$180,069 for the three months endedMarch 31, 2022 , compared to net unrealized gains of$151,667 for the three months endedMarch 31, 2021 . Average yields on the Company's average invested assets and investment income, excluding net realized investment gain and losses and net unrealized investment losses on equity securities, are as follows: Three Months Ended March 31 2022 2021 Average invested assets (1) - at amortized cost$ 74,212,049 $ 88,417,672 Net investment income from: Invested assets (2)$ 328,760 $ 514,392 Invested Cash 22 331 Total investment income$ 328,782 $ 514,723
Average yield on average invested assets (3) 1.8 %
2.3 %
(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
investment expense for the three months ended
(3) Average yield on average invested assets did not include the investment
income from cash equivalents.
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Table Of Contents
As Crusader entered into runoff, it will need to liquidate some of its
investment holdings to support its operations. Accordingly, the size of
Crusader's investment portfolio and investment income are expected to decrease.
Investment expenses are expected to decrease as the portfolio's invested assets
decrease.
The amortized cost, estimated fair value (adjusted for YTD unrealized gains and
losses) and weighted average yield of fixed maturity investments by contractual
maturity are as follows:
Amortized Weighted
Maturities by Year at
Due in one year$ 17,978,044 $ 17,974,935 1.83 % Due after one year through five years 15,417,501 15,283,963 2.11 % Due after five years through ten years 19,091,698 18,372,496 2.43 % Due after ten years and beyond 15,068,613 14,513,270
2.36 %
Total $ 67,555,856 $ 66,144,664 2.18 %
Maturities by Year atDecember 31 , Amortized
Weighted 2021 Cost Fair Value Average Yield Due in one year$ 15,758,755 $ 15,875,423 2.21
Due after one year through five years 19,349,200 19,681,599
1.80
Due after five years through ten years 19,335,034 19,832,093
2.39
Due after ten years and beyond 17,075,416 17,324,290
2.35
Total $ 71,518,405 $ 72,713,405 2.18
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
7.0 years as of
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
Gross
Estimated Gross Unrealized Number of Estimated Unrealized Number of
Fair Value Losses Securities Fair Value Losses Securities
March 31, 2022
U.S. Treasury
securities $ - $ - - $ 896,328 $ (98,208 ) 2
Corporate
securities 21,182,647 (755,757 ) 29 1,806,455 (252,497 ) 4
Agency
mortgage-backed
securities 15,248,602 (394,717 ) 37 860,650 (91,755 ) 2
Total debt
securities 36,431,249 (1,150,474 ) 66 3,563,433 (442,460 ) 8
Equity
securities 1,162,916 (103,530 ) 100 84,921 (11,312 ) 11
Total $ 37,594,165 $ (1,254,004 ) 166 $ 3,648,354 $ (453,772 ) 19
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Less than 12 Months 12 Months or Longer
Gross Gross
Estimated Unrealized Number of Estimated Unrealized
Fair Value Losses Securities Fair Value Losses Number of SecuritiesDecember 31, 2021 U.S. Treasury securities$ 481,875 $ (15,785 ) 1$ 476,016 $ (20,690 ) 1 Corporate securities 13,152,240 (128,502 ) 15 1,179,235 (68,006 ) 1 Agency mortgage-backed securities 5,086,187 (43,019 ) 8 471,479 (25,268 ) 1 Total debt securities 18,720,302 (187,306 ) 24 2,126,730 (113,964 ) 3 Equity securities 665,100 (55,156 ) 18 76,454 (4,703 ) 3 Total$ 19,385,402 $ (242,462 ) 42$ 2,203,184 $ (118,667 ) 6
The fair value of the Company's investment portfolio atMarch 31, 2022 was significantly impacted by higher market interest rates caused by the tightening of monetary policy by theFederal Reserve and the economic impact ofRussia's invasion ofUkraine . 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 ofMarch 31, 2022 , andDecember 31, 2021 , were determined to be temporary.
The fixed maturity securities previously held by the Company were sold and called prior to maturity as follows:
Three Months Ended
March 31
2022 2021
Fixed maturities securities sold
Number of securities sold - 1
Amortized cost of sold securities $ -
$ - $ 2
Fixed maturities securities called
Number of securities called 1 2
Amortized cost of called securities
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 inInsurance Company Revenues and Other Insurance Operations was$91,289 for the three months endedMarch 31, 2022 , compared to other loss of$26,212 for the three months endedMarch 31, 2021 . The increase in other income during the three months endedMarch 31, 2022 , is primarily attributable to an increase in Crusader's share of California FAIR Plan Equity of$134,598 offset by a decrease in rental income of$13,806 from the Mureau building that was sold. 44 Table Of Contents Gross commissions and fees Gross commissions and fees decreased$119,811 (-28%) to$313,650 for the three months endedMarch 31, 2022 , compared to gross commissions and fees of$433,461 for the three months endedMarch 31, 2021 . The comparison in gross commission and fee income for the three months endedMarch 31, 2022 , as compared to the three months endedMarch 31, 2021 , are as follows: Three Months Ended March 31 2022 2021 Change
Brokerage fee income
Unifax sold insurance policies for Crusader until it was put into runoff and for USIC until its contract with USIC ended onAugust 31, 2021 . Unifax continues to service the Crusader and USIC insurance policies. For these brokerage services, Unifax received 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$115,430 (-49%) in the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , due primarily to reduction in policy counts. As a result of Crusader's entering into runoff, the brokerage fee income, which is generated from production of Crusader and USIC insurance policies, is expected to gradually decrease over time. The Company does not expect any brokerage fee income in 2023. AIB markets health insurance inCalifornia through non-affiliated insurance companies for individuals and groups. For these services, AIB receives commissions based on the premiums that it writes. Commission income increased$6,966 (4%) in the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . The increase in the commissions during the three months endedMarch 31, 2022 , is due to increase in override commissions for health and life business, offset by decreases in commission income from individual, group, and other health and life policies. 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$11,347 (-61%) for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . The decrease in the membership and fee income during the three months endedMarch 31, 2022 , are due primarily to a decrease the cancellation of a few large groups.
Finance charges and fees earned
EffectiveAugust 8, 2021 , the Company decided to discontinue loan issuance through AAC. 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$38,700 (-86%) to$6,298 for the three months endedMarch 31, 2022 , compared to$44,998 in fees earned during the three months endedMarch 31, 2021 , due primarily to the discontinuation of loan issuance through AAC inAugust 2021 . During the three months endedMarch 31, 2022 , AAC issued 0 loans, and had 182 loans outstanding as ofMarch 31, 2022 . During the three months endedMarch 31, 2021 , AAC issued 231 loans and had 745 loans outstanding as ofMarch 31, 2021 . AAC provided premium financing for Crusader and USIC policies produced by Unifax inCalifornia . The Company will continue servicing existing loans through their expiration inJune 2022 . 45 Table Of Contents
Losses and loss adjustment expenses
Loss and loss adjustment expenses are the Company's largest expense item. The loss ratio, which is calculated by dividing losses and loss adjustment expenses by net earned premium, was 125% for the three months endedMarch 31, 2022 , compared to 85% for the three months endedMarch 31, 2021 . The loss ratio is expected to increase as the Company settles additional claims and net earned premium continues to decrease.
Losses and loss adjustment expenses and loss ratios are as follows:
Three Months Ended March 31
Loss Loss
2022 Ratio 2021 Ratio Change
Net earned premium$ 5,449,052 $ 6,603,760 $ (1,154,708 ) Losses and loss adjustment expenses: Provision for insured events of current year 6,121,111 112 % 6,757,564
102 % (636,453 ) Development of insured events of prior years 710,393 13 % (1,172,351 ) (17 )% 1,882,744 Total losses and loss adjustment
expenses$ 6,831,504 125 %$ 5,585,213 85 % 1,246,291 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$6,121,111 provision for insured events of current year for the three months endedMarch 31, 2022 , was$636,453 less than the$6,757,564 provision for insured events of current year for the three months endedMarch 31, 2021 , due primarily to decreases in the IBNR reserves associated with the Apartments business during the three months endedMarch 31, 2022 . The$710,393 unfavorable development of insured events of prior years for the three months endedMarch 31, 2022 , was$1,882,744 higher compared to the$1,172,351 favorable development for the three months endedMarch 31, 2021 , due primarily to increases in direct IBNR associated with the Transportation business. Crusader has received a number of COVID-19-related business interruption claims. With the exception of one claim for which the investigation is still ongoing, all 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 COVID-19. 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.
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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
The following table breaks out adverse (favorable) development from total losses
and loss adjustment expenses quarterly since
Adverse (Favorable)
Provision for Insured Development of Insured Total Losses and Loss
Events of Current Year Events of Prior Years Adjustment Expenses
Three
Months
Ended:
March 31,
2022 $ 6,121,111 $ 710,393 $ 6,831,504
December
31, 2021 6,290,918 1,160,104 7,451,022
September
30, 2021 8,017,701 (1,165,803 ) 6,851,898
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
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.
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.
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The preparation of the Company's condensed consolidated financial statements
requires that management makes an 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. The
statistics reviewed for each accident year include: 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
considered.
Policy acquisition costs
Policy acquisition costs consist of commissions, premium taxes, inspection fees,
and certain other underwriting costs that are directly related to the 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 March 31
2022 2021 Change
Policy acquisition costs $ 285,641 $ 1,021,965 $ (736,324 )
Ratio to net earned premium (GAAP ratio) 5 % 15 %
Policy acquisition costs decreased due to the cessation of underwriting
operations, which resulted in an overall decrease in the ratio for three months
ended
As a result of the runoff of Crusader, policy acquisition costs, which are related to production of Crusader insurance policies, are expected to gradually decrease over time. The Company does not expect any policy acquisition costs in 2023.
Salaries and employee benefits
Salaries and employee benefits decreased$269,686 (-24%) to$858,404 for the three months endedMarch 31, 2022 , compared to$1,128,090 for the three months endedMarch 31, 2021 . 48 Table Of Contents Salaries and employee benefits incurred and charged to operating expenses are as follows: Three Months Ended March 31 2022 2021 Change
Total salaries and employee benefits incurred
$ (340,805 ) Less: charged to losses and loss adjustment expenses (974,231 ) (567,338 ) (406,893 ) Less: capitalized to policy acquisition costs - (309,695 ) 309,695 Less: charged to IT system upgrade - (168,317 ) 168,317 Net amount charged to operating expenses$ 858,404 $ 1,128,090
$ (269,686 ) The decrease in the total salaries and employee benefits incurred for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , was due primarily to reductions in headcount of non-claims personnel, partially offset by increases in employee benefits costs as a result of higher medical insurance rates. As a result of the runoff of Crusader, salaries and employee benefits are expected to decrease over time as the Company reduces its employee headcount to adequately support the diminished operations. The decrease in the salaries and employee benefits is expected to be partially offset by costs of severance paid to terminated employees and retention bonuses paid to remaining employees.
Commissions to agents/brokers
Commissions to agents/brokers (not including commissions on Crusader and USIC policies that are reflected in policy acquisition costs) are generally related to gross commission income from the health insurance program. Commissions to agents/brokers on the health insurance program decreased$1,381 (-7%) to$19,187 for the three months endedMarch 31, 2022 , compared to$20,568 for the three months endedMarch 31, 2021 . These decreases in commissions to agents/brokers were due primarily to lower commissions associated with the loss of a large
group account. Other operating expenses Other operating expenses increased$365,981 (31%) to$1,539,460 for the three months endedMarch 31, 2022 , compared to$1,173,479 for the three months endedMarch 31, 2021 . The increases in other operating expenses for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , were primarily due to increases in legal fees to attorneys and examination fees paid toCalifornia , offset by expense savings from no longer having a rental property. Income tax expense
Income tax expense was$547,301 (16% of pre-tax loss) for the three months endedMarch 31, 2022 and income tax expense was$274,636 (-11% of pre-tax income) for the three months endedMarch 31, 2021 . As ofMarch 31, 2022 , the Company had deferred tax assets of$9,529,432 generated from$45,378,251 of federal net operating loss carryforwards that will begin to expire in 2035 and deferred tax assets of$2,458,655 generated from state net operating loss carryforwards which begin to expire in 2028. 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 periods endedMarch 31, 2022 andDecember 31, 2021 , the Company has established a full valuation allowance against all deferred tax assets in the amount of$13,049,316 and$11,939,459 , respectively, as in management's judgement they will not more-likely-than-not be realized. 49 Table Of Contents
Critical Accounting Policies and Estimates
The consolidated condensed financial statements included elsewhere in this report have been prepared in accordance with accounting principles generally accepted inthe United States which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated condensed financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies and estimates which we believe could have the most significant effect on our reported results and require subjective or complex judgments by Management is contained in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . There have been no significant changes from the information discussed therein.
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.
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