Company Quick10K Filing
Quick10K
Unico American
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$5.96 5 $32
10-Q 2019-03-31 Quarter: 2019-03-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-10 Amend Bylaw, Exhibits
8-K 2019-05-23 Shareholder Vote
8-K 2019-05-15 Earnings, Exhibits
8-K 2019-01-17 Regulation FD, Other Events, Exhibits
8-K 2018-11-15 Earnings, Exhibits
8-K 2018-08-15 Earnings, Exhibits
8-K 2018-05-24 Shareholder Vote
8-K 2018-05-15 Earnings, Exhibits
8-K 2018-04-03 Earnings, Exhibits
8-K 2018-03-20 Officers
8-K 2018-01-30 Regulation FD, Exhibits
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UNAM 2019-03-31
Part I - Financial Information
Item 1. Financial Statements
Note 1 - Summary of Significant Accounting Policies
Note 2 - Repurchase of Common Stock - Effects on Stockholders' Equity
Note 3 - Loss per Share
Note 4 - Recently Issued Accounting Standards
Note 5 - Accounting for Taxes
Note 6 - Property and Equipment, Net
Note 7 - Fair Value of Financial Instruments
Note 8 - Investments
Note 9 - Unpaid Losses and Loss Adjustment Expenses
Note 10 - Contingencies
Note 11 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex31-1.htm
EX-31.2 ex31-2.htm
EX-32.1 ex32-1.htm
EX-32.2 ex32-2.htm

Unico American Earnings 2019-03-31

UNAM 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10-q.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended March 31, 2019 or

 

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

For the transition period from ____ to ____.

 

Commission File No. 000-03978

 

UNICO AMERICAN CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

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

 

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

 

No Change

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

 

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

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

 

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

Yes X No __ 

 

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

 

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

 

Large accelerated filer __ Accelerated filer __

 

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

(Do not check if a smaller reporting company)

 

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

 

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

 

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

 

Class Outstanding at May 15, 2019
Common Stock, no par value per share 5,306,964

 

 

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UNICO AMERICAN CORPORATION

INDEX TO FORM 10-Q

 

   Page No.
Cautionary Note Regarding Forward-Looking Statements   3 
Part I - Financial Information   4 
Item 1. Financial Statements   4 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   15 
Item 3. Quantitative and Qualitative Disclosures About Market Risk   26 
Item 4. Controls and Procedures   26 
Part II - Other Information   27 
Item 1. Legal Proceedings   27 
Item 1A. Risk Factors   27 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   27 
Item 3. Defaults Upon Senior Securities   27 
Item 4. Mine Safety Disclosures   27 
Item 5. Other Information   28 
Item 6. Exhibits   28 
Signatures   28 

 

  

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

·failure to meet minimum capital and surplus requirements;
·vulnerability to significant catastrophic property loss;
·a change in accounting standards issued by the Financial Accounting Standards Board;
·ability to adjust claims accurately;
·insufficiency of loss and loss adjustment expense reserves to cover future losses;
·changes in federal or state tax laws;
·ability to realize deferred tax assets;
·ability to accurately underwrite risks and charge adequate premium;
·ability to obtain reinsurance or collect from reinsurers and or losses in excess of reinsurance limits;
·extensive regulation and legislative changes;
·reliance on subsidiaries to satisfy obligations;
·downgrade in financial strength rating by A.M. Best;
·changes in interest rates;
·investments subject to credit, prepayment and other risks;
·geographic concentration;
·reliance on independent insurance agents and brokers;
·insufficient reserve for doubtful accounts;
·litigation;
·enforceability of exclusions and limitations in policies;
·reliance on information technology systems;
·ability to prevent or detect acts of fraud with disclosure controls and procedures;
·change in general economic conditions;
·dependence on key personnel;
·ability to attract, develop and retain employees and maintain appropriate staffing levels;
·insolvency, financial difficulties, or default in performance of obligations by parties with significant contracts or relationships;
·ability to effectively compete;
·maximization of long-term value and no focus on short-term earnings expectations;
·control by a small number of shareholders;
·limited trading of stock;
·failure to maintain effective system of internal controls; and
·difficulty in effecting a change of control or sale of any subsidiaries.

Please see Part I - Item 1A – “Risk Factors” in the Company’s 2018 Annual Report on Form 10-K as filed with the U.S. Securities and Exchange Commission (“SEC”), as well as other documents we file with the SEC from time-to-time, for other important factors that could cause our actual results to differ materially from our current expectations and from the forward-looking statements discussed herein. Because of these and other risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. In addition, these statements speak only as of the date of this Form 10-Q and, except as may be required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

 

 

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PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   March 31  December 31
   2019  2018
    (Unaudited)      
ASSETS          
Investments          
Available-for-sale:          

Fixed maturities, at fair value (amortized cost : $80,847,158 a March 31, 2019, and $78,302,588 at December 31, 2018)


  $80,690,006   $76,910,137 
Held-to-maturity:          
Fixed maturities, at amortized cost (fair value: $5,878,000 at
March 31, 2019, and $7,126,000 at December 31, 2018)
   5,878,000    7,126,000 
Short-term investments, at fair value   696,792    4,690,954 
Total Investments   87,264,798    88,727,091 
Cash and cash equivalents   3,646,134    4,917,762 
Accrued investment income   510,897    393,782 
Receivables, net   4,270,133    3,933,068 
Reinsurance recoverable:          
Paid losses and loss adjustment expenses   987,019    (1,319)
Unpaid losses and loss adjustment expenses   11,679,320    9,531,602 
Deferred policy acquisition costs   3,570,780    3,489,728 
Property and equipment, net   9,788,819    9,692,325 
Deferred income taxes   4,265,529    4,375,484 
Other assets   206,160    557,443 
Total Assets  $126,189,589   $125,616,966 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
LIABILITIES          
Unpaid losses and loss adjustment expenses  $51,332,871   $51,657,155 
Unearned premiums   16,526,366    15,964,589 
Advance premium and premium deposits   342,963    234,442 
Accrued expenses and other liabilities   1,767,156    1,845,358 
Total Liabilities   $69,969,356   $69,701,544 
           
Commitments and contingencies          
           
STOCKHOLDERS'  EQUITY          
Common stock, no par value – authorized 10,000,000 shares; 5,307,103, shares issued and outstanding at March 31, 2019 and December 31, 2018  $3,772,857   $3,772,857 
Accumulated other comprehensive loss   (124,151)   (1,100,036)
Retained earnings   52,571,527    53,242,601 
Total Stockholders’ Equity  $56,220,233   $55,915,422 
           
Total Liabilities and Stockholders' Equity  $126,189,589   $125,616,966 

 

 

See notes to condensed consolidated financial statements (unaudited).

 

 

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

   Three Months Ended
      March 31
   2019  2018
REVENUES      
Insurance company operation:          
Net earned premium  $6,264,150   $7,681,628 
Investment income   532,630    444,702 
Net realized investments losses   (8,149)   —   
Other income (loss)   (260,700)   55,689 
Total Insurance Company Operation   6,527,931    8,182,019 
           
Other insurance operations:          
Gross commissions and fees   547,445    606,657 
Investment income   7    97 
Finance charges and fees earned   49,373    18,097 
Other income   10,718    21 
Total Revenues   7,135,474    8,806,891 
           
EXPENSES          
Losses and loss adjustment expenses   5,154,443    7,801,757 
Policy acquisition costs   1,086,713    1,621,505 
Salaries and employee benefits   1,027,849    1,288,078 
Commissions to agents/brokers   50,121    41,339 
Other operating expenses   628,080   866,143 
Total Expenses   7,947,206    11,618,822 
           
Loss before taxes   (811,732)   (2,811,931)
Income tax benefit   140,658    604,680 
Net Loss  $(671,074)  $(2,207,251)
           
           
           
PER SHARE DATA:          
Basic          
Loss Per Share  $(0.13)  $(0.42)
Weighted Average Shares   5,307,103    5,307,133 
           
Diluted          
Loss Per Share  $(0.13)  $(0.42)
Weighted Average Shares   5,307,103    5,307,133 

 

 

See notes to condensed consolidated financial statements (unaudited).

 

 

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

 

 

   Three Months Ended
   March 31
   2019  2018
       
Net loss  $(671,074)  $(2,207,251)
Changes in unrealized gains (losses) on securities classified as available-for-sale arising during the period, net of income tax   969,448    (895,126)
Comprehensive Income (Loss)  $298,374   $(3,102,377)

 

   

See notes to condensed consolidated financial statements (unaudited).

 

 

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

   Three Months Ended
   March 31
   2019  2018
Cash flows from operating activities:          
Net loss  $(671,074)  $(2,207,251)
Adjustments to reconcile net loss to net cash from operations:          
Depreciation and amortization   135,027    140,202 
Bond amortization, net   6,880    98,269 
Bad debt expense   2,739    128 
Net realized investment losses   8,149    —   
Changes in assets and liabilities:          
Net receivables and accrued investment income   (456,919)   533,963 
Reinsurance recoverable   (3,136,056)   (3,589,663)
Deferred policy acquisition costs   (81,052)   224,155 
Other assets   351,282    34,429 
Unpaid losses and loss adjustment expenses   (324,284)   4,837,012 
Unearned premiums   561,777    (713,923)
Advance premium and premium deposits   108,521    101,379 
Accrued expenses and other liabilities   (78,202)   (430,537)
Income taxes current/deferred   (149,458)   (607,446)
Net Cash Used by Operating Activities   (3,722,670)   (1,579,283)
           
Cash flows from investing activities:          
Purchase of fixed maturity investments   (3,573,566)   (8,160,736)
Proceeds from maturity of fixed maturity investments   1,779,271    4,837,436 
Proceeds from sale or call of fixed maturity investments   482,696    —   
Net decrease in short-term investments   3,994,162    1,647,778 
Additions to property and equipment   (231,521)   (37,739)
Net Cash Provided (Used) by Investing Activities   2,451,042    (1,713,261)
           
Cash flows from financing activities:          
Net Cash Used by Financing Activities   —      —   
           
Net decrease in cash and cash equivalents   (1,271,628)   (3,292,544)
Cash and cash equivalents at beginning of period   4,917,762    9,366,944 
Cash and Cash Equivalents at End of Period  $3,646,134   $6,074,400 
           
Supplemental cash flow information          
Cash paid during the period for:          
Interest   —      —   
Income taxes  $8,800    —   
           

 

  

See notes to condensed consolidated financial statements (unaudited).

 

 

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2019

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Unico American Corporation is an insurance holding company that underwrites property and casualty insurance through its insurance company subsidiary; provides property, casualty, and health insurance through its agency subsidiaries; and provides insurance premium financing and membership association services through its other subsidiaries. Unico American Corporation is referred to herein as the "Company" or "Unico" and such references include both the corporation and its subsidiaries, all of which are wholly owned. Unico was incorporated under the laws of Nevada in 1969.

 

Principles of Consolidation

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

 

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X for smaller reporting companies. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. Quarterly financial statements should be read in conjunction with the consolidated financial statements and related notes in the Company’s 2018 Annual Report on Form 10-K as filed with the Securities and Exchange Commission. Certain reclassifications have been made to prior period amounts to conform to current quarter presentation.

 

Use of Estimates in the Preparation of the Financial Statements

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

 

Fair Value of Financial Instruments

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

 

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

 

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

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

 

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

 

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

  

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

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

Cash Equivalents

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

 

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

On December 19, 2008, the Board of Directors authorized a stock repurchase program to acquire from time to time up to an aggregate of 500,000 shares of the Company’s common stock. This program has no expiration date and may be terminated by the Board of Directors at any time. As of March 31, 2019, and December 31, 2018, the Company had remaining authority under the 2008 program to repurchase up to an aggregate of 188,625 shares of its common stock. The 2008 program is the only program under which there is authority to repurchase shares of the Company’s common stock. The Company did not repurchase any stock during the three months ended March 31, 2019 and 2018. The Company has retired or will retire all stock repurchased.

 

NOTE 3 – LOSS PER SHARE

The following table represents the reconciliation of the Company's basic loss per share and diluted loss per share computations reported on the Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018:

   Three Months Ended March 31
   2019  2018
Basic Loss Per Share      
Net loss  $(671,074)  $(2,207,251)
           
Weighted average shares outstanding   5,307,103    5,307,133 
           
Basic loss per share  $(0.13)  $(0.42)
           
Diluted Loss per Share          
Net loss  $(671,074)  $(2,207,251)
           
Weighted average shares outstanding   5,307,103    5,307,133 
Diluted shares outstanding   5,307,103    5,307,133 
           
Diluted loss per share  $(0.13)  $(0.42)

 

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

 

NOTE 4 – RECENTLY ISSUED ACCOUNTING STANDARDS

 

Recently adopted standards

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The core principal of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, the transaction price for a contract is allocated among separately identifiable performance obligations and a portion of the transaction price is recognized as revenue when the associated performance obligation has been completed or transferred to the customer. The Company adopted ASU 2014-09 effective January 1, 2018. The adoption of ASU 2014-09 did not have a material impact to the Consolidated Statement of Operations and the Consolidated Balance Sheet.

 

 

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

 

Standards not yet adopted

 

In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 replaces the current incurred loss methodology for recognizing credit losses with a current expected credit loss model, which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 also requires enhanced disclosures for better understanding of significant estimates and judgments used in estimating credit losses. The Company is currently evaluating the effect ASU 2016-13 will have on the Company's consolidated financial statements, but expects the primary changes to be (i) the use of the expected credit loss model for its premium receivables and reinsurance recoverables and (ii) the presentation of credit losses within the available-for-sale fixed maturities portfolio through an allowance method rather than as a direct write-down. ASU 2016-13 will become effective for fiscal years beginning after December 31, 2019.

 

NOTE 5 – ACCOUNTING FOR TAXES

The Company and its wholly owned subsidiaries file consolidated federal and state income tax returns. Pursuant to a tax allocation agreement, the Company’s subsidiaries, Crusader Insurance Company (“Crusader”) and American Acceptance Corporation (“AAC”), are allocated taxes or tax credits in the case of losses, at current corporate rates based on their own taxable income or loss. The Company files income tax returns under U.S. federal and various state jurisdictions. The Company is subject to examination by U.S. federal income tax authorities for tax returns filed starting at taxable year 2015 and California state income tax authorities for tax returns filed starting at taxable year 2014. There are no ongoing examinations of income tax returns by federal or state tax authorities.

 

As of March 31, 2019, and December 31, 2018, the Company had no unrecognized tax benefits or liabilities and, therefore, had not accrued interest and penalties related to unrecognized tax benefits or liabilities. However, if interest and penalties would need to be accrued related to unrecognized tax benefits or liabilities, such amounts would be recognized as a component of federal income tax expense.

 

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

 

NOTE 6 – PROPERTY AND EQUIPMENT, NET

Property and equipment consist of the following:

   March 31  December 31
   2019  2018
       
Building  and leasehold improvements located in Calabasas, California  $8,398,275   $8,398,275 
Furniture, fixtures, and equipment   2,064,737    2,063,549 
Computer software   363,016    363,016 
Accumulated depreciation and amortization   (3,186,532)   (3,051,505)
Computer software under development   361,838    131,505 
Land located in Calabasas, California   1,787,485    1,787,485 
Property and equipment, net  $9,788,819   $9,692,325 

 

Depreciation on the Calabasas building, owned by Crusader, is computed using the straight line method over 39 years. Depreciation on furniture, fixtures, and equipment in the Calabasas building is computed using the straight line method over 3 to 15 years. Amortization of leasehold improvements in the Calabasas building is being computed using the shorter of the useful life of the leasehold improvements or the remaining years of the lease.

 

 

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Depreciation and amortization expense on all property and equipment for the three months ended March 31, 2019 and 2018 was $135,027 and $140,202, respectively.

 

For the three months ended March 31, 2019 and 2018, the Calabasas building has generated rental revenue from non-affiliated tenants in the amount of $42,230 and $85,906, respectively, which is included in “Other income” from insurance company operation in the Company’s Condensed Consolidated Statements of Operations.

 

For the three months ended March 31, 2019 and 2018, the Calabasas building incurred operating expenses (including depreciation) in the amount of $156,789 and $187,904, respectively, which are included in “Other operating expenses” in the Company’s Condensed Consolidated Statements of Operations.

 

The total square footage of the Calabasas building is 46,884, including common areas. As of March 31, 2019, 5,092 square feet of the Calabasas building was leased to non-affiliated entities and 9,389 square feet was vacant and available to be leased to non-affiliated entities.

 

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

 

NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS

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

 

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

 

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

 

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

 

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

 

The following table presents information about the Company’s consolidated financial instruments and their estimated fair values, which are measured on a recurring basis, and are allocated among the three levels within the fair value hierarchy as of March 31, 2019, and December 31, 2018:

 

 

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   Level 1  Level 2  Level 3  Total
March 31, 2019                    
Financial instruments:                    
Available-for-sale fixed maturities:                    
U.S. treasury securities
  $16,722,377   $—     $—     $16,722,377 
Corporate securities   —      41,970,507    —      41,970,507 
Agency mortgage backed securities   —      21,997,122    —      21,997,122 
Short-term investments   696,792    —      —      696,792 
Total financial instruments at fair value  $17,419,169   $63,967,629   $—     $81,386,798 
                     
                     
December 31, 2018                    
Financial instruments:                    
Available-for-sale fixed maturities:                    
U.S. treasury securities
  $16,619,619   $—     $—     $16,619,619 
Corporate securities   —      40,003,723    —      40,003,723 
Agency mortgage backed securities   —      20,286,795    —      20,286,795 
Short-term investments   4,690,954    —      —      4,690,954 
Total financial instruments at fair value  $21,310,573   $60,290,518   $—     $81,601,091 

 

Fair value measurements are not adjusted for transaction costs. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer. The Company did not have any transfers between Levels 1, 2, and 3 of the fair value hierarchy during the three months ended March 31, 2019 and 2018.

 

NOTE 8 – INVESTMENTS

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

   Three Months Ended March 31
   2019  2018
       
Fixed maturities  $543,695   $462,167 
Short-term investments and cash equivalents   26,561    7,947 
Gross investment income   570,256    470,114 
Less investment expenses   (37,619)   (25,315)
Net investment income  $532,637   $444,799 

 

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

 

   Amortized Cost  Gross Unrealized Gains  Gross Unrealized Losses  Estimated Fair Value
March 31, 2019            
Available-for-sale fixed maturities:                    
   U.S. treasury securities  $16,760,924   $35,356   $(73,903)  $16,722,377 
   Corporate securities   41,893,331    265,109    (187,933)   41,970,507 
   Agency mortgage-backed securities   22,192,903    49,701    (245,482)   21,997,122 
Held-to-maturity fixed securities:                    
   Certificates of deposits   5,878,000    —      —      5,878,000 
     Total fixed maturities  $86,725,158   $350,166   $(507,318)  $86,568,006 

 

 

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   Amortized Cost  Gross Unrealized Gains  Gross Unrealized Losses  Estimated Fair Value
December 31, 2018                    
Available-for-sale fixed maturities:                    
U.S. treasury securities  $16,746,832   $16,069   $(143,282)  $16,619,619 
Corporate securities   40,804,425    50,422    (851,124)   40,003,723 
Agency mortgage-backed securities   20,751,331    7,757    (472,293)   20,286,795 
Held-to-maturity fixed securities:                    
Certificates of deposits   7,126,000    —      —      7,126,000 
Total fixed maturities  $85,428,588   $74,248   $(1,466,699)  $84,036,137 

 

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

   March 31  December 31
   2019  2018
       
Gross unrealized gains on fixed maturities  $350,166   $74,248 
Gross unrealized losses on fixed maturities   (507,318)   (1,466,699)
Net unrealized losses on fixed maturities   (157,152)   (1,392,451)
Deferred federal tax benefit   33,001    292,415 
Net unrealized losses, net of deferred income taxes  $(124,151)  $(1,100,036)

 

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

March 31, 2019                  
U.S. treasury securities  $—     $—      —     $9,842,591   $(73,903)   7 
Corporate securities   —      —      —      25,079,280    (187,933)   32 
Agency mortgage-backed securities   —      —      —      16,815,741    (245,482)   15 
Total  $—     $—      —     $51,737,612   $(507,318)   54 

 

   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, 2018                  
U.S. treasury securities  $1,760,491   $(20,181)   2   $8,496,069   $(123,101)   6 
Corporate securities   10,878,381    (272,515)   17    21,189,487    (578,609)   27 
Agency mortgage-backed securities   —      —      —      17,034,086    (472,293)   15 
Total  $12,638,872   $(292,696)   19   $46,719,642   $(1,174,003)   48 

 

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 as of March 31, 2019, and December 31, 2018, 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 Company sold one security prior to maturity during the three months ended March 31, 2019. This security had amortized cost of $498,994. The Company realized a net investment loss of $8,149 on this sale for the three months ended March 31, 2019. The Company had no sales or calls of investment securities during the three months ended March 31, 2018. 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.

 

 

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The Company’s investment in certificates of deposit included $5,478,000 and $6,726,000 of brokered certificates of deposit as of March 31, 2019, and December 31, 2018, respectively. Brokered certificates of deposit provide the safety and security of a certificate of deposit combined with the convenience gained by one-stop shopping for rates at various institutions. This allows the Company to spread its investments across multiple institutions so that all of its certificate of deposit investments are insured by the Federal Deposit Insurance Corporation (“FDIC”).

 

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

 

   March 31  December 31
   2019  2018
       
Certificates of deposit  $200,000   $200,000 
Short-term investments   200,000    200,000 
Total state held deposits  $400,000   $400,000 

 

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

 

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

   March 31  December 31
   2019  2018
           
U.S. treasury bills  $496,792   $4,490,954 
Certificates of deposit   200,000    200,000 
Total short-term investments  $696,792   $4,690,954 

 

NOTE 9 – UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

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

 

   Three Months Ended March 31
   2019  2018
       
Reserve for unpaid losses and loss adjustment expenses at January 1 – gross of reinsurance  $51,657,155   $49,076,991 
Less reinsurance recoverable on unpaid losses and loss adjustment expenses   9,531,602    8,393,550 
Reserve for unpaid losses and loss adjustment expenses at January 1 – net of reinsurance   42,125,553    40,683,441 
           
Incurred losses and loss adjustment expenses:          
Provision for insured events of current year   4,550,888    6,009,138 
Development of insured events of prior years   603,555    1,792,619 
Total incurred losses and loss adjustment expenses   5,154,443    7,801,757 
           
Loss and loss adjustment expense payments:          
Attributable to insured events of the current year   1,158,426    1,388,589 
Attributable to insured events of prior years   6,468,019    4,752,912 
Total payments   7,626,445    6,141,501 
           
Reserve for unpaid losses and loss adjustment expenses at March 31 – net of reinsurance   39,653,551    42,343,697 
Reinsurance recoverable on unpaid losses and loss adjustment expenses   11,679,320    11,570,306 
Reserve for unpaid losses and loss adjustment expenses at March 31 – gross of reinsurance  $51,332,871   $53,914,003 

 

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Some lines of insurance are commonly referred to as "long-tail" lines because of the extended time required before claims are ultimately settled. Lines of insurance in which claims are settled relatively quickly are called "short-tail" lines. It is generally more difficult to estimate loss reserves for long-tail lines because of the long period of time that elapses between the occurrence of a claim and its final disposition and the difficulty of estimating the settlement value of the claim. Crusader’s short-tail lines consist of its property coverages, and its long-tail lines consist of its liability coverages. However, Crusader’s long-tail liability claims tend to be settled relatively quicker than other long-tail lines not underwritten by Crusader, such as workers’ compensation, professional liability, umbrella liability, and medical malpractice. Since trends develop over longer periods of time on long-tail lines of business, the Company generally gives credibility to those trends more slowly than for short-tail or less volatile lines of business.

 

NOTE 10 – CONTINGENCIES

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

 

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

 

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

 

NOTE 11 – SUBSEQUENT EVENTS

On May 13, 2019, Crusader issued a cash dividend of $2,000,000 to Unico, its parent and sole shareholder. This dividend was used primarily for general corporate purposes. Based on Crusader’s statutory surplus for the year ended December 31, 2018, the maximum dividend that could be made by Crusader to Unico without prior regulatory approval in 2019 is $5,014,826.

 

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 March 31, 2019, was $7,135,474 compared to $8,806,891 for the three months ended March 31, 2018, a decrease of $1,671,417 (19%). The Company had net loss of $671,074 for the three months ended March 31, 2019, compared to net loss of $2,207,251 for the three months ended March 31, 2018, a decrease in net loss of $1,536,177.

 

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 2018 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

 

 

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The Company’s financial performance has suffered in recent years, and the Company has reported 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 its high loss ratios, management believes that other contributing factors include (1) flat or declining revenues due to intense competition, (2) the somewhat-fixed nature of many of the Company’s expenses relative to flat or declining revenues, (3) 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 (4) the failure to have shifted focus to larger premium accounts and fee-for-service operations.

 

In 2018, the Company determined that the cost to replace its legacy IT system would be between $4 million and $8 million, and the installation of such a system would take between two to four years; so, recognizing that any corresponding benefit from such an investment would be significantly speculative and not accretive to earnings in the short term, the Company opted for a much less expensive upgrade to its legacy system, an upgrade that offers more certain and immediate benefits. That system upgrade is expected to be completed by the end of 2019. While working to bring Crusader’s loss ratios back into line with historical expectations, and to improve its sales in the markets that it historically serves, the Company’s other subsidiaries are working to generate new sources of revenue on a fee-for-service basis. For example, the Unifax operations are preparing to transact admitted and non-admitted business with non-affiliated insurers; and the Company is working to re-activate its US Risk Managers, Inc. subsidiary so it can provide claims adjustment services to non-affiliated insurers and self-insurers. The Company cannot predict the outcome of such endeavors but believes them to have a reasonable likelihood of long-term success.

 

Revenue and Income Generation

The Company receives its revenues primarily from earned premium derived from the insurance company operations, commission and fee income generated from the insurance agency operations, finance charges and fee income from the premium finance operations, and investment income from cash generated primarily from the insurance company operation. The insurance company operation generated approximately 91% and 93% of consolidated revenues for the three months ended March 31, 2019 and 2018, respectively. The Company’s remaining operations constitute a variety of specialty insurance services, each with unique characteristics and individually not material to consolidated revenues.

 

Insurance Company Operation

As of March 31, 2019, 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 business remains concentrated in California (99.8% and 99.7% of direct written premium (before reinsurance ceded) during the three months ended March 31, 2019 and 2018, respectively).

 

Crusader’s total direct written premium (direct written premium before premium ceded to reinsurers), as reported on Crusader’s statutory financial statements, was produced geographically as follows:

 

   Three Months Ended March 31
   2019  2018  Decrease
          
California  $8,515,555   $8,626,671   $(111,116)
Arizona   14,775    29,472    (14,697)
Washington   (1,149)   —      (1,149)
Total direct written premium  $8,529,181   $8,656,143   $(126,962)

 

Crusader believes that it can grow its sales and profitability through improved specialization and sales incentives. Crusader currently focuses in four underwriting verticals: (1) Transportation, (2) Food, Beverage & Entertainment, (3) Garage & Mercantile, and (4) Apartments & Commercial Buildings. Crusader 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 financial measure that is defined, under the statutory accounting practices prescribed or permitted by the California Department of Insurance, 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 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.

 

 

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The following is a reconciliation of net written premium to net earned premium (after premium ceded to reinsurers):

   Three Months Ended March 31
   2019  2018
       
Net written premium  $6,845,491   $6,904,312 
Change in direct unearned premium   (561,777)   713,923 
Change in ceded unearned premium   (19,564)   63,393 
Net earned premium  $6,264,150   $7,681,628 

 

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

 

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

   Three Months Ended March 31
         Increase
   2019  2018  (Decrease)
          
Net written premium  $6,845,491   $6,904,312   $(58,821)
Change in net unearned premium   (581,341)   777,316    (1,358,657)
Net earned premium   6,264,150    7,681,628    (1,417,478)
Less:               
Losses and loss adjustment expenses   5,154,443    7,801,757    (2,647,314)
Policy acquisition costs   1,086,713    1,621,505    (534,792)
Total underwriting expenses   6,241,156    9,423,262    (3,182,106)
Underwriting gain (loss) before income taxes  $22,994   $(1,741,634)  $(1,764,628)

 

Underwriting gain or loss before income taxes is a non-GAAP financial measure. Underwriting gain or loss before income taxes represents one measure of the pretax profitability of the insurance company operation and is derived by subtracting losses and loss adjustment expenses, and policy acquisition costs from net earned premium, which are all GAAP financial measures. Management believes disclosure of underwriting income or loss before income taxes is useful supplemental information that helps align the reader’s understanding with management’s view of insurance company operations profitability. Each of these captions is presented in the Condensed Consolidated Statements of Operations but is not subtotaled.

 

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

 

   Three Months Ended March 31
   2019  2018
       
Underwriting gain (loss) before income taxes  $22,994   $(1,741,634)
Insurance company operation revenues:          
Investment income   532,630    444,702 
Net realized investment losses   (8,149)   —   
Other income (loss)   (260,700)   55,689 
Other insurance operations revenues:          
Gross commissions and fees   547,445    606,657 
Investment income   7    97 
Finance charges and fees earned   49,373    18,097 
Other income   10,718    21 
Less expenses:          
Salaries and employee benefits   1,027,849    1,288,078 
Commissions to agents/brokers   50,121    41,339 
Other operating expenses   628,080    866,143 
Loss before taxes  $(811,732)  $(2,811,931)

 

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 did not carry a premium deficiency reserve as of March 31, 2019 and 2018.

 

 

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

   Three Months Ended March 31
   2019  2018  Decrease
          
Losses and loss adjustment expenses:               
Provision for insured events of current year  $4,550,888   $6,009,138   $(1,458,250)
Development of insured events of prior years   603,555    1,792,619    (1,189,064)
Total losses and loss adjustment expenses  $5,154,443   $7,801,757   $(2,647,314)

 

Losses and loss adjustment expenses were 82% of net earned premium for the three months ended March 31, 2019, compared to 102% of net earned premium for the three months ended March 31, 2018. For further analysis, refer to “Results of Operations.”

 

On January 17, 2019, the A.M. Best Company downgraded Crusader’s Financial Strength Rating to “B++” (Good) from “A-” (Excellent) and the Long-Term Issuer Credit Rating to “bbb+” from “a-”. The outlook of the Financial Strength Rating has been revised to stable from negative while the outlook of the Long-Term Issuer Credit Rating remains negative.  The rating downgrades reflect a revision in A.M. Best’s assessment of the company’s operating performance to adequate from strong. 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 Company rating of “A-” or higher; also, the A.M. Best Company’s changed rating of Crusader may have a negative impact on Crusader’s reputation; therefore, Crusader’s changed rating may have a negative impact on some of the Company’s revenue. The Company cannot quantify the impact that the rating change will have on its revenue, and the Company cannot determine when Crusader might regain the “A-” rating from the A.M. Best Company. The Company does not expect Crusader to regain the A.M. Best Company “A-” rating prior to January of 2021.

 

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

 

Revenues from Other Insurance Operations

The Company’s revenues from other insurance operations consist of commissions, fees, investment and other income. Excluding investment and other income, these operations accounted for approximately 7% and 9% of total revenues in the three months ended March 31, 2019 and 2018, respectively.

 

Investments

The Company generated revenues from its total invested assets of $87,431,950 (at amortized cost) and $89,676,151 (at amortized cost) as of March 31, 2019 and 2018, respectively.

 

Net investment income (net of investment expenses) included in insurance company operation and other insurance operations revenue increased $87,838 (20%) to $532,637 for the three months ended March 31, 2019, compared to $444,799 for the three months ended March 31, 2018. This increase in net investment income was due primarily to an increase in the yield on average invested assets.

 

Due to the current interest rate environment, the current target effective duration for the Company’s investment portfolio is between 3.25 and 4.75 years. As of March 31, 2019, all of the Company’s investments are in U.S. treasury securities, corporate fixed maturity securities, agency mortgage-backed securities, 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, and money market funds are readily marketable. As of March 31, 2019, the weighted average maturity of the Company’s investments was approximately 6.7 years, and the effective duration for available-for-sale investments (investments managed under the investment guidelines) was 3.18 years.

 

LIQUIDITY AND CAPITAL RESOURCES

Crusader has a significant amount of cash as a result of its holdings of unearned premium reserves, its reserves for loss and loss adjustment expense payments, and its capital and surplus. Crusader's loss and loss adjustment expense payments are the most significant cash flow requirement of the Company. These payments are continually monitored and projected to ensure that the Company has the liquidity to cover these payments without the need to liquidate its investments. Cash, cash equivalents, and investments (at amortized cost) of the Company at March 31, 2019, were $91,068,084 compared to $95,037,304 at December 31, 2018. The decrease in cash, cash equivalents, and investments (at amortized cost) from December 31, 2018, to March 31, 2019, was due primarily to timing of loss and loss adjustment expense payments. 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 March 31, 2019, and December 31, 2018, respectively.

 

 

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As of March 31, 2019 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, and short-term investments. All of the Company’s investments, except for the certificates of deposit, are readily marketable. The Company’s investments, at amortized cost, were as follows:

 

   March 31  December 31
   2019  2018
       
Fixed maturities:          
Certificates of deposit  $5,878,000   $7,126,000 
U.S. treasury securities   16,760,924    16,746,832 
Corporate securities   41,893,331    40,804,425 
Agency mortgage-backed securities   22,192,903    20,751,331 
Total fixed maturities   86,725,158    85,428,588 
Short-term investments   696,792      4,690,954 
Total investments  $87,421,950   $90,119,542 

 

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

 

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

 

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

 

Under the Company’s investment guidelines, investments may only include U.S. treasury notes, U.S. government agency notes, mortgage-backed securities (including pass through securities and collateralized mortgage obligations) that are backed by agency and non-agency collateral, commercial mortgage-backed securities, U.S. corporate obligations, asset backed securities, (including but not limited to credit card, automobile and home equity backed securities), tax-exempt bonds, preferred stocks, common stocks, commercial paper, repurchase agreements (treasuries only), mutual funds, exchange traded funds, bank certificates of deposits and time deposits. The investment guidelines provide for certain investment limitations in each investment category.

 

Unless agreed to in advance in writing by Crusader, investments in the following types of securities are prohibited:

 

    Mortgage loans, except for mortgage backed securities issued by an agency of the U.S. government.
    Derivative mortgage-backed securities including interest only, principal only and inverse floating rate securities.
    All fixed maturity real estate securities, except mortgage-backed securities (including pass through securities and collateralized mortgage obligations) that are backed by agency and non-agency collateral and commercial mortgage-backed securities.
    Options and futures contracts.
    All non-U.S. dollar denominated securities.
    Any security that would not be in compliance with the regulations of Crusader’s state of domicile.

 

An outside investment advisor manages Crusader’s investments.  The advisor’s role currently is limited to maintaining Crusader’s portfolio within the new investment guidelines and providing investment accounting services to the Company.  The investments continue to be held by Crusader’s current custodian, Union Bank Global Custody Services.

 

 

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On December 19, 2008, the Board of Directors authorized a stock repurchase program to acquire from time to time up to an aggregate of 500,000 shares of the Company’s common stock. This program has no expiration date and may be terminated by the Board of Directors at any time. As of March 31, 2019, and December 31, 2018, the Company had remaining authority under the 2008 program to repurchase up to an aggregate of 188,625 shares of its common stock. The 2008 program is the only program under which there is authority to repurchase shares of the Company’s common stock. The Company did not repurchase any stock during the three months ended March 31, 2019 and 2018. The Company has retired or will retire all stock repurchased.

 

The Company reported $3,722,670 net cash used by operating activities for the three months ended March 31, 2019, compared to $1,579,283 net cash used by operating activities for the three months ended March 31, 2018. 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 primarily due 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. 

 

While material capital expenditures may be funded through borrowings, the Company believes that its cash and short-term investments at March 31, 2019, net of statutory deposits of $710,000, and California insurance company statutory dividend restrictions applicable to Crusader, plus the cash to be generated from operations, should be sufficient to meet its operating requirements during the next 12 months without the necessity of borrowing funds.

 

RESULTS OF OPERATIONS

All comparisons made in this discussion are comparing the three months ended March 31, 2019, to the three months ended March 31, 2018, unless otherwise indicated.

 

For the three months ended March 31, 2019, total revenues were $7,135,474, a decrease of $1,671,417 (19%) compared to total revenues of $8,806,891 for the three months ended March 31, 2018. For the three months ended March 31, 2019, the Company had loss before taxes of $811,732 a decrease of $2,000,199 (71%) compared to loss before taxes of $2,811,931 for the three months ended March 31, 2018. For the three months ended March 31, 2019, the Company had net loss of $671,074, a decrease of $1,536,177 (70%) compared to net loss of $2,207,251 for the three months ended March 31, 2018.

 

The decrease in revenues of $1,671,417 for the three months ended March 31, 2019, when compared to March 31, 2018, was primarily due to a decrease in net earned premium of $1,417,478 (18%) and a $310,098 decrease in Crusader’s share of California FAIR Plan equity during the three months ended March 31, 2019, compared a $44,761 decrease during the three months ended March 31, 2018.

 

The decrease in loss before tax of $2,000,199 for the three months ended March 31, 2019, compared to the three months ended March 31, 2018, was due primarily to a decrease in losses and loss adjustment expenses of $2,647,314 (34%), a decrease in policy acquisition costs of $534,792 (33%), a decrease in salaries and employee benefits of $260,229 (20%) and a decrease in other operating expenses of $238,063 (27%), partially offset by the decrease in revenues of $1,671,417 (19%).

 

Written premium

Written premium is a required statutory measure. Direct written premium (written premium before reinsurance) reported on Crusader’s statutory financial statements decreased $126,962 (1%) to $8,529,181 for the three months ended March 31, 2019, compared to $8,656,143 for the three months ended March 31, 2018.

 

The property casualty insurance marketplace continues to be intensely competitive. While Crusader attempts to meet such competition with competitive prices, its emphasis is on service, innovation, promotion, and distribution. Crusader believes that rate adequacy is more important than premium growth and that underwriting profit (net earned premium less losses and loss adjustment expenses and policy acquisition costs) is its primary goal. Crusader believes that it can grow its sales and profitability through improved specialization and sales incentives, currently focused in four underwriting verticals: (1) Transportation, (2) Food, Beverage & Entertainment, (3) Garage & Mercantile, and (4) Apartments & Commercial Buildings.

 

 

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Direct earned premium

Direct earned premium (earned premium before reinsurance) decreased $1,402,662 (15%) to $7,967,404 for the three months ended March 31, 2019, compared to $9,370,066 for the three months ended March 31, 2018. The Company writes annual policies. Earned premium represents a portion of written premium that is recognized as income in the financial statements for the period presented and earned daily on a pro-rata basis over the terms of the policies, and, therefore, premiums earned in the current year are related to policies written during both the current year and immediately preceding year. The decrease in direct earned premium was due primarily to a decrease in direct written premium in 2018.

 

Ceded earned premium

Ceded earned premium (premium ceded to reinsurers under reinsurance treaties) increased $14,815 (1%) to $1,703,254 for the three months ended March 31, 2019, compared to $1,688,438 for the three months ended March 31, 2018. Ceded earned premium as a percentage of direct earned premium was 21% and 18% for the three months ended March 31, 2019 and 2018, respectively. The increase in the ceded earned premium as a percentage of direct earned premium for the three months ended March 31, 2019, compared to the three months ended March 31, 2018, was due primarily to higher rates on Crusader’s excess of loss reinsurance treaties.

 

Reinsurance treaties are generally structured in layers, with different negotiated economic terms and retention of participation, or liability, in each layer. In calendar year 2019, Crusader will retain 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. In calendar year 2018, Crusader retained a participation in its excess of loss reinsurance treaties of 5% 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 2019 and 2018, 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).

 

The Company 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 March 31, 2019, all such ceded contracts are accounted for as risk transfer reinsurance.

 

Net investment income

Net investment income increased $87,838 (20%) to $532,637 for the three months ended March 31, 2019, compared to $444,799 for the three months ended March 31, 2018. This increase in investment income was due primarily to increase in the yield on average invested assets. The Company realized a net investment loss of $8,149 on a sale of an investment security for the three months ended March 31, 2019. The Company had no sales or calls of investment securities during the three months ended March 31, 2018.

 

Net investment income, excluding net realized investment losses, and average annualized yields on the Company’s average invested assets are as follows:

   Three Months Ended March 31
   2019  2018
       
Average invested assets (1) - at amortized cost  $88,770,746   $88,887,525 
Net investment income:          
Insurance company operation (2)  $532,630   $444,702 
Other insurance operations   7    97 
Total investment income  $532,637   $444,799 
Annualized yield on average invested assets   2.4%   2.0%

 

(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 $37,619 of investment expense for the three months ended March 31, 2019, compared to $25,315 of investment expense for the three months ended March 31, 2018.

 

 

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

 

 

Par Value

 

Amortized Cost

 

Fair Value

 

Weighted Average Yield

             
Maturities by Year at March 31, 2019:            
Due in one year  $8,080,000   $8,079,327   $8,072,790    1.4%
Due after one year through five years   46,573,000    46,507,768    46,472,915    2.5%
Due after five years through ten years   15,568,816    15,651,310    15,710,993    3.2%
Due after ten years and beyond   16,055,199    16,486,753    16,311,308    2.8%
Total  $86,277,015   $86,725,158   $86,568,006    2.6%

 

 

 

Par Value

 

Amortized Cost

 

Fair Value

 

Weighted Average Yield

             
Maturities by Year at December 31, 2018:                    
Due in one year  $9,328,000   $9,326,886   $9,311,678    1.3%
Due after one year through five years   43,893,000    43,821,970    43,211,883    2.5%
Due after five years through ten years   15,788,408    15,876,016    15,497,513    3.2%
Due after ten years and beyond   15,964,156    16,403,716    16,015,063    2.8%
Total  $84,973,564   $85,428,588   $84,036,137    2.5%

 

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 6.7 years as of March 31, 2019, and 6.8 years as of March 31, 2018.

 

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

March 31, 2019                  
U.S. treasury securities  $—     $—      —     $9,842,591   $(73,903)   7 
Corporate securities   —      —      —      25,079,280    (187,933)   32 
Agency mortgage-backed securities   —      —      —      16,815,741    (245,482)   15 
Total  $—     $—      —     $51,737,612   $(507,318)   54 

 

   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, 2018                  
U.S. treasury securities  $1,760,491   $(20,181)   2   $8,496,069   $(123,101)   6 
Corporate securities   10,878,381    (272,515)   17    21,189,487    (578,609)   27 
Agency mortgage-backed securities   —      —      —      17,034,086    (472,293)   15 
Total  $12,638,872   $(292,696)   19   $46,719,642   $(1,174,003)   48 

 

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 as of March 31, 2019, and December 31, 2018, 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. The Company realized a net investment loss of $8,149 on a sale of an investment security for the three months ended March 31, 2019. The Company had no sales or calls of investment securities during the three months ended March 31, 2018. 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.

 

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Other income

Other income included in Insurance Company Revenues and Other Insurance Operations decreased $305,692 (549%) to $(249,982) for the three months ended March 31, 2019, compared to $55,710 for the three months ended March 31, 2018. The decrease in other income is due primarily to a $310,098 decrease in Crusader’s share of California FAIR Plan equity during the three months ended March 31, 2019, compared a $44,761 decrease during the three months ended March 31, 2018.

 

Gross commissions and fees

Gross commissions and fees decreased $59,212 (10%) to $547,445 for the three months ended March 31, 2019, compared to gross commissions and fees of $606,657 for the three months ended March 31, 2018.

 

The changes in gross commission and fee income for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, are as follows:

   Three Months Ended March 31
         Increase
   2019  2018  (Decrease)
          
Policy fee income  $298,701   $380,920   $(82,219)
Health insurance program   234,822    209,407    25,415 
Membership and fee income   13,922    16,330    (2,408)
Total  $547,445   $606,657   $(59,212)

 

Unifax sells and services insurance policies for Crusader. The commissions paid by Crusader to Unifax are eliminated as intercompany transactions and are not reflected as income in the condensed consolidated financial statements. Unifax also receives non-refundable policy fee income that is directly related to the Crusader policies it sells. For financial statement reporting purposes, policy fees are earned ratably over the life of the related insurance policy. The unearned portion of the policy fee is recorded as a liability on the Condensed Consolidated Balance Sheets under “Accrued expenses and other liabilities.” The earned portion of the policy fee charged to the policyholder by Unifax is recognized as income in the condensed consolidated financial statements. Policy fee income decreased $82,219 (22%) in the three months ended March 31, 2019, compared to the three months ended March 31, 2018, 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 $25,415 (12%) in the three months ended March 31, 2019, compared to the three months ended March 31, 2018. The increase in commission income reported in the three months ended March 31, 2019, when compared to the prior year period, is primarily a result of an increase in commission income on group health and life premiums.

 

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 $2,408 (15%) for the three months ended March 31, 2019, compared to the three months ended March 31, 2018. This decrease is primarily a result of a decrease in the number of association members enrolled in AAQHC.

 

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 increased $31,276 (173%) to $49,373 for the three months ended March 31, 2019, compared to $18,097 in fees earned during the three months ended March 31, 2018. AAC issued 473 loans and had 1,445 loans outstanding during the three months ended March 31, 2019, compared to 660 loans issued and 2,071 loans outstanding during the three months ended March 31, 2018. AAC provides premium financing only for Crusader policies produced by Unifax in California. From July 2010 to March 1, 2018, AAC offered 0% financing on policies produced by Unifax for Crusader. Effective March 1, 2018, the annual percentage rate charged by AAC on new loans increased to 4.99% from 0%. The Company believes the new interest rate is competitive and will not have a negative impact on its business.

 

Losses and loss adjustment expenses

Losses and loss adjustment expenses were 82% of net earned premium for the three months ended March 31, 2019, compared to 102% of net earned premium for the three months ended March 31, 2018.

 

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Loss ratio is calculated by dividing losses and loss adjustment expenses by net earned premium. Losses and loss adjustment expenses and loss ratios are as follows:

   Three Months Ended March 31
   2019  2019 Loss Ratio  2018  2018 Loss Ratio  Decrease
                
Net earned premium  $6,264,150        $7,681,628        $(1,417,478)
Losses and loss adjustment expenses:                         
Provision for insured events of current year   4,550,888    72%   6,009,138    78%   (1,458,250)
Development of insured events of prior years   603,555    10%   1,792,619    24%   (1,189,064)
Total losses and loss adjustment expenses  $5,154,443    82%  $7,801,757    102%  $(2,647,314)

 

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 $4,550,888 provision for insured events of current year for the three months ended March 31, 2019, was $1,458,250 lower than the $6,009,138 provision for insured events of current year for the three months ended March 31, 2018, due primarily to lower case incurred losses and loss adjustment expenses on long-tail liability claims during the three months ended March 31, 2019.

 

The $603,555 development of insured events of prior years for the three months ended March 31, 2019, was $1,189,064 lower than the $1,792,619 for the three months ended March 31, 2018, due primarily to lower incurred but not reported (“IBNR”) losses and loss adjustment expenses on long-tail liability claims during the three months ended March 31, 2019.

 

The following table breaks out adverse (favorable) development from total losses and loss adjustment expenses quarterly since March 31, 2017:

 

      

 

Provision for Insured Events of Current Year

    

Adverse Development of Insured Events of Prior Years

    

 

Total Losses and Loss Adjustment Expenses

 
                  
 Three Months Ended:                
 March 31, 2019   $4,550,888   $603,555   $5,154,443 
 December 31, 2018    5,134,166    53,997    5,188,163 
 September 30, 2018    4,840,242    798,378    5,638,620 
 June 30, 2018    4,652,240    276,963    4,929,203 
 March 31, 2018     6,009,138    1,792,619    7,801,757 
 December 31, 2017    5,330,275    808,481    6,138,756 
 September 30, 2017    5,982,245    3,935,651    9,917,896 
 June 30, 2017    5,567,142    341,532    5,908,674 
 March 31, 2017    6,497,566    2,027,615    8,525,181 

 

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 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 Company’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, the Company increases its loss and loss adjustment expense reserves immediately. However, if the claims costs that emerge are more favorable than initially anticipated, generally, the Company 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 the Company’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.

 

At the end of each fiscal quarter, the Company’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.

 

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 March 31
   2019  2018  (Decrease)
          
Policy acquisition costs  $1,086,713   $1,621,505   $(534,792)
Ratio to net earned premium (GAAP ratio)   17%   21%     

 

Policy acquisition costs decreased during the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, due primarily to the decrease in premium.

 

 

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Salaries and employee benefits

Salaries and employee benefits decreased $260,229 (20%) to $1,027,849 for the three months ended March 31, 2019, compared to $1,288,078 for the three months ended March 31, 2018.

 

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

   Three Months Ended March 31
   2019  2018  Increase
(Decrease)
          
Total salaries and employee benefits incurred  $1,831,860   $2,092,704   $(260,844)
Less: charged to losses and loss adjustment expenses   (495,028)   (430,146)   64,882 
Less: capitalized to policy acquisition costs   (308,983)   (374,480)   (65,497)
Net amount charged to operating expenses  $1,027,849   $1,288,078   $(260,229)

 

The decrease in the total salaries and employee benefits incurred for the three months ended March 31, 2019, compared to the three months ended March 31, 2018, was due primarily to a decrease in the average number of support personnel for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.

 

Commissions to agents/brokers

Commissions to agents/brokers increased $8,782 (21%) to $50,121 for the three months ended March 31, 2019, compared to $41,339 for the three months ended March 31, 2018. The increase in commissions to agents/brokers for the three months ended March 31, 2019, compared to the three months ended March 31, 2018, was due primarily to timing of payment receipts.

 

Other operating expenses

Other operating expenses decreased $238,063 (27%) to $628,080 for the three months ended March 31, 2019, compared to $866,143 for the three months ended March 31, 2018. The decrease in other operating expenses for the three months ended March 31, 2019, compared to the three months ended March 31, 2018, was due to lower costs of acquiring new employees and a number of various insignificant fluctuations.

 

Income tax benefit

Income tax benefits decreased $464,022 (77%) to $140,658 (17% of pre-tax loss) for the three months ended March 31, 2019, from an income tax benefit of $604,680 (22% of pre-tax loss) for the three months ended March 31, 2018. The decrease in income tax benefit during the three months ended March 31, 2019, when compared to three months ended March 31, 2018, was primarily due to the decrease in loss before tax of $2,000,199. The calculated tax rate for the three months ended March 31, 2019, consisted of federal tax benefit rate of 21% and a state income tax benefit rate of 0.8%. The calculated tax rate for the three months ended March 31, 2018, was comprised of a calculated federal tax benefit rate of approximately 21% while the calculated state tax expense rate was approximately 0.8%. The Company increased its valuation allowance related to deferred tax assets on federal net operating losses by $43,000 during the three months ended March, 31, 2019, thus making the effective tax rate 17%.

 

OFF-BALANCE SHEET ARRANGEMENTS

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 4. CONTROLS AND PROCEDURES

 

An evaluation was carried out by the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of March 31, 2019, as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of March 31, 2019.

 

 

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

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The Company and its subsidiaries are named from time to time as defendants in various legal actions that are incidental to its business, including those which arise out of or are related to the handling of claims made in connection with Crusader’s insurance policies. The Company establishes reserves for certain claims-related lawsuits, regulatory actions and other contingencies when the Company believes a loss is probable and is able to estimate its potential exposure. While actual losses may differ from the amounts recorded and such matters are subject to many uncertainties and outcomes that are not predictable with assurance, the Company is not aware of any currently pending or threatened legal or regulatory proceedings that, either individually or in the aggregate, it anticipates will have a material adverse effect on its consolidated financial condition, results of operations or cash flows.

 

ITEM 1A. RISK FACTORS

 

As addressed in Item 5 to Part II of this Form 10-Q, the Company is no longer a “Controlled Company” as defined in the Nasdaq Stock Market (“Nasdaq”) Listing Rules. As a result, the risk factor titled “The Company may lose its ‘Controlled Company’ status” is no longer applicable. In addition, the risk factor titled “The Company is controlled by a small number of shareholders who will be able to exert significant influence over matters requiring shareholder approval” is revised as follows:

 

The Company is controlled by a small number of shareholders who will be able to exert significant influence over matters requiring shareholder approval.

 

A small number of holders of the Company’s stock own a majority of the voting power of the Company.

Accordingly, those holders have the ability to exert significant influence on the outcome of corporate actions the Company requiring shareholder approval, including the election of directors, change of control transactions or any other significant corporate transactions. This concentration of ownership may conflict with the interests of the Company’s other shareholders.

 

Crusader is a participant in various underwriting pools and programs which have legal power to levy assessments to Crusader.

 

As an admitted insurer in several states, Crusader is obligated to participate in various underwriting pools and programs run at federal and state levels. Examples include, but not limited to, a program established by the Terrorism Risk Insurance Act of 2002 within the Department of the Treasury, California Assigned Risk Plan, California FAIR Plan, and California Insurance Guarantee Association. These underwriting pools and programs have legal powers to assets their participants for net losses sustained in these underwriting pools and programs operations. Such assessments could have an adverse effect on the Company's financial condition and results of operations.

 

There were no other material changes from risk factors as previously disclosed in the Company’s Form 10-K for the year ended December 31, 2018, in response to Item 1A to Part I of Form 10-K.

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

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ITEM 5. OTHER INFORMATION

 

On April 15, 2019, the voting agreement among Messrs. Erwin Cheldin, Cary L. Cheldin, and George C. Gilpatrick, who hold approximately 50.2% of the voting power of the Company, expired and was not replaced.  As a result, the Company is no longer a “Controlled Company” as defined in the Nasdaq Listing Rules. Effective April 15, 2019, and subject to phase-in periods, the Company is no longer exempt from the requirements of the Nasdaq Listing Rules requiring that (i) the Company have a majority of independent directors on the Board of Directors, (ii) the Compensation Committee be composed solely of independent directors, (iii) the Compensation Committee have a written charter, (iv) the compensation of the executive officers be determined by a majority of the independent directors or a compensation committee comprised solely of independent directors, and (v) director nominees be elected or recommended either by a majority of the independent directors or a nominating committee comprised solely of independent directors.

 

ITEM 6. EXHIBITS

 

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

 

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

 

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

 

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

 

 

101The following information from the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2019, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive Loss; (iv) the Condensed Consolidated Statements of Cash Flows; and (v) the Condensed Notes to Unaudited Condensed Consolidated Financial Statements.*

 

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

 

SIGNATURES

 

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

 

UNICO AMERICAN CORPORATION

 

Date: May 15, 2019 By: /s/ CARY L. CHELDIN

Cary L. Cheldin

Chairman of the Board, President and Chief

Executive Officer, (Principal Executive Officer)

 

 

Date: May 15, 2019 By: /s/ MICHAEL BUDNITSKY

Michael Budnitsky

Treasurer, Chief Financial Officer and Secretary, (Principal

Accounting and Principal Financial Officer)

 

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