10-Q 1 unam_10q.htm FORM 10-Q unam_10q.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

 

 

For the quarterly period ended September 30, 2022 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.)

 

 

 

5230 Las Virgenes Road, #100

 

 

Calabasas, California

 

91302

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (818) 591‑9800

 

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

 

 

 

Trading

 

Name of each exchange

Title of each class

 

Symbol

 

on which registered

Common Stock, No Par Value

 

UNAM

 

The 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 ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ 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

 

 

Emerging growth 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 January 19, 2023

Common Stock, no par value per share

 

5,304,863

 

 

 

 

UNICO AMERICAN CORPORATION

 

INDEX TO FORM 10-Q

 

 

 

Page No.

 

Cautionary Note Regarding Forward-Looking Statements and Industry Data

 

3

 

Part I ‑ Financial Information

 

5

 

Item 1. Financial Statements

 

5

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

24

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

45

 

Item 4. Controls and Procedures

 

45

 

Part II ‑ Other Information

 

46

 

Item 1. Legal Proceedings

 

46

 

Item 1A. Risk Factors

 

47

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

47

 

Item 3. Defaults Upon Senior Securities

 

47

 

Item 4. Mine Safety Disclosures

 

47

 

Item 5. Other Information

 

47

 

Item 6. Exhibits

 

48

 

Signatures

 

49

 

 

 
2

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

 

This Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 (“Form 10-Q”) and the documents incorporated by reference in this document, Unico American Corporation’s (“Unico” or the “Company”) press releases and oral statements made from time to time by the Company or on the Company’s behalf, may contain “forward-looking statements” within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended (“the Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In this context, forward-looking statements are not historical facts and include statements about the Company’s plans, objectives, beliefs and expectations. Forward-looking statements include statements preceded by, followed by, or that include the words “believes,” “expects,” “anticipates,” “seeks,” “plans,” “estimates,” “intends,” “projects,” “targets,” “should,” “could,” “may,” “will,” “can,” “hope,” “can have,” “likely,” the negatives thereof or similar words and expressions. These forward-looking statements are contained throughout this Form 10-Q, including, but not limited to, statements found in Part I – Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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

 

 

·

The Company may be unable to continue as a going concern.

 

·

Unico is dependent on financial support from Crusader Insurance Company (“Crusader”) to fund its operations or engage in certain strategic alternatives, and there can be no assurances that Crusader’s financial support of Unico will continue.

 

·

Crusader is subject to extensive supervision by the California Department of Insurance, (“CA DOI”) and may be subject to further regulatory action.

 

·

Crusader is subject to minimum capital and surplus requirements, and its failure to meet those requirements could subject Crusader to additional regulatory action.

 

·

The ability of the Company to retain personnel and to maintain appropriate staffing levels is critical to the Company’s success.

 

·

Failure to maintain an effective system of internal control over financial reporting and disclosure controls and procedures could lead to errors in our financial reporting and could adversely affect our business.

 

·

The Company has a history of net losses and could continue to incur substantial net losses in the future.

 

·

The Company’s success will depend on its ability to adjust claims accurately.

 

·

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

 

·

The Company does not expect to realize its deferred tax assets, which may have a materially adverse effect on the Company’s financial condition and results of operations.

 

·

The Company may be negatively impacted by emerging claim and coverage issues.

 

·

The Company’s success depends on the accuracy of its past underwriting of risks and the adequacy of the premiums charged to policyholders.

 

·

The inability to obtain reinsurance or to collect ceded losses and loss adjustment expenses could adversely affect Crusader.

 

·

The insurance business is subject to extensive regulation and such regulation may become more extensive in the future, which may adversely affect the Company’s business, financial condition, and results of operations.

 

·

The Company’s risk management framework could prove inadequate, which could adversely affect the Company.

 

·

High inflation levels may have adverse consequences.

 

·

The Company’s earnings and the value of its investment portfolio may be affected by changes in interest rates.

 

·

The Company’s investments may be subject to credit, prepayment, and other risks.

 

·

The Company’s geographic concentration ties its performance to the business, economic, and regulatory conditions in California.

 

·

The Company’s single operating location exposes it to geographic risk.

 

·

The Company’s reserve for doubtful accounts is based on estimates.

 

·

Litigation may have an adverse effect on the Company’s business.

 

·

The exclusions and limitations in the Company’s policies may not be enforceable.

 

·

The Company may find it difficult to acquire necessary data.

 

·

Cybersecurity risks, or failure of the Company’s information technology systems to operate properly and/or the failure to maintain the confidentiality, integrity, and availability of policyholder and claims data, could result in a materially adverse effect on the Company’s business, reputation, financial condition, and results of operations.

 

·

Data privacy and security laws and regulations are continuing to change.

 

·

Uncertain economic conditions may negatively affect the Company’s business and operating results.

 

·

The Company’s business is vulnerable to climate change and significant catastrophic property loss, which could have an adverse effect on its financial condition and results of operations.

 

·

The Company’s business may be adversely affected by public health threats and epidemics, including the novel coronavirus (“COVID-19”) and any variants of COVID-19.

 

·

The Company’s financial condition may be adversely affected if one or more parties that have significant contracts or relationships with the Company become insolvent, experience other financial difficulties, or default in the performance of obligations.

 

·

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

 

·

The Company’s primary goal is to maximize the long-term value of the enterprise which may sometimes conflict with short-term earnings expectations.

 

 
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·

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

 

·

Insurance laws make it difficult to effect a change of control of the Company or sale of the insurance subsidiary.

 

·

If the Company is unable to regain and maintain compliance with Nasdaq’s listing requirements, its common stock could be delisted from the Nasdaq Global Market.

 

·

Unless the Company's common stock continues to be listed on a national securities exchange, it will become subject to the so-called "penny stock" rules that impose restrictive sales price requirements.

 

·

The Company does not expect to declare or pay dividends on its common shares in the future so any returns will be limited to the value of its stock.

 

·

The trading market for the Company’s stock is relatively illiquid.

 

·

Changes in the accounting standards issued by the Financial Accounting Standards Board (“FASB”) or other standard-setting bodies may adversely affect the Company’s condensed consolidated financial statements.

 

·

Changes in federal or state tax laws could have a materially adverse effect on the Company’s financial condition and results of operations.

 

·

The Company’s disclosure controls and procedures may not prevent or detect all acts of fraud.

 

·

Changes in general economic conditions may have an adverse effect on the Company’s financial condition and results of operations.

 

·

The Company incurs significant costs as a result of operating as a public company, and its management is required to devote substantial time to related compliance initiatives.

 

Please see Part I - Item 1A – “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as amended by Amendment No. 1 on Form 10-K/A (the “2021 Form 10-K/A”) as filed with the U.S. Securities and Exchange Commission (“SEC”) on July 12, 2022 as well as other documents we file with the SEC from time-to-time, for other important factors that could cause the Company’s actual results to differ materially from the Company’s current expectations and from the forward-looking statements discussed herein. Because of these and other risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. In addition, these statements speak only as of the date of this Form 10-Q and, except as may be required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

 

 
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PART I - FINANCIAL INFORMATION

ITEM 1. -FINANCIAL STATEMENTS

 

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

 2021

 

 

 

(Unaudited)

 

 

 

ASSETS

 

Investments

 

 

 

 

 

 

Available-for-sale: Fixed maturities, at fair value (cost: $47,120,595 at September 30, 2022, and amortized cost $71,218,405 at December 31, 2021)

 

$47,120,595

 

 

$72,413,405

 

Held-to-maturity: Fixed maturities, at amortized cost (fair value: $300,000)

 

 

300,000

 

 

 

300,000

 

Equity securities, at fair value (cost: $3,532,026 at December 31, 2021)

 

 

-

 

 

 

4,131,153

 

Short‑term investments, at fair value

 

 

100,000

 

 

 

1,154,750

 

Total investments

 

 

47,520,595

 

 

 

77,999,308

 

Cash, cash equivalents, and restricted cash (restricted cash of $881,506 at September 30, 2022, and $381,942 at December 31,2021)

 

 

13,338,955

 

 

 

15,626,651

 

Accrued investment income

 

 

302,041

 

 

 

369,928

 

Receivables, net

 

 

140,117

 

 

 

1,204,013

 

Reinsurance recoverable:

 

 

 

 

 

 

 

 

Paid losses and loss adjustment expenses

 

 

552,904

 

 

 

911,566

 

Unpaid losses and loss adjustment expenses

 

 

23,293,350

 

 

 

27,116,043

 

Deferred policy acquisition costs

 

 

-

 

 

 

986,806

 

Property and equipment, net

 

 

1,608,313

 

 

 

2,154,520

 

Other assets

 

 

1,454,514

 

 

 

502,095

 

Total assets

 

$88,210,789

 

 

$126,870,930

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES

 

 

 

 

 

 

 

 

Unpaid losses and loss adjustment expenses

 

$69,828,351

 

 

$82,492,674

 

Unearned premium

 

 

84,120

 

 

 

14,331,273

 

Advance premium and premium deposits

 

 

90,889

 

 

 

102,846

 

Accrued expenses and other liabilities

 

 

296,001

 

 

 

2,266,237

 

Total liabilities

 

 

70,299,361

 

 

 

99,193,030

 

Commitments and Contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Common stock, no par value – authorized 10,000,000 shares: 5,304,863 shares issued and outstanding.

 

 

3,798,141

 

 

 

3,783,346

 

Accumulated other comprehensive income

 

 

7,947

 

 

944,050

 

Retained earnings

 

 

14,105,340

 

 

 

22,950,504

 

Total stockholders’ equity

 

 

17,911,428

 

 

 

27,677,900

 

Total liabilities and stockholders’ equity

 

$88,210,789

 

 

$126,870,930

 

 

See notes to condensed consolidated financial statements (unaudited).

 

 
5

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

 

September 30

 

 

 

September 30

 

 

 

 

2022

 

 

 

2021

 

 

 

2022

 

 

 

2021

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance company operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premium

 

$1,164,019

 

 

$7,737,622

 

 

$10,068,950

 

 

$21,309,130

 

Net investment income

 

 

236,978

 

 

 

427,244

 

 

 

947,556

 

 

 

1,470,846

 

Net realized investment (losses) gains

 

 

(4,188,007

 

 

57,173

 

 

 

(4,658,073

 

 

3,912,840

 

Net unrealized investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(losses) gains on equity securities

 

 

-

 

 

(147,722)

 

 

-

 

 

18,559

 

Other income

 

 

19,748

 

 

 

95,330

 

 

 

144,039

 

 

 

123,044

 

Total insurance company operations

 

 

(2,767,262

 

 

8,169,647

 

 

 

6,502,472

 

 

 

26,834,419

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other insurance operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross commissions and fees

 

 

237,371

 

 

 

385,548

 

 

 

777,757

 

 

 

1,234,720

 

Finance charges and fees earned

 

 

-

 

 

 

40,458

 

 

 

7,020

 

 

 

130,228

 

Other income (loss), net

 

 

1

 

 

 

(5)

 

 

1,692

 

 

 

541

 

Total revenues

 

 

(2,529,890

 

 

8,595,648

 

 

 

7,288,941

 

 

 

28,199,908

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

1,328,347

 

 

 

6,851,898

 

 

 

10,308,235

 

 

 

18,521,818

 

Policy acquisition costs

 

 

(145,899)

 

 

1,951,053

 

 

 

(353,275)

 

 

4,078,563

 

Salaries and employee benefits

 

 

26,046

 

 

1,171,944

 

 

 

1,135,918

 

 

 

3,505,665

 

Commissions to agents/brokers

 

 

12,186

 

 

 

20,022

 

 

 

56,630

 

 

 

61,024

 

Other operating expenses

 

 

1,932,357

 

 

 

1,051,350

 

 

 

4,728,960

 

 

 

3,371,952

 

Total expenses

 

 

3,153,037

 

 

 

11,046,267

 

 

 

15,876,468

 

 

 

29,539,022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before taxes

 

 

(5,682,927)

 

 

(2,450,619)

 

 

(8,587,527)

 

 

(1,339,114)

Income tax benefit (expense)

 

 

636,604

 

 

(59,579)

 

 

(257,637)

 

 

(310,191)

Net loss

 

$(5,046,323)

 

$(2,510,198)

 

$(8,845,164)

 

$(1,649,305)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PER SHARE DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per share

 

$(0.95)

 

$(0.47)

 

$(1.67)

 

$(0.31)

Weighted average shares

 

 

5,304,863

 

 

 

5,304,863

 

 

 

5,304,863

 

 

 

5,304,878

 

 

See notes to condensed consolidated financial statements (unaudited).

 

 
6

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

 

 

 

Three Months Ended September 30

 

 

Nine Months Ended September 30

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$(5,046,323)

 

$(2,510,198)

 

$(8,845,164)

 

$(1,649,305)

Other changes in comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in unrealized losses on securities classified as available-for-sale arising during the period, net of income tax

 

 

(1,118,739

)

 

 

(224,132)

 

 

(4,449,683)

 

 

(1,166,911)

Changes in unrealized losses related to securities for which an intent-to-sell impairment loss has been recorded,net of income tax

 

 

 3,513,580

 

 

 

 -

 

 

 

 3,513,580

 

 

 

 -

 

Other comprehensive income (loss), net of income tax

 

 

 2,394,841

 

 

 

 (224,132

 

 

 (936,103

 

 

 (1,166,911

Comprehensive loss, net of income tax

 

$(2,651,482)

 

$(2,734,330)

 

$(9,781,267)

 

$(2,816,216)

 

See notes to condensed consolidated financial statements (unaudited).

 

 
7

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive

 

 

 

 

 

 

 

 

 

Common

 

 

Income

 

 

Retained

 

 

Equity

 

 

 

Shares

 

 

Amount

 

 

(Loss)

 

 

Earnings

 

 

Total

 

Balance at January 1, 2021

 

 

5,304,885

 

 

$3,771,767

 

 

$2,637,347

 

 

$28,623,846

 

 

$35,032,960

 

Shares repurchased

 

 

(22)

 

 

(10)

 

 

-

 

 

 

(91)

 

 

(101)

Other comprehensive loss, net of income tax

 

 

-

 

 

 

-

 

 

 

(942,779)

 

 

-

 

 

 

(942,779)

Net Income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

860,892

 

 

 

860,892

 

Balance at June 30, 2021

 

 

5,304,863

 

 

$3,771,757

 

 

$1,694,568

 

 

$29,484,647

 

 

$34,950,972

 

Stock based compensation

 

 

-

 

 

 

11,589

 

 

 

-

 

 

 

-

 

 

 

11,589

 

Other comprehensive loss, net of income tax

 

 

-

 

 

 

-

 

 

 

(224,132)

 

 

-

 

 

 

(224,132)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,510,198)

 

 

(2,510,198)

Balance at September 30, 2021

 

 

5,304,863

 

 

$3,783,346

 

 

$1,470,436

 

 

$26,974,449

 

 

$32,228,231

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive

 

 

 

 

 

 

 

 

 

Common

 

 

Income

 

 

Retained

 

 

Equity

 

 

 

Shares

 

 

Amount

 

 

(Loss)

 

 

Earnings

 

 

Total

 

Balance at January 1, 2022

 

 

5,304,863

 

 

$3,783,346

 

 

$944,050

 

 

$22,950,504

 

 

$27,677,900

 

Other comprehensive loss, net of income tax

 

 

-

 

 

 

-

 

 

 

(3,330,944)

 

 

-

 

 

 

(3,330,944)

Stock based compensation

 

 

-

 

 

 

14,795

 

 

 

-

 

 

 

-

 

 

 

14,795

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,798,841)

 

 

(3,798,841)

Balance at June 30, 2022

 

 

5,304,863

 

 

$3,798,141

 

 

$(2,386,894)

 

$19,151,663

 

 

$20,562,910

 

Other comprehensive income, net of income tax

 

 

-

 

 

 

-

 

 

 

2,394,841

 

 

-

 

 

 

2,394,841

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,046,323)

 

 

(5,046,323)

Balance at September 30, 2022

 

 

5,304,863

 

 

$3,798,141

 

 

$7,947

 

$14,105,340

 

 

$17,911,428

 

 

See notes to condensed consolidated financial statements (unaudited).

  

 
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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 (UNAUDITED)

  

 

 

 

Nine Months Ended September 30

 

Cash flows from operating activities:

 

2022

 

 

2021

 

Net loss

 

$(8,845,164)

 

$(1,649,305)

Adjustments to reconcile net loss to net cash from operations:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

546,207

 

 

 

416,631

 

Bond amortization, net

 

 

(31,133)

 

 

(243,365)

Stock based compensation

 

 

14,795

 

 

 

11,589

 

Bad debt expense

 

 

14,011

 

 

 

(165,837)

Net realized losses (gains)

 

 

210,503

 

 

 

(218,982)

         Intent-to-sell impairment loss

 

 

4,447,570

 

 

 

-

 

         Net realized gain on real estate sale

 

 

-

 

 

 

(3,693,858

)

Net unrealized investment gains on equity securities

 

 

-

 

 

 

(18,559)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Net receivables

 

 

1,049,885

 

 

 

(300,873)

Accrued investment income

 

 

67,887

 

 

 

(35,012)

Reinsurance recoverable

 

 

4,181,355

 

 

 

(2,323,987)

Deferred policy acquisition costs

 

 

986,806

 

 

 

447,879

 

Other assets

 

 

(961,219)

 

 

(146,533)

Unpaid losses and loss adjustment expenses

 

 

(12,664,324)

 

 

3,643,386

 

Unearned premiums

 

 

(14,247,153)

 

 

4,582,109

 

Advance premium and premium deposits

 

 

(11,958)

 

 

(64,598)

Accrued expenses and other liabilities

 

 

(1,970,236)

 

 

(662,318)

Income taxes deferred/current

 

 

257,637

 

 

 

310,191

 

Net cash used by operating activities

 

 

(26,954,531)

 

 

(111,442)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of fixed maturity investments

 

 

(101,484)

 

 

(26,757,588)

Purchase of equity securities

 

 

(646,564)

 

 

(1,841,681)

Proceeds from maturity of fixed maturity investments

 

 

24,324,877

 

 

 

23,082,609

 

Proceeds from sale or call of fixed maturity investments

 

 

(4,742,462)

 

 

7,373,846

 

Proceeds from sale of equity securities

 

 

4,777,718

 

 

 

1,160,676

 

Sales (purchases) of short-term investments

 

 

1,054,750

 

 

 

(2,461,690)

Proceeds from sale of real estate held for sale

 

 

-

 

 

 

12,028,876

 

Purchase of property and equipment

 

 

-

 

 

 

(640,714)

Net cash provided by investing activities

 

 

24,666,835

 

 

 

11,944,334

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repurchase of common stock

 

 

-

 

 

 

(102)

Net cash used by financing activities

 

 

-

 

 

 

(102)

 

 

 

 

 

 

 

 

 

Net change in cash, cash equivalents and restricted cash

 

 

(2,287,696)

 

 

11,832,790

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

15,626,651

 

 

 

3,957,980

 

Cash, cash equivalents and restricted cash at end of period

 

$13,338,955

 

 

$15,790,770

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Cash Paid for Income Taxes

 

$8,800

 

 

$8,800

 

 

See notes to condensed consolidated financial statements (unaudited)

 

 
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 UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2022

 

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

Unico American Corporation (the “Company” or “Unico”) is an insurance holding company that underwrote property and casualty insurance through its insurance company subsidiary; provided property, casualty, and health insurance through its agency subsidiaries; and provided insurance premium financing and membership association services through its other subsidiaries. References to Unico or the Company include both the corporation and its subsidiaries, all of which are wholly owned. Unico was incorporated under the laws of Nevada in 1969.

 

During the quarter ended September 30, 2021, Unico took actions to cause its insurance company subsidiary, Crusader Insurance Company (“Crusader”), to enter into runoff. In connection with its runoff, Crusader began to cease writing new and renewal business and to wind down operations that support the writing of insurance policies. Effective September 30, 2021, Crusader ceased writing any new insurance policies and ceased renewing policies that were expiring after December 8, 2021. Crusader issued notices of non-renewal in accordance with the California Department of Insurance ("CA DOI") rules and regulations for its existing in-force policies to terminate such policies at the expiration of the current policy periods. In August 2021, Unico also discontinued its premium financing operations formerly conducted through its subsidiary American Acceptance Corporation (“AAC”), which activity is reflected on the Condensed Consolidated Statements of Operations under “Other insurance operations.” On August 24, 2022, the Company’s subsidiaries American Insurance Brokers, Inc., National Insurance Brokers, Inc. and Insurance Club, Inc. (collectively, the “Sellers”) each entered into an Asset Purchase Agreement (collectively, the “Agreements”) with Warner Pacific Insurance Services, Inc. (the “Purchaser”) pursuant to which the Sellers agreed to sell and the Purchaser agreed to purchase certain assets, primarily contracts, trademarks and service marks, owned by each respective Seller, subject to satisfaction of customary closing conditions (the “Asset Sale Transaction”). The Asset Sale Transaction closed on October 1, 2022. As a result of the Asset Sale Transaction, the Company received $630,000 of the aggregate purchase price at closing and $70,000 of the aggregate purchase price is being retained by the Purchaser for one year to secure claims that may arise against the Sellers under the Agreements.

 

Principles of Consolidation

 

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

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10‑Q and Rule 8-03 of Regulation S-X for smaller reporting companies. Accordingly, the condensed consolidated financial statements do not include all 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 nine months ended September 30, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The quarterly condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes in the Company’s 2021 Form 10-K/A.

 

 
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Going Concern

 

Based on Unico’s current cash and short‑term investments at September 30, 2022, as well as the other factors described herein, there is substantial doubt that Unico will have sufficient cash to meet its operating and other liquidity requirements when they become due during the next twelve months from the date of issuance of the accompanying condensed consolidated financial statements.

 

The Company prepared the accompanying condensed consolidated financial statements on a going concern basis, which assumes that it will realize its assets and satisfy its liabilities in the normal course of business. Unico has a history of recurring losses from operations and negative cash flows from its operating activities which may continue in the future, and as an insurance holding company, does not independently generate significant revenue, and is dependent on dividends and other cash distributions from Crusader and its other subsidiaries to fund its operations and expenses. Historically, Unico received dividends periodically from Crusader, but does not expect to receive any such dividends for the foreseeable future due to prohibitions on the payment of dividends imposed by the CA DOI pursuant to the Administration Supervision Agreement (the “Supervision Agreement”), dated September 7, 2021, by and between Crusader and the CA DOI and other actions by the CA DOI in its review of the financial statements of Crusader. The CA DOI advised in April 2021, that Crusader was prohibited from paying dividends during the year 2021 and for the years 2022 through 2025. Any continued financial support from Crusader will be at the discretion of the Special Examiner appointed pursuant to the Supervision Agreement (the “Special Examiner”). If the Special Examiner does not permit Crusader to continue to provide financial support to Unico, Unico will be unable to continue to fund its continued operations and expenses. The Special Examiner has recently informed Crusader that the CA DOI does not intend to continue to permit Crusader to fund certain expenses attributable to Unico’s status as a public company, including certain legal and accounting expenses without an undertaking by the Company to repay payments made on its behalf by Crusader. The Company will have an inter-company account payable to Crusader and Crusader will have an inter-company account receivable due from the Company for such payments made by Crusader and authorized by the Special Examiner. The inability of Crusader to pay certain expenses of the Company will exacerbate Unico’s lack of liquidity. Additionally, many of the potential strategic alternatives that the Unico Board of Directors is considering will also depend on continued financial support from Crusader to fund transaction expenses and other costs. If Crusader is not permitted to do so, Unico would be unable to pursue such alternatives, which may otherwise be in the best interests of its stockholders. These circumstances raise substantial doubt about Unico’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of the uncertainty of Unico’s ability to remain a going concern. Unico needs to improve its condensed consolidated operating results through expense reductions, continue to receive financial support from Crusader, and/or raise substantial additional capital to continue to fund its operations. Unico has taken actions to cause Crusader to enter into runoff and to wind down operations that support the writing of insurance policies. To address its liquidity concerns and meet its capital obligations, Unico has announced a review of strategic alternatives and, with the assistance of a financial advisor, is considering multiple alternatives, including, but not limited to, strategic financing, further scaling back, or eliminating some or all of its remaining business operations, expense reductions, reorganization, merger with another entity, filing for bankruptcy or cessation of operations. Unico is also considering a potential transaction, which is known as a loss portfolio transfer transaction. In a loss portfolio transfer transaction, Crusader would cede its loss obligations to another insurer through the transfer of assets equivalent to the reserves being transferred to that insurer. Additional consideration or premium will be required to be paid by Crusader if the loss obligations of Crusader are viewed as being greater than the reserves being transferred to the insurer. There can be no assurances that capital will be available when needed or that, if available, it will be obtained on terms favorable to the Company and its stockholders, particularly in light of the effects that the coronavirus COVID-19 pandemic and general economic conditions have had on the capital markets and investor sentiment. In addition, equity or debt financings may have a dilutive effect on the holdings of Unico’s existing stockholders, and debt financings may subject Unico to restrictive covenants, operational restrictions, and security interests in Unico’s assets. Many of these potential alternatives will also depend on continued financial support from Crusader to fund transaction expenses and other costs. If Unico becomes unable to continue as a going concern, Unico may have to dispose of or liquidate its assets and might realize significantly less than the values at which they are carried on its condensed consolidated financial statements. Additionally, Unico may have to write down some or all of its capitalized assets or liquidate some or all of its investments in a gross unrealized loss position. These actions may cause Unico’s stockholders to lose all or part of their investment in Unico’s common stock. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Supervision Agreement

 

Crusader and the CA DOI entered into the Supervision Agreement due to the CA DOI’s concerns regarding the financial stability of Crusader and the potential effects on Crusader and Crusader’s California policyholders of any potential bankruptcy of Unico. The Supervision Agreement among other things, provides for the appointment by the CA DOI of a Special Examiner to provide supervision and regulatory oversight of Crusader. The Supervision Agreement imposes limitations on Crusader’s ability to take certain actions without the prior written consent of the CA DOI Commissioner (the “Commissioner”), the Special Examiner, or the Special Examiner’s appointed representative. Among the actions that Crusader is prohibited from making without such prior written consent are the following: (i) making payments, engaging in any transaction with or entering into any agreement with, any affiliated or otherwise related person or entity if the cost to Crusader is an individual payment of more than $5,000 or aggregate payments of more than $20,000; (ii) making payments, engaging in any transaction with or entering into any agreement with, any non-affiliated or otherwise unrelated person or entity if the cost to Crusader is an individual payment of more than $5,000 or aggregate payments of more than $20,000; (iii) paying any dividend of any amount; (iv) except as provided in (i) and (ii), making any payments to or on behalf of the Company in connection with any agreement entered into between Crusader and the Company; (v) making any loans to affiliates, officers, directors, stockholders or third parties; (vi) incurring any debt, obligation or liability greater than $5,000; (vii) entering into any new reinsurance contract or treaty or amending any existing reinsurance contract or treaty; (viii) making any material changes in management and essential staffing; (ix) increasing salaries or benefits of officers or directors or making any preferential payment of bonuses or other payments considered legally preferential; and (x) making any other material changes in its normal course of operations, including but not limited to, entering into new lines of business, making major corporate reorganizations, or redomesticating from California. The Supervision Agreement provides that the Special Examiner will meet with Crusader to develop a list of recurring payments under items (i) and (ii) that may not require prior written approval. To date, the Special Examiner has permitted Crusader to provide significant financial support to Unico in the form of reimbursement and/or direct payment of certain operating and other expenses, but there can be no assurance that the Special Examiner will continue to permit Crusader to do so under the Supervision Agreement. If the Special Examiner does not continue to permit Crusader to financially support Unico in the future, Unico will be unable to continue to fund its ongoing operations.

 

On September 13, 2021, the Special Examiner advised Crusader, through its counsel, that a deficiency existed in certain funds that Unifax Insurance Systems, Inc. (“Unifax”), a subsidiary of the Company and an affiliate of Crusader, is required to maintain, in a fiduciary capacity, for Crusader’s benefit. Pursuant to the provisions of California Insurance Code (“CIC”) Sections 1733 and 1734, Unifax is required to hold premium payment funds received from policyholders as fiduciary funds in trust maintained for the benefit of Crusader. The Special Examiner informed Crusader that the CA DOI believed that the deficiency in such fiduciary funds was approximately $3,100,000 as of September 13, 2021. In January 2022, Unico, Crusader, and Unifax agreed, with the pre-approval of the Special Examiner, to transfer a computer system, owned by Unico, to Crusader. Unico contributed the computer system at its book value of $1,991,956 to Unifax, and Unifax in turn contributed the computer system to Crusader at its book value of $1,991,956 as a direct reduction in the amount due to Crusader which resulted in a dollar-for-dollar reduction in the premium trust deficiency. The amount of such deficiency was $340,907 as of September 30, 2022. The premium trust deficiency was paid to Crusader on November 18, 2022.

 

Independent Investigation

 

The Audit Committee of Unico’s Board of Directors retained independent outside counsel, who in turn engaged forensic accountants to work at their direction, to conduct an independent investigation and provide legal advice to the Audit Committee (the “Independent Investigation”), regarding the facts and circumstances relating to, and resulting in, the observed fiduciary funds deficiency. As a result of the Independent Investigation, the Company has determined that, over a period of multiple years, (i) Unifax did not comply with the requirements of the CIC to hold premium trust funds in separate accounts or segregate such funds in accordance with the CIC; (ii) the funds in question were improperly transferred to an operating account of Unifax and were subsequently transferred to a Unico operating account; and (iii) the funds in question were utilized by Unico and its consolidated subsidiaries for general corporate purposes. The Independent Investigation did not find any evidence that any of such funds had been stolen or used for non-corporate purposes.

 

Concentration of Risks

 

100% of Crusader’s gross written premium was derived from California during the three and nine months ended September 30, 2022 and 2021. As of September 30, 2022, Crusader was licensed as an admitted insurance carrier in the states of Arizona, California, Nevada, Oregon, and Washington. During the three and nine months ended September 30, 2022, 100.0% of Crusader’s business was commercial multiple peril (“CMP”) policies. During the three and nine months ended September 30, 2021, approximately 99.9% and 99.7%, respectively, of Crusader’s business was comprised of CMP policies.

 

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.)

 

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

 

 

·

Available-for-sale fixed securities, equity securities, and short-term investments – Fair values are obtained from widely accepted third party vendors.

 

·

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

 

·

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

 

·

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.

 

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 estimates in the preparation of these unaudited condensed consolidated financial statements relate to losses and loss adjustment expenses. Actual results may differ significantly from the estimates used in preparing the condensed consolidated financial statements.

 

 
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Table of Contents

 

NOTE 2 – CASH, RESTRICTED CASH AND CASH EQUIVALENTS

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows:

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Cash and cash equivalents

 

$12,457,449

 

 

$15,244,709

 

Restricted cash

 

 

881,506

 

 

 

381,942

 

Total

 

$13,338,955

 

 

$15,626,651

 

 

As of September 30, 2022 and December 31, 2021 cash, cash equivalents and restricted cash include custodial trust, bank money market accounts, and a bank savings account. Any financial instruments that are readily convertible into known amounts of cash or are so near their maturity that they present an insignificant interest rate risk are considered cash equivalents. Any certificate of deposit which matures in three months or less from the reporting date is considered a cash equivalent.

 

NOTE 3 – LOSS PER SHARE

 

The following table represents the reconciliation of the Company’s basic and diluted loss per share computations reported on the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022, and 2021:

 

 

 

Three Months Ended September 30

 

 

Nine months Ended September 30

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Basic and Diluted loss per share

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$(5,046,323)

 

$(2,510,198)

 

$(8,845,164)

 

$(1,649,305)

Weighted average shares outstanding

 

 

5,304,863

 

 

 

5,304,863

 

 

 

5,304,863

 

 

 

5,304,878

 

Basic and Diluted loss per share

 

$(0.95)

 

$(0.47)

 

$(1.67)

 

$(0.31)

 

Basic loss per share excludes the impact of common share equivalents and is based upon the weighted average common shares outstanding. Diluted loss per share utilizes 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 or losses 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. There is no difference between basic and diluted loss per share.

 

NOTE 4 – RECENTLY ISSUED ACCOUNTING STANDARDS

 

Standards not yet adopted

 

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, (“ASU 2016-13”). 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 reinsurance recoverable and (ii) the presentation of credit losses within the available-for-sale fixed maturities portfolio through an allowance method rather than as a direct write-down. ASU 2016-13 will primarily impact the Company’s available-for-sale fixed maturities portfolio and reinsurance recoverable.

 

In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses, Derivatives and Hedging, and Leases, (“ASU 2019-10”). ASU 2019-10 updated the effective date for implementing ASU 2016-13 for smaller reporting entities, and that effective date will be for fiscal years beginning after December 15, 2022. Since the Company’s fixed income portfolio is invested primarily in higher rated bonds and the reinsurance is purchased from financially strong reinsurers, the Company believes the adoption of ASU 2016-13 will not have a material impact to the Condensed Consolidated Statements of Operations and the Condensed Consolidated Balance Sheets.

 

 
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NOTE 5 – ACCOUNTING FOR TAXES

 

The Company and its subsidiaries file consolidated federal and state income tax returns. Pursuant to a tax allocation agreement, Crusader and 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 2018 and California state income tax authorities for tax returns filed starting at taxable year 2017. There are no ongoing examinations of income tax returns by federal or state tax authorities.

 

As a California insurance company, Crusader is obligated to pay a premium tax on direct written premium in all states where Crusader is admitted. The premium tax is in lieu of state franchise taxes and is not included in the provision for state taxes.

 

As of September 30, 2022 and December 31, 2021, 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 of September 30, 2022 and December 31, 2021, the Company had deferred tax assets of $10,144,183 and $8,584,487 generated from $48,305,638 and $40,878,510, respectively, of federal net operating loss carryforwards that will begin to expire in 2035 and deferred tax assets of $2,499,635 and $2,509,115 generated from state net operating loss carryforwards which begin to expire between 2028 and 2040. In connection with the preparation of its condensed consolidated financial statements, the Company performed an analysis of future income projections to determine the adequacy of the valuation allowance. In light of the net losses that were generated in recent years, for the periods ended September 30, 2022 and December 31, 2021, the Company has established a full valuation allowance against all deferred tax assets in the amount of $12,643,818 and $11,093,602, respectively, as in management’s judgement they will not more-likely-than-not be realized.

 

NOTE 6 –PROPERTY AND EQUIPMENT, NET

 

Property and equipment consist of the following:

 

 

 

 

 

 

September 30

 

 

December 31

 

 

 

2022

 

 

2021

 

Furniture, fixtures, and equipment

 

$1,168,516

 

 

$2,316,885

 

Computer software

 

 

1,861,912

 

 

 

466,892

 

Accumulated depreciation and amortization

 

 

(1,422,115)

 

 

(2,983,418)

Computer software under development

 

 

-

 

 

 

2,354,161

 

Property and equipment, net

 

$1,608,313

 

 

$2,154,520

 

 

On January 11, 2022, Crusader entered into a sublease agreement (the “Lease”) with Western General Insurance Company, in Liquidation (“Western General”) for the lease of approximately 4,199 rentable square feet of office space located at 5230 Las Virgenes Road, Suite 100, Calabasas, CA 91302 (the “Premises”). The Lease is subject and subordinate to that certain Office Lease by and between Western General and Colorado Capital Calabasas LLC, a Delaware limited liability Company, dated August 1, 2021. Crusader is using the Premises for its new corporate headquarters.

 

The term of the Lease commenced on February 1, 2022 (the “Commencement Date”) and will terminate on January 31, 2023, unless earlier terminated pursuant to the terms of the Lease and becomes month to month after the termination date. The Lease is considered a “short-term” lease as a lease term with twelve months or less that does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. Management has elected the permitted practical expedient that applies solely to short-term leases under ASC 842-Leases of not recognizing a right-of-use asset on the Company’s balance sheet and expensing the rental payments as an operating expense when incurred.

 

 
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Beginning on the Commencement Date, Crusader is obligated to make monthly rent payments in an amount of $10,539. In addition, Crusader is obligated to pay Western General its proportionate share, 5.45%, of operating expenses. Crusader was also required to deliver to Western General an initial payment of $20,539, $10,000 of which is held by Western General as a refundable security deposit.

 

In January 2022, Unico, Crusader, and Unifax agreed, with the pre-approval of the Special Examiner, to transfer a computer system, owned by Unico, to Crusader. Unico contributed the computer system at its book value of $1,991,956 to Unifax, and Unifax in turn contributed the computer system to Crusader at its book value of $1,991,956 as a direct reduction in the amount due to Crusader, which resulted in a dollar-for-dollar reduction in the premium trust deficiency. The amount of such deficiency was $340,907 as of September 30, 2022. The premium trust deficiency was paid to Crusader on November 18, 2022.

 

Depreciation on furniture, fixtures, and equipment was computed using the straight-line method over 3 to 15 years. Depreciation and amortization expense on all property and equipment for the three and nine months ended September 30, 2022, was $176,345 and $546,207, respectively, and for the three and nine months ended September 30, 2021, was $147,463 and $416,631, respectively.

 

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.

 

 
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The following table presents information about the Company’s financial instruments and their estimated fair values, which are measured on a recurring basis, and are allocated among the three levels within the fair value hierarchy as of September 30, 2022, and December 31, 2021:

 

September 30, 2022

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$3,177,903

 

 

$-

 

 

$-

 

 

$3,177,903

 

Corporate securities

 

 

-

 

 

 

28,908,704

 

 

 

-

 

 

 

28,908,704

 

Agency mortgage-backed securities

 

 

-

 

 

 

15,033,988

 

 

 

-

 

 

 

15,033,988

 

Held-to-maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposits

 

 

-

 

 

 

300,000

 

 

 

-

 

 

 

300,000

 

Equity securities

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Short-term investments

 

 

100,000

 

 

 

-

 

 

 

-

 

 

 

100,000

 

Total financial instruments at fair value

 

$3,277,903

 

 

$44,242,692

 

 

$-

 

 

$47,520,595

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$6,309,805

 

 

$-

 

 

$-

 

 

$6,309,805

 

Corporate securities

 

 

-

 

 

 

45,249,973

 

 

 

-

 

 

 

45,249,973

 

Agency mortgage-backed securities

 

 

-

 

 

 

20,853,627

 

 

 

-

 

 

 

20,853,627

 

Held-to-maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposits

 

 

-

 

 

 

300,000

 

 

 

-

 

 

 

300,000

 

Equity securities

 

 

4,131,153

 

 

 

-

 

 

 

-

 

 

 

4,131,153

 

Short-term investments

 

 

1,154,750

 

 

 

-

 

 

 

-

 

 

 

1,154,750

 

Total financial instruments at fair value

 

$11,595,708

 

 

$66,403,600

 

 

$-

 

 

$77,999,308

 

 

Fair value measurements are not adjusted for transaction costs. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer. The Company did not have any transfers between Levels 1, 2, and 3 of the fair value hierarchy during the three and nine months ended September 30, 2022 and 2021.

 

 

 
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NOTE 8 – INVESTMENTS

 

A summary of investment income, net realized gains (losses), and net unrealized investment gains (losses) on equity securities is as follows:

 

 

 

Three Months Ended September 30

 

 

Nine Months Ended September 30

 

Investment income:

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Fixed maturities

 

$329,948

 

 

$440,961

 

 

$1,054,816

 

 

$1,513,099

 

Equity securities

 

 

8,306

 

 

 

24,009

 

 

 

62,952

 

 

 

66,783

 

Short-term investments and cash equivalents

 

 

8,001

 

 

 

1,129

 

 

 

13,691

 

 

 

1,851

 

Gross investment income

 

 

346,255

 

 

 

466,099

 

 

 

1,131,459

 

 

 

1,581,733

 

Less investment expenses

 

 

(109,277)

 

 

(38,855)

 

 

(183,903)

 

 

(110,887)

Net investment income

 

 

236,978

 

 

 

427,244

 

 

 

947,556

 

 

 

1,470,846

 

Net realized investment gains (losses)

 

 

259,563

 

 

 

57,173

 

 

 

(210,503

 

 

3,912,840

 

         Intent-to-sell impairments

 

 

          (4,447,570

)

 

 

                         -

 

 

 

         (4,447,570

 

 

                        - 

 

Net unrealized investment gains (losses) on equity securities

 

 

-

 

 

(147,722)

 

 

-

 

 

18,559

 

Net investment income, realized gains, and unrealized investment gains

 

$(3,951,029

 

$336,695

 

 

$(3,710,517

 

$5,402,245

 

 

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

 

 

 

 

 

 

Gross

 

 

Gross

 

 

Estimated

 

 

 

 

 

Unrealized

 

 

Realized

 

 

Fair

 

September 30, 2022

 

Cost1

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$3,177,903

 

 

$-

 

 

$-

 

$3,177,903

 

Corporate securities

 

 

28,908,704

 

 

 

-

 

 

 

-

 

 

28,908,704

 

Agency mortgage-backed securities

 

 

15,033,988

 

 

 

-

 

 

 

-

 

 

15,033,988

 

Total Available-for-sale fixed maturities

 

 

47,120,595

 

 

 

-

 

 

 

-

 

 

47,120,595

 

Held-to-maturity fixed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposits

 

 

300,000

 

 

 

-

 

 

 

-

 

 

 

300,000

 

Total fixed maturities

 

$47,420,595

 

 

$-

 

 

$-

 

$47,420,595

 

 

(1) On September 30, 2022, the Company recorded an intent-to-sell impairment loss of $4,447,570 on its fixed maturities, available-for-sale portfolio and a new cost basis for these securities was established. 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

Estimated

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

December 31, 2021

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$6,278,764

 

 

$67,516

 

 

$(36,475)

 

$6,309,805

 

Corporate securities

 

 

44,370,193

 

 

 

1,076,288

 

 

 

(196,508)

 

 

45,249,973

 

Agency mortgage-backed securities

 

 

20,569,448

 

 

 

352,466

 

 

 

(68,287)

 

 

20,853,627

 

Total Available-for-sale fixed maturities

 

 

71,218,405

 

 

 

1,496,270

 

 

 

(301,270)

 

 

72,413,405

 

Held-to-maturity fixed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposits

 

 

300,000

 

 

 

-

 

 

 

-

 

 

 

300,000

 

Total fixed maturities

 

$71,518,405

 

 

$1,496,270

 

 

$(301,270)

 

$72,713,405

 

 

As of September 30, 2022 and December 31, 2021, five securities and six securities, respectively, were held as collateral with Comerica Bank & Trust, N. A. (“Comerica”), pursuant to the Reinsurance Trust Agreement among Crusader, United Insurance Company (“USIC”), and Comerica (the “Reinsurance Trust Agreement”) to secure payment of Crusader’s liabilities and performance of its obligations under the Reinsurance Agreement with USIC described in Note 9, Unpaid Losses and Loss Adjustment Expenses, Termination of Reinsurance Arrangement below. The estimated fair value and amortized cost of those securities was $7,612,474 and $7,612,474 and $8,243,758 and $8,162,053 on September 30, 2022 and December 31, 2021 respectively.

 

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

 

 

 

 September 30

 

 

December 31

 

 

 

 2022

 

 

2021

 

 

 

 

 

 

 

 

Gross unrealized gains on fixed maturities

 

$-

 

 

$1,496,270

 

Gross unrealized losses on fixed maturities

 

 

-

 

 

(301,270)

Net unrealized gains on fixed maturities

 

 

-

 

 

1,195,000

 

Deferred federal tax expense

 

 

-

 

 

 

(250,950)

Net unrealized gains, net of deferred income taxes

 

$-

 

$944,050

 

 

The amortized cost, estimated fair value (net of unrealized gains and losses) and weighted average yield of fixed maturity investments by contractual maturity are as follows:

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

Average

 

Maturities by Year at September 30, 2022

 

Cost(1)

 

 

Fair Value

 

 

Yield

 

Due in one year

 

$11,732,546

 

 

$11,732,546

 

 

 

1.82%

Due after one year through five years

 

 

12,343,370

 

 

 

12,343,370

 

 

 

2.68%

Due after five years through ten years

 

 

12,586,173

 

 

 

12,586,173

 

 

 

2.50%

Due after ten years and beyond

 

 

10,758,506

 

 

 

10,758,506

 

 

 

2.75%

Total

 

$47,420,595

 

 

$47,420,595

 

 

 

2.45%

 

(1) On September 30, 2022, the Company recorded an intent-to-sell impairment loss of $4,447,570 on fixed maturities, available-for-sale portfolio and a new cost basis for these securities was established.

 

 

 

 

 

 

 

 

Weighted

 

 

 

Amortized

 

 

 

 

Average

 

Maturities by Year at December 31, 2021

 

Cost

 

 

Fair Value

 

 

Yield

 

Due in one year

 

$15,758,755

 

 

$15,875,423

 

 

 

2.21%

Due after one year through five years

 

 

19,349,200

 

 

 

19,681,599

 

 

 

1.80%

Due after five years through ten years

 

 

19,335,034

 

 

 

19,832,093

 

 

 

2.39%

Due after ten years and beyond

 

 

17,075,416

 

 

 

17,324,290

 

 

 

2.35%

Total

 

$71,518,405

 

 

$72,713,405

 

 

 

2.18%

 

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties. The weighted average maturity of the Company’s fixed maturity investments was approximately 3.1 years as of September 30, 2022 and approximately 6.7 years as of December 31, 2021.

 

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 as of September 30, 2022 is not necessary as all securities were marked to their fair market value and a new cost basis established: therefore, there is no unrealized amount.  The following table is as of December 31, 2021:

 

 

 

Less than 12 Months

 

 

 

12 Months or Longer

 

 

 

 

 

 

 

Gross

 

 

Number

 

 

 

 

 

 

Gross

 

 

Number

 

 

 

Estimated

 

 

Unrealized

 

 

of

 

 

Estimated

 

 

Unrealized

 

 

of

 

December 31, 2021

 

Fair Value

 

 

Losses

 

 

Securities

 

 

Fair Value

 

 

Losses

 

 

Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Securities

 

$481,875

 

 

$(15,785)

 

 

1

 

 

$476,016

 

 

 

(20,690)

 

 

1

 

Corporate securities

 

 

13,152,240

 

 

 

(128,502)

 

 

15

 

 

 

1,179,235

 

 

 

(68,006)

 

 

1

 

Agency mortgage-backed securities

 

 

5,086,187

 

 

 

(43,019)

 

 

8

 

 

 

471,479

 

 

 

(25,268)

 

 

1

 

Total debt securities

 

 

18,720,302

 

 

 

(187,306)

 

 

24

 

 

 

2,126,730

 

 

 

(113,964)

 

 

3

 

Equity securities

 

 

665,100

 

 

 

(55,156)

 

 

18

 

 

 

76,454

 

 

 

(4,703)

 

 

3

 

Total

 

$19,385,402

 

 

$(242,462)

 

 

42

 

 

$2,203,184

 

 

$(118,667)

 

 

6

 

 

 

 
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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 Company will record an "intent-to-sell impairment" as a reduction to the amortized cost of fixed maturities, Available-For-Sale in an unrealized loss position if the Company intends to sell or it is more likely than not that the Company will be required to sell the fixed maturity before a recovery in value. A corresponding charge is recorded in net realized losses equal to the difference between the fair value and the amortized cost basis of the fixed maturity before recognizing the impairment.  For the three and nine months ended September 30, 2022, the Company recorded an intent-to-sell impairment loss of $4,447,570 as a reduction to the amortized cost of fixed maturities, available-for-sale.  The unrealized losses on all securities as of December 31, 2021 were determined to be temporary.

 

The Company may sell investment securities from time to time in response to cash flow requirements, economic, regulatory, and/or market conditions or investment securities may be called by their issuers prior to the securities’ maturity. The fixed maturity securities previously held by the Company were sold and called prior to maturity as follows:

 

 

 

Three Months Ended September 30

 

 

Nine Months Ended September 30 

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Fixed maturities securities sold

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of securities sold

 

 

2

 

 

 

-

 

 

 

2

 

 

 

3

 

Amortized cost of sold securities

 

$1,492,890

 

 

$-

 

 

$1,492,890

 

 

$2,193,393

 

Realized (losses) gains on sales

 

$(13,132

 

$-

 

 

$(13,132)

 

$710

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities securities called

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of securities called

 

 

-

 

 

 

4

 

 

 

7

 

 

 

7

 

Amortized cost of called securities

 

$-

 

 

$2,929,834

 

 

$4,194,899

 

 

$5,323,613

 

Realized gains (losses) on calls

 

$-

 

 

$166

 

 

$101

 

 

$(18,613)

 

The unrealized gains or losses from fixed maturities are reported as “Accumulated other comprehensive income or loss,” which is a separate component of stockholders’ equity, net of any deferred tax effect. The Company’s equity securities allocation was intended to enhance the return of and provide diversification for the total investment portfolio. All equity securities owned by the Company were sold in 2022. A summary of equity securities is shown below:

 

 

 

September 30

 

 

December 31

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Cost

 

$-

 

 

$3,532,026

 

Unrealized gains

 

 

-

 

 

 

599,127

 

Estimated fair value of equity securities

 

$-

 

 

$4,131,153

 

 

The Company’s investment in certificates of deposit was $300,000 as of September 30, 2022 and December 31, 2021.

 

The following securities 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 and are reported here at their fair market value.

 

 

 

 

 

 

 (Restated)

 

 

 

September 30

 

 

December 31

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

California

 

$407,765

 

 

$511,289

 

Nevada

 

 

295,938

 

 

 

302,344

 

Total state held deposits

 

$703,703

 

 

$813,633

 

 

All the Company’s brokered and non-brokered certificates of deposit are within the Federal Deposit Insurance Corporation (“FDIC”) insured permissible limits. Due to the nature of the Company’s business, certain bank accounts may exceed FDIC insured permissible limits.

 

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

 

 

 

September 30

 

 

December 31

 

 

 

2022

 

 

2021

 

Short-term bonds

 

$-

 

 

$954,750

 

Certificates of deposit

 

 

100,000

 

 

 

200,000

 

Total short-term investments

 

$100,000

 

 

$1,154,750

 

 

 
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NOTE 9 – UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

 

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

 

 

 

Nine Months Ended September

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Reserve for unpaid losses and loss adjustment expenses at January 1 – gross of reinsurance

 

$82,492,674

 

 

$74,893,509

 

Less reinsurance recoverable on unpaid losses and loss adjustment expenses

 

 

27,116,043

 

 

 

22,253,642

 

Reserve for unpaid losses and loss adjustment expenses at January 1 – net of reinsurance

 

 

55,376,631

 

 

 

52,639,867

 

Incurred losses and loss adjustment expenses:

 

 

 

 

 

 

 

 

Provision for insured events of current year

 

 

10,068,950

 

 

 

20,529,747

 

Development of insured events of prior years

 

 

239,285

 

 

 

(2,007,929)

Total incurred losses and loss adjustment expenses

 

 

10,308,235

 

 

 

18,521,818

 

Loss and loss adjustment expense payments:

 

 

 

 

 

 

 

 

Attributable to insured events of the current year

 

 

4,513,360

 

 

 

5,455,432

 

Attributable to insured events of prior years

 

 

14,636,505

 

 

 

11,663,536

 

Total payments

 

 

19,149,865

 

 

 

17,118,968

 

Reserve for unpaid losses and loss adjustment expenses at September 30 – net of reinsurance

 

 

46,535,001

 

 

 

54,042,716

 

Reinsurance recoverable on unpaid losses and loss adjustment expenses

 

 

23,293,350

 

 

 

24,494,179

 

Reserve for unpaid losses and loss adjustment expenses at September 30 – gross of reinsurance

 

$69,828,351

 

 

$78,536,895

 

 

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. The Company has reinsurance to mitigate the impact of large losses on the financial position of Crusader.

 

Termination of Reinsurance Arrangement

 

On August 31, 2021, Crusader and USIC, terminated the Quota Share Reinsurance Agreement (the “Reinsurance Agreement”) effective April 1, 2020, by and between Crusader and USIC. Pursuant to the Reinsurance Agreement, Crusader agreed to reinsure all of USIC’s liability for policies issued by USIC and produced by Unifax, for property, general liability, CMP, liability and other miscellaneous coverages, subject to certain maximum policy limits. Crusader’s obligations under the Reinsurance Agreement continue after termination but issued after termination for business in force at the time of termination, for policies with effective dates prior to the termination but issued after the termination date, and for policies that must be issued or renewed as a matter of law until the expiration of the policies.

 

On August 31, 2021, as a result of the termination of the Reinsurance Agreement, the Surplus Line Broker Agreement (the “Broker Agreement”) effective April 1, 2020, by and between Unifax and USIC, automatically terminated. Pursuant to the Broker Agreement, USIC authorized Unifax to act as its broker for the purpose of producing and administering certain specified classes of insurance policies, which are the subject of the Reinsurance Agreement. Unifax’s obligations under the Broker Agreement continue after termination for insurance business reinsured under the Broker Agreement. Unifax’s obligations including handling and servicing of all policies until their expiration.

 

On August 31, 2021, as a result of the termination of the Broker Agreement, the Claims Administration Agreement (the “Claims Administration Agreement”), effective April 1, 2020, by and between U.S. Risk and USIC, automatically terminated. Pursuant to the Claims Administration Agreement, USIC appointed U.S. Risk to adjust and settle claims on its behalf in connection with the surplus lines policies issued by USIC in connection with the Reinsurance Agreement. Upon termination of the Claims Administration Agreement, U.S. Risk is obligated (unless revoked by USIC) to continue to manage claims during the runoff of the business reinsured.

 

The Reinsurance Agreement was mutually terminated by Crusader and USIC. There were no early termination penalties incurred as a result of the termination. The Reinsurance Agreement provides for a minimum ceding fee, and, upon termination of the Reinsurance Agreement, the minimum ceding fee was pro-rated to the date of termination unless there were policies issued after the termination of the Reinsurance Agreement. In such case, the minimum ceding fee will continue past the termination of the Reinsurance Agreement until such time as no further policies are issued. USIC waived any additional ceding fees payable under the Reinsurance Agreement under the agreement to terminate that agreement.

 

 
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Table of Contents

 

Under the Reinsurance Agreement, Crusader was required to secure its obligations to USIC for unearned premium reserves, if any, and loss reserves (losses incurred and not reported and loss reported but unpaid) in a security fund, trust agreement or letter of credit to permit USIC to receive credit for the reinsurance ceded to Crusader by USIC. Such security was required because Crusader is not authorized to transact insurance in Delaware the domiciliary state of USIC. Initially, the security required to be provided by Crusader was 150% of the unearned premium and loss reserves. USIC was permitted to request additional security for the unearned premium and loss reserves in the event (i) Crusader’s A.M. Best rating is reduced; or (ii) Crusader’s A.M. Best rating is removed or withdrawn; or (iii) there is a reduction the capital and policyholder surplus of Crusader by 10% or more in any rolling 12-month period or (iv) Crusader fails to maintain its Cat excess of loss reinsurance coverage at certain levels. As of September 30, 2022 and December 31, 2021, five securities and six securities, respectively, were held as collateral with Comerica, pursuant to the Reinsurance Trust Arrangement. The estimated fair value and amortized cost of those securities was $7,612,474 and $7,612,474 and $8,243,758 and $8,162,053 on September 30, 2022 and December 31, 2021 respectively.

 

Crusader has no reinsurance recoverable balances in dispute.

 

NOTE 10 – COMMITMENTS AND CONTINGENCIES

 

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

 

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

 

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

 

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

 

Crusader has received several coronavirus-related business interruption claims. All such claims were denied after the individual circumstances of each claim were reviewed to determine whether insurance coverage applied. Like many companies in the property casualty insurance industry, Crusader was named as a defendant in lawsuits seeking insurance coverage under the policies issued by Crusader for alleged economic losses resulting from the shutdown or suspension of their businesses due to COVID-19. Although the allegations vary, the plaintiffs generally seek a declaration of insurance coverage, damages for breach of contract in unspecified amounts for claim denials, interest and attorney’s fees. Some of the lawsuits also allege that the insurance claims were denied in bad faith or otherwise in violation of state laws and seek extra-contractual or punitive damages. Only one of these suits remains active.

 

Although the policy terms vary in general, the claims at issue in these lawsuits were denied because the policyholder identified had no direct physical loss, such as fire or water damage, to property at the insured premises, and the governmental orders that led to the complete or partial shutdown of the business were not due to the existence of any direct physical loss or damage to property in the immediate vicinity of the insured premises and did not prohibit access to the insured premises, as required by the terms of the insurance policies. Depending on the individual policy, additional policy terms and conditions may also prohibit coverage, such as exclusions for pollutants, ordinance or law, loss of use, and acts or decisions. Most of Crusader’s policies also contain an exclusion for losses caused directly or indirectly by “virus or bacteria.”

 

In addition to the inherent difficulty in predicting litigation outcomes, COVID-19 business income coverage lawsuits present a number of uncertainties and contingencies that are not yet known, including how many policyholders will ultimately file claims, the number of lawsuits that will be filed, the extent to which any class may be certified, and the size and scope of any such classes. The legal theories advanced by plaintiffs vary by case.

 

On March 23, 2021, ten policyholders sued Crusader in a putative class action entitled Anchors & Whales LLC et al. v. Crusader Insurance Company, Superior Court of the State of California for the County of San Francisco (CGC-21-590999). The action alleged that Crusader wrongly denied claims for business interruption coverage made by bars and restaurants related to COVID-19 and related government orders that limited or halted operations of bars and restaurants. The action further alleged that Crusader acted unreasonably in denying the claims, and it sought as damages the amounts allegedly due as contract benefits under the insurance policies, attorneys’ fees and costs, punitive damages, and other unspecified damages. The lawsuit alleged a putative class of all bars and restaurants in California that were insured by Crusader for loss of business income, who made such a claim as a result of “one or more Governmental Orders and the presence of the COVID-19 virus on the property,” and whose claim was denied by Crusader. On October 1, 2021, Crusader was granted its motions on the pleadings without leave to amend and the lawsuit was dismissed. On December 15, 2021, Anchors & Whales LLC filed a notice of appeal with California Court of Appeals, 1st Appellate District, Division 2 (A164412). Crusader has filed a respondent brief and plaintiffs have filed their reply brief.  The appeals court will schedule oral arguments, but there is no definite time frame for the court to do so.  Counsel opines that this will occur with the next six months. The Company cannot predict whether the action of the Superior Court in dismissing the lawsuit against Crusader without leave to amend will be affirmed by the actions of the Court of Appeals.

 

 
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Crusader has no claims related to civil unrest through September 30, 2022 or as of the date of this report.

 

On May 9, 2022, Donald Esparza filed an action in the Superior Court of California, County of Los Angeles, against the Company, Michael Budnitsky and Steven L. Shea (22VECV00627) relating to the termination of the employment of Mr. Esparza by the Company. The action was entitled Donald Esparza v. Unico American Corporation, Michael Budnitsky and Stephen Shea. The action alleged that the Company (i) failed to timely pay wages upon termination of employment in violation of the California Labor Code (ii) failed to provide accurate itemized wage statements in violation of the California Labor Code (iii) violated the California unfair competition law by the forgoing alleged violations of the California Labor Code; and (iv) failure to provide the personnel file of Mr. Esparza after written demand in violation of the California Labor Code. The action sought general and statutory damages, including without limitation lost wages, back pay, front pay, and lost earning capacity; special damages, statutory penalties and other relief, including reasonable attorneys’ fees. The employment of Mr. Esparza, a former officer, director and employee of Crusader, was terminated in connection with a reduction in force of employees in connection with the runoff of Crusader. Defendant Budnitsky is a former officer of the Company and Crusader. Defendant Shea is the current Chairman of the Board, President and Chief Executive Officer of the Company and Crusader. In August 2022, the Company and Mr. Esparza settled all claims in a confidential settlement releasing the Company of any further claims.

 

As a property and casualty insurance company, Crusader is subject to Risk Based Capital (“RBC”) requirements. RBC is a method developed by the National Association of Insurance Commissioners (“NAIC”) and adopted in the CIC to determine the minimum amount of statutory capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. The RBC requirements require Crusader to report the results of RBC calculations to the CA DOI, as its domiciliary insurance regulator, and the NAIC. If Crusader fails to meet certain standards related to its RBC Authorized Control Level and its RBC total adjusted capital standards and requirements, the CA DOI may require specified actions to be taken, which could have a material and adverse impact on the Company’s competitiveness, operational flexibility, and operations. Crusader’s adjusted capital at December 31, 2021 and 2020, was 214% and 278%, respectively, of the authorized control level RBC, which is less than the required 300%.

 

As of December 31, 2021, and December 31, 2020, Crusader’s RBC Level was less than 300% of its Authorized Control Level RBC, and its statutory accounting basis combined ratio was in excess of 120% for the years then ended. The RBC Level when coupled with the statutory accounting basis combined ratio triggered Company Action Level Events under the RBC for the years then ended. On March 24, 2021, Crusader submitted to the CA DOI a comprehensive Risk Based Capital Plan (the “RBC Plan”) to increase the adjusted capital above 300% and to address the actions that Crusader would take to correct the conditions that resulted in the Company Action Level Event. The CA DOI found the RBC Plan to be deficient and requested that a revised RBC Plan be submitted. On July 2, 2021, the Company submitted a revised RBC Plan, which addressed issues raised by the CA DOI (the “2021 Revised RBC Plan”). No action was taken by the CA DOI regarding the 2021 Revised RBC Plan. As of December 31, 2021, a second Company Action Event occurred. At December 31, 2021, Crusader’s RBC Level was less than 300%, with a combined ratio greater than 130%, which resulted in another Company Action Level event (the “2022 Company Action Level Event”). As a result of the 2022 Company Action Level Event, Crusader was required to submit another comprehensive Risk Based Capital Plan (“2022 RBC Plan”) to the CA DOI. Crusader submitted its 2022 RBC Plan on May 15, 2022. On June 9, 2022, the CA DOI requested additional information regarding the 2022 RBC Plan, which information was submitted on August 24, 2022. On September 27, 2022, the CA DOI requested additional information on the 2022 RBC Plan, which information was submitted on October 13, 2022. The CA DOI may accept Crusader’s revised 2022 RBC Plan to correct the conditions that lead to the 2022 Company Action Event, or it may request that an additional revised plan be submitted, or it may take no action with respect to the 2022 RBC Plan. Depending on the scope and nature of any such requests from the CA DOI, regarding the 2022 RBC Plan the Company and Crusader may not be able to implement certain corrective actions. The Company continues to be engaged in discussions with the CA DOI on various strategic alternatives to address the RBC issues, including a potential loss portfolio transfer by Crusader. On December 30, 2022 Crusader supplemented its 2022 RBC Plan to address the changes in its investment portfolio and decrease in its statutory policyholder surplus at September 30, 2022.

 

On September 22, 2022, Unico received written notice from Nasdaq stating that the Company is not in compliance with the requirement of a minimum Market Value of Publicly Held Shares (“MVPHS”) of $5,000,000 for continued listing on the Nasdaq Global Market, as set forth in Nasdaq Listing Rule 5450(b)(1)(C). Nasdaq calculates MVPHS by subtracting from the total shares of common stock outstanding any shares held by officers, directors or any person who beneficially owns more than 10% of the total shares outstanding. The notice has no immediate effect on the listing of the Company’s common stock, and its common stock will continue to trade on the Nasdaq Global Market under the symbol “UNAM” at this time. In accordance with Nasdaq Listing Rule 5810(c)(3)(D), the Company has a period of 180 calendar days, or until March 21, 2023, to regain compliance with the minimum MVPHS requirement. To regain compliance, the minimum MVPHS of the Company’s common stock must meet or exceed $5,000,000 for at least ten consecutive business days during this 180-calendar day compliance period.

 

If the Company does not regain compliance with the minimum MVPHS requirement by March 21, 2023, Nasdaq will provide written notification to the Company that its securities are subject to delisting. Alternatively, the Company may consider applying to transfer the Company’s securities to the Nasdaq Capital Market which has a minimum MVPHS requirement of $1,000,000, provided that the Company meets the Nasdaq Capital Market’s continued listing requirements.

 

NOTE 11 – PROFIT SHARING PLAN

 

The Unico American Corporation Profit Sharing Plan (“Plan”) covers Company’s employees who are at least 21 years of age and have met certain service and eligibility requirements. Unico American Corporation is the Plan sponsor and the Plan administrator. Fidelity Management Trust Company is the Plan trustee. The Plan is intended to be a qualified retirement plan under the Internal Revenue Code. Under the Plan, participants have the option to elect to make 401(k) and Roth 401(k) deferral contributions that are matched at up to 4%. In addition, pursuant to the terms of the Plan, the Company may contribute a discretionary profit-sharing amount to participants as determined by the Board of Directors. The Plan was modified in 2022 and beginning in 2023 the Company will no longer make this optional contribution. Participants are eligible to request a distribution of their account balance upon death, retirement, minimum required distributions, and termination of employment. The Company modified the Plan so that all the participants immediately vested in their plan at December 31, 2021. Contributions to the Plan for fiscal year end December, 31, 2021 were $171,205 . The Company contributed $71,421 in profit-sharing for the 2021 Plan year, which was paid to eligible employees in April 2022.

 

 
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NOTE 12 – INCENTIVE STOCK PLANS AND STOCK BASED COMPENSATION

 

The Company’s 2021 Equity Incentive Plan (the “Equity Incentive Plan”) covers 500,000 shares of Unico’s common stock (subject to adjustment in the case of merger, consolidation, reorganization, recapitalization, stock split, reverse stock split, split up, spin-off, combination of shares, exchange of shares, stock dividend, dividend in kind, etc.) and was approved by Unico’s stockholders on May 27, 2021. The Equity Incentive Plan provides for the grant of the following equity-based incentive awards to participants: (i) non-qualified stock options, (ii) stock appreciation rights, (iii) restricted stock, (iv) restricted stock units and (v) other stock-based awards. Through the date of this Form 10-Q there have been 44,250 non-qualified stock options granted and 48,000 restricted stock grants under the Equity Incentive Plan, of which none were vested and exercisable as of September 30, 2022.

 

The exercise price, term and other conditions applicable to each non-qualified stock option and restricted stock granted under the Equity Incentive Plan are determined by the Company’s Compensation Committee of the Board of Directors. The exercise price of the stock options is set on the grant date and may not be less than the fair market value per share of the Company’s stock on that date (at market close). The non-qualified stock options granted under the Equity Incentive Plan in 2021 vest 25% on the first anniversary of the grant date and 25% annually thereafter on the anniversary date and expire four years after the date of the grant. The restricted stock grants granted under the Equity Incentive Plan in 2021 vest 100% on the fourth anniversary of the grant date.

 

The Company recognized stock-based compensation expense in the amount of $14,795 for all awards issued under the Equity Incentive Plan in the “Salaries and employee benefits” line item in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2022. $11,589 in stock-based compensation expense was recognized for the nine months ended September 30, 2021.

 

The fair value of each option award is estimated on the date of the grant using the Black-Scholes Option-Pricing Model using a number of complex and subjective variables. These variables include expected stock price volatility over the term of the awards, a risk-free interest rate and expected dividends.

 

Expected dividend yield is based on the historical dividend behavior as well as the expected dividend behavior of the Company. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve for a 30-day treasury in effect at the time of grant. The expected term represents an estimate of time the options are expected to remain outstanding. In accordance with ASC Topic 718, “Compensation – Stock Compensation,” the Company estimates forfeitures at the time of the grant and revises those estimates in subsequent periods if the actual forfeitures differ from those estimates.

 

 

The following table summarizes non-qualified stock option and restricted stock grants activity for nine months ended September 30, 2022:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted

 

 

Remaining

 

 

 

 

 

Number

 

 

Average

 

 

Contractual

 

 

Aggregate

 

 

 

of

 

 

Exercise

 

 

Term

 

 

Intrinsic

 

 

 

Shares

 

 

Price

 

 

(in years)

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2022

 

 

36,250

 

 

 

4.52

 

 

 

3.48

 

 

 

-

 

Non-qualified stock option granted

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Restricted stock granted

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Forfeited or expired

 

 

(12,000)

 

 

4.52

 

 

 

-

 

 

 

-

 

Exercised

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Outstanding at September 30, 2022

 

 

24,250

 

 

$4.52

 

 

 

2.72

 

 

 

-

 

Exercisable at September 30, 2022

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price and the exercise price, multiplied by the number of in the money options) that would have been received by the option holders had all options been exercised on September 30, 2022.

 

No options or restricted stock were granted to employees or non-employees during the nine months ended September 30, 2022. Unrecognized compensation cost was $47,737 at September 30, 2022 and is expected to be recognized over a weighted-average period of 2.72 years. Compensation expense is reversed as options are forfeited. 24,250 options were outstanding at September 30, 2022, and 500,000 shares of the Company’s common stock were available under the Equity Incentive Plan.

 

NOTE 13 – SUBSEQUENT EVENTS

 

The Company evaluated subsequent events and transactions for potential recognition or disclosure through the date the condensed consolidated financial statements were filed. Except as disclosed elsewhere and below, no events have occurred subsequent to September 30, 2022, requiring disclosure or recording in the condensed consolidated financial statements.

 

On August 24, 2022, the Company’s subsidiaries American Insurance Brokers, Inc., National Insurance Brokers, Inc. and Insurance Club, Inc. (collectively, the “Sellers”) each entered into an Asset Purchase Agreement (collectively, the “Agreements”) with Warner Pacific Insurance Services, Inc. (the “Purchaser”) pursuant to which the Sellers agreed to sell and the Purchaser agreed to purchase certain assets, primarily contracts, trademarks and service marks, owned by each respective Seller, subject to satisfaction of customary closing conditions (the “Asset Sale Transaction”). The Asset Sale Transaction closed on October 1, 2022. As a result of the Asset Sale Transaction, the Company received $630,000 of the aggregate purchase price at closing and $70,000 of the aggregate purchase price is being retained by the Purchaser for one year to secure claims that may arise against the Sellers under the Agreements 

  

On November 18, 2022, the premium trust deficiency of Unifax to Crusader was paid in the amount of $340,907 and the premium trust deficiency was eliminated.

 

On November 22, 2022, Unico American Corporation (the “Company”) received a notice from Nasdaq (the “Notice”) notifying the Company that, because its Quarterly Report on Form 10-Q for the period ended September 30, 2022 has not been filed with the Securities and Exchange Commission by the required due date of November 14, 2022, the Company is not in compliance with the periodic filing requirements for continued listing set forth in Nasdaq Listing Rule 5250(c)(1) (the “Rule”).

 

Under the Nasdaq rules, the Company has 60 calendar days from receipt of the Notice to submit a plan to regain compliance with the Rule. However, there can be no assurance that Nasdaq will accept the Company’s plan to regain compliance or that the Company will be able to regain compliance within the extension period granted by Nasdaq. If Nasdaq does not accept the Company’s plan, then the Company will have the opportunity to appeal that decision to a Nasdaq hearings panel. The Notice received from Nasdaq has no immediate effect on the listing or trading of the Company’s shares. However, if the Company fails to timely regain compliance with the Rule, the Company’s securities will be subject to delisting from Nasdaq.

 

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

 

OVERVIEW

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide an understanding of the Company’s financial condition and results of operations by focusing on changes in certain key measures quarter over quarter. This MD&A should be read in conjunction with the Company’s 2021 Form 10-K/A, plus the condensed consolidated financial statements and notes thereto. This discussion contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed elsewhere in this Form 10-Q. The results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results expected for the year ending December 31, 2022.

 

General

 

Unico American Corporation is an insurance holding company. Crusader Insurance Company (“Crusader”), Unico’s insurance company subsidiary, underwrote commercial property and casualty insurance. The Company’s subsidiaries Unifax Insurance Systems, Inc. (“Unifax”) and American Insurance Brokers, Inc., (“AIB”)  provided marketing and provided various underwriting support services related to property, casualty, health and life insurance. The Company’s subsidiary American Acceptance Corporation (“AAC”) provided insurance premium financing, and the Company’s subsidiary Insurance Club, Inc., dba AAQHC, an Administrator (“AAQHC”) provides membership association services. The Company’s subsidiary U.S. Risk Manager’s Inc. (“U.S. Risk”) provides claims adjustment services. Unico American Corporation is referred to herein as the “Company” or “Unico” and such references include both the corporation and its subsidiaries, all of which are wholly owned. Unico was incorporated under the laws of Nevada in 1969.

 

In connection with the Company’s previously announced review of strategic alternatives, during the quarter ended September 2021, Unico took actions to cause Crusader to enter into runoff. In connection with its runoff, Crusader began to cease writing new and renewal business and to wind down operations that support the writing of insurance policies. Effective September 30, 2021, Crusader ceased writing any new insurance policies and no longer renewed policies subsequent to December 8, 2021. Crusader has issued notices in accordance with the CA DOI rules and regulations of non-renewal for its existing in-force policies to terminate such policies at the expiration of the current policy periods. Crusader continues to provide services to existing insurance policyholders and claimants during its runoff. Actions to wind down operations that support the writing of new insurance policies and the issuance of renewal insurance policies began immediately, and the servicing operations will be adjusted over time to support business requirements including the retention of the necessary staff. In August 2021, Unico also discontinued its premium financing operations formerly conducted through AAC, which activity is reflected on the Condensed Consolidated Statement of Operations under “Other insurance operations.” On August 24, 2022, the Company’s subsidiaries American Insurance Brokers, Inc., National Insurance Brokers, Inc. and Insurance Club, Inc. (collectively, the “Sellers”) each entered into an Asset Purchase Agreement (collectively, the “Agreements”) with Warner Pacific Insurance Services, Inc. (the “Purchaser”) pursuant to which the Sellers agreed to sell and the Purchaser agreed to purchase certain assets, primarily contracts, trademarks and service marks, owned by each respective Seller, subject to satisfaction of customary closing conditions (the “Asset Sale Transaction”). The Asset Sale Transaction closed on October 1, 2022. As a result of the Asset Sale Transaction, the Company received $630,000 of the aggregate purchase price at closing and $70,000 of the aggregate purchase price is being retained by the Purchaser for one year to secure claims that may arise against the Sellers under the Agreements

   

Total revenues for the three months ended September 30, 2022, were ($2,529,890) compared to $8,595,648 for the three months ended September 30, 2021, a decrease of $11,125,538 (-129%). Total revenues for the nine months ended September 30, 2022, were $7,288,941 compared to $28,199,908 for the nine months ended September 30, 2021, a decrease of $20,910,967 (-74%). The decrease in revenue was attributable to a decrease in the net earned premium as Crusader’s operations are now in runoff and intent-to-sell impairment losses.  Additionally, included in 2021 revenue is a $3,693,858 gain realized in February 2021 on the sale of the building previously owned by Crusader. The Company had a net loss of $5,046,323 for the three months ended September 30, 2022, compared to a net loss of $2,510,198 for the three months ended September 30, 2021, a change of $2,536,125 (101%). The Company had a net loss of $8,845,164 for the nine months ended September 30, 2022, compared to net loss of $1,649,305 for the nine months ended September 30, 2021, an increase in net loss of $7,195,859 (436%). The increase in net loss is due mainly to $20.3 million more revenue from insurance operations in 2021 compared to 2022 as a result of Crusader being in runoff, along with a decline in net investment income as a result of a reduced portfolio, and intent-to-sell impairment losses, a decline in finance charges as a result of the cessation of the financing operations of AAC, an increase in legal expenses and administrative fees from the supervision agreement, which is offset by a decrease in salaries.

  

 
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Going Concern

 

Based on Unico’s current cash and short‑term investments at September 30, 2022, as well as the other factors described herein, there is substantial doubt that Unico will have sufficient cash to meet its operating and other liquidity requirements when they become due during the next twelve months from the date of issuance of the accompanying condensed consolidated financial statements.

 

Unico has a history of recurring losses from operations, negative cash flows from its operating activities which may continue in the future, and as an insurance holding company, Unico does not independently generate significant revenue, and is dependent on dividends and other cash distributions from Crusader and its other subsidiaries to fund its operations and expenses. Historically, Unico received dividends periodically from Crusader, but does not expect to receive any such dividends for the foreseeable future due to prohibitions on the payment of dividends imposed by the CA DOI pursuant to the Administration Supervision Agreement (the “Supervision Agreement”), dated as of September 7, 2021, by and between Crusader and the CA DOI and other actions by the CA DOI in its review of the financial statements of Crusader. The CA DOI advised in April 2021, that Crusader was prohibited from paying dividends during the year 2021 and for the years 2022 through 2025. Any continued financial support from Crusader will be at the discretion of the Special Examiner appointed pursuant to the Supervision Agreement (“Special Examiner”). If the Special Examiner does not permit Crusader to continue to provide financial support to Unico, Unico will be unable to continue to fund its continued operations and expenses. The Special Examiner has recently informed Crusader that the CA DOI does not intend to continue to permit Crusader to fund certain expenses attributable to Unico’s status as a public company, including certain legal and accounting expenses without an undertaking by the Company to repay payments made on its behalf by Crusader. The Company will have an account payable to Crusader and Crusader will have an intercompany account receivable due from the Company for such payments made by Crusader and authorized by the Special Examiner. The inability of Crusader to pay certain expenses of the Company will exacerbate Unico’s lack of liquidity. Additionally, many of the potential strategic alternatives that the Unico Board of Directors is considering will also depend on continued financial support from Crusader to fund transaction expenses and other costs. If Crusader is not permitted to do so, Unico would be unable to pursue such alternatives, which may otherwise be in the best interests of its stockholders. These circumstances raise substantial doubt about Unico’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of the uncertainty of Unico’s ability to remain a going concern.

 

Unico needs to improve its consolidated operating results, continue to receive financial support from Crusader, and/or raise substantial additional capital to continue to fund its operations. Unico has taken actions to cause Crusader to enter into runoff and to wind down operations that support the writing of insurance policies. To address its liquidity concerns and meet its capital obligations, Unico has announced a review of strategic alternatives and, with the assistance of a financial advisor, is considering multiple alternatives, including, but not limited to, strategic financing, further scaling back, or eliminating some or all of its remaining business operations, expense reductions, reorganization, merger with another entity, filing for bankruptcy or cessation of operations. Unico is also considering a potential transaction, which is known as a loss portfolio transfer transaction. In a loss portfolio transfer transaction, Crusader would cede its loss obligations to another insurer through the transfer of assets equal to the reserves being transferred to that insurer. An additional consideration or premium may be required to be paid by Crusader if the loss obligations of Crusader are viewed as being greater than the reserves being transferred to the insurer. There can be no assurances that capital will be available when needed or that, if available, it will be obtained on terms favorable to the Company and its stockholders, particularly in light of the effects that the coronavirus COVID-19 pandemic and general economic conditions have had on the capital markets and investor sentiment. In addition, equity or debt financings may have a dilutive effect on the holdings of Unico’s existing stockholders, and debt financings may subject Unico to restrictive covenants, operational restrictions, and security interests in Unico’s assets. Many of these potential alternatives will also depend on continued financial support from Crusader to fund transaction expenses and other costs. If Unico becomes unable to continue as a going concern, Unico may have to dispose of or liquidate its assets and might realize significantly less than the values at which they are carried on its consolidated financial statements. Additionally, Unico may have to write down some or all of its capitalized assets or liquidate some or all of its investments in a gross unrealized loss position. These actions may cause Unico’s stockholders to lose all or part of their investment in Unico’s common stock. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 
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Supervision Agreement

 

On September 10, 2021, Crusader and the CA DOI entered into the Supervision Agreement at the request of the CA DOI. The Supervision Agreement was requested by the CA DOI because of the CA DOI’s concerns regarding the financial stability of Crusader and the potential effects on Crusader and Crusader’s California policyholders of any potential bankruptcy of Unico. The Supervision Agreement among other things, provides for the appointment by the CA DOI of a Special Examiner to provide supervision and regulatory oversight of Crusader. The Supervision Agreement imposes limitations on Crusader’s ability to take certain actions without the prior written consent of the California Insurance Commissioner (the “Commissioner”), the Special Examiner, or the Special Examiner’s appointed representative. Among the actions that Crusader is prohibited from making without such prior written consent are the following: (i) making payments, engaging in any transaction with or entering into any agreement with, any affiliated or otherwise related person or entity if the cost to Crusader is an individual payment of more than $5,000 or aggregate payments of more than $20,000; (ii) making payments, engaging in any transaction with or entering into any agreement with, any non-affiliated or otherwise unrelated person or entity if the cost to Crusader is an individual payment of more than $5,000 or aggregate payments of more than $20,000; (iii) paying any dividend of any amount; (iv) except as provided in and (ii), making any payments to or on behalf of the Company in connection with any agreement entered into between Crusader and the Company; (v) making any loans to affiliates, officers, directors, stockholders or third parties; (vi) incurring any debt, obligation or liability greater than $5,000; (vii) entering into any new reinsurance contract or treaty or amending any existing reinsurance contract or treaty; (viii) making any material changes in management and essential staffing; (ix) increasing salaries or benefits of officers or directors or making any preferential payment of bonuses or other payments considered legally preferential; and (x) making any other material changes in its normal course of operations, including but not limited to, entering into new lines of business, making major corporate reorganizations, or redomesticating from California. The Supervision Agreement provides that the Special Examiner will meet with Crusader to develop a list of recurring payments under items (i) and (ii) that may not require prior written approval. To date, the Special Examiner has permitted Crusader to provide significant financial support to Unico in the form of reimbursement and/or direct payment of certain operating and other expenses, but there can be no assurance that the Special Examiner will continue to permit Crusader to do so under the Supervision Agreement. If the Special Examiner does not continue to permit Crusader to financially support Unico in the future, Unico will be unable to continue to fund its ongoing operations.

 

On September 13, 2021, the Special Examiner advised Crusader, through its counsel, that a deficiency existed in certain funds that Unifax is required to maintain, in a fiduciary capacity, for Crusader’s benefit. Pursuant to the provisions of California Insurance Code (“CIC”) Sections 1733 and 1734, Unifax is required to hold premium payment funds received from policyholders as fiduciary funds in trust maintained for the benefit of Crusader. The Special Examiner informed Crusader that the CA DOI believed that the deficiency in such fiduciary funds was approximately $3,100,000 as of September 13, 2021. In January 2022, Unico, Crusader, and Unifax agreed, with the pre-approval of the Special Examiner, to transfer a computer system, owned by Unico, to Crusader. Unico contributed the computer system at its book value of $1,991,956 to Unifax, and Unifax in turn contributed the computer system to Crusader at its book value of $1,991,956 as a direct reduction in the amount due to Crusader which resulted in a dollar-for-dollar reduction in the premium trust deficiency. The amount of such deficiency was $340,907 as of September 30, 2022. The premium trust deficiency was paid to Crusader on November 18, 2022.

  

Independent Investigation

 

In October 2021, the Audit Committee of Unico’s Board of Directors retained independent outside counsel, who in turn engaged forensic accountants to work at their direction, to conduct an independent investigation and provide legal advice to the Audit Committee (the “Independent Investigation”), regarding the facts and circumstances relating to, and resulting in, the observed fiduciary funds deficiency. As a result of the Independent Investigation, the Company has determined that, over a period of multiple years, (i) Unifax did not comply with the requirements of the CIC to hold premium trust funds in separate accounts or segregate such funds in accordance with the CIC; (ii) the funds in question were improperly transferred to an operating account of Unifax and were subsequently transferred to a Unico operating account, and (iii) the funds in question were utilized by Unico and its consolidated subsidiaries for general corporate purposes. The independent investigation did not find any evidence that any of such funds had been stolen or used for non-corporate purposes.

 

 
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Certain Information Regarding Runoff of Crusader

 

 In connection with the ongoing runoff of Crusader, the Company and its subsidiaries have focused, among other things, on winding down operations that supported the writing of new insurance policies and the issuance of renewal insurance policies, managing claims and otherwise providing services to existing policyholders and claimants.

 

Effective September 30, 2021, Crusader ceased writing any new insurance policies and no longer renewed policies subsequent to December 8, 2021.  The following table presents (i) the number of employees of the Company and its subsidiaries as of such date, (ii) the number of policies in force as of such date, (iii) the total number of open claims being managed by the Company and its subsidiaries as of such date, (iv) the number of new claims that were opened during the quarter ending on such date, and (v) the number of claims that were closed during the quarter ended on such date.

 

 

 

September 30, 2022

 

June 30, 2022

 

March 31, 2022

 

December 31, 2021

 

Number of employees

24

25

33

38

Number of active policies

180

1,018

1,917

3,065

Number of open claims

752

865

907

803

New claims opened during the quarter ended

83

137

228

217

Claims closed during the quarter ended

192

185

153

185

 

The number of active policies will continue to decrease over time, while the number of open claims, the number of new claims opened and the number of claims closed will fluctuate depending on the number of new claims made by policyholders, as well as Crusader’s ability to manage open claims to resolution.

 

Work Force Reduction

 

In connection with the runoff of Crusader, on October 7 and October 8, 2021, the Company informed thirteen employees of the Company’s determination to terminate their employment, effective as of October 8, 2021 (the “October 2021 Work Force Reduction”). Additionally, on December 16, 2021, and December 17, 2021, the Company informed an additional twelve employees of the Company’s determination to terminate their employment, effective as of December 17, 2021 (the “December 2021 Work Force Reduction”). The terminated employees were primarily employed in the Company’s underwriting and marketing groups. In connection with the October 2021 Work Force Reduction and the December 2021 Work Force Reduction, the Company expects to incur total pretax costs of $793,971, consisting of severance payments under the Company’s existing policy. In addition, the Company implemented another retention bonus plan to certain employees and expects to incur total pretax costs of $256,000 related to the plan, which is being recognized ratably over the last three quarters of 2022. The Company may incur additional costs in connection with the runoff of Crusader, including additional costs associated with workforce reductions. In 2021, the Company paid $331,331 in severance payments and $0 in retention bonus payments.

 

In 2022, the Company has paid $465,803 in severance payments and $255,275 in retention bonus payments.

 

COVID-19

 

As a result, of the ongoing COVID-19 pandemic, economic uncertainties have arisen which have impacted the fair value of investments, day-to-day administration of the business and premium volume. While the Company does not believe it is exposed to substantial risk from coronavirus-related claims under the insurance policies written by Crusader, it is possible that the Company’s results of operations, financial condition and the fair value of its investment portfolio may be adversely affected by the general economic conditions as a result of the pandemic.

  

The effects of the ongoing COVID-19 pandemic were a major contributor to the variability in fair value of the Company’s fixed income and equity investments during the first half of 2020, which rebounded in 2021 and has been impacted once again in 2022 by the economic environment. The overall response to the pandemic and economic conditions contributed to the decline in investment yields, compared to previous years, which will cap the Company’s investment portfolio’s ability to generate higher levels of investment income, absent a larger invested asset base or a change in investment philosophy.

  

 
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Crusader has received several coronavirus-related business interruption claims. All such claims were denied after the individual circumstances of each claim were reviewed to determine whether insurance coverage applied. Like many companies in the property casualty insurance industry, Crusader was named as defendant in lawsuits seeking insurance coverage under the policies issued by Crusader for alleged economic losses resulting from the shutdown or suspension of their businesses due to the COVID-19 pandemic. Although the allegations vary, the plaintiffs generally seek a declaration of insurance coverage, damages for breach of contract in unspecified amounts for claim denials, interest, and attorney fees. Some of the lawsuits also allege that the insurance claims were denied in bad faith or otherwise in violation of state laws and seek extra-contractual or punitive damages. Only one of these suits remains active.

 

Although the policy terms vary in general, the claims at issue in these lawsuits were denied because the policyholder identified no direct physical loss, such as fire or water damage, to property at the insured premises, and the governmental orders that led to the complete or partial shutdown of the business were not due to the existence of any direct physical loss or damage to property in the immediate vicinity of the insured premises and did not prohibit access to the insured premises, as required by the terms of the insurance policies. Depending on the individual policy, additional policy terms and conditions may also prohibit coverage, such as exclusions for pollutants, ordinance or law, loss of use, and acts or decisions. Most of Crusader’s policies also contain an exclusion for losses caused directly or indirectly by “virus or bacteria.”

 

In addition to the inherent difficulty in predicting litigation outcomes, the COVID-19 pandemic business income coverage lawsuits present a number of uncertainties and contingencies that are not yet known, including how many policyholders will ultimately file claims, the number of lawsuits that will be filed, the extent to which any class may be certified, and the size and scope of any such classes. The legal theories advanced by plaintiffs vary by case.

 

On March 23, 2021, ten policyholders sued Crusader in a putative class action entitled Anchors & Whales LLC et al. v. Crusader Insurance Company, Superior Court of the State of California for the County of San Francisco (CGC-21-590999). The action alleges that Crusader wrongly denied claims for business interruption coverage made by bars and restaurants related to the COVID-19 pandemic and related government orders that limited or halted operations of bars and restaurants. The action further alleges that Crusader acted unreasonably in denying the claims, and it seeks as damages the amounts allegedly due as contract benefits under the insurance policies, attorneys’ fees and costs, punitive damages, and other unspecified damages. The lawsuit alleges a putative class of all bars and restaurants in California that were insured by Crusader for loss of business income, who made such a claim as a result of “one or more Governmental Orders and the presence of the COVID-19 virus on the property,” and whose claim was denied by Crusader. On October 1, 2021, Crusader was granted its motions on the pleadings without leave to amend and the lawsuit was dismissed. On December 15, 2021, Anchors & Whales LLC filed a notice of appeal with California Court of Appeals, 1st Appellate District, Division 2 (A164412). Crusader has filed a respondent brief and plaintiffs have filed their reply brief.  The appeals court will schedule oral arguments, but there is no definite time frame for the court to do so.  Counsel opines that this will occur with the next six months. The Company cannot predict whether the action of the Superior Court in dismissing the lawsuit against Crusader without leave to amend will be affirmed by the actions of the Court of Appeals.

  

While the coronavirus pandemic is also affecting the Company’s internal operations, the Company implemented a plan at the onset of the COVID-19 pandemic to help its operations continue effectively during the ongoing pandemic, including processes to limit the spread of COVID-19 among employees. For example, the Company modified its business practices in accordance with social distancing and safety guidelines, allowing many work-from-home arrangements, flexible work schedules, and restricted business travel. The Company’s employees are following the guidelines and approximately 75% are working from their homes. The Company follows governmental safety guidelines in determining when to remove the coronavirus-related business restrictions and where and when to request the employees working from their homes return to their workplaces for a few days per week. While the pandemic has created new challenges for the Company, the Company’s ability to maintain its operations, internal controls and relationships has not been adversely affected.

 

Termination of Reinsurance Arrangement

 

On August 31, 2021, Crusader and United Specialty Insurance Company (“USIC”), terminated the Quota Share Reinsurance Agreement (the “Reinsurance Agreement”), effective April 1, 2020, by and between Crusader and USIC. Pursuant to the Reinsurance Agreement, Crusader agreed to reinsure all of USIC’s liability for policies issued by USIC and produced by Unifax, for property, general liability, commercial multiple peril (“CMP”), liability and other miscellaneous coverages, subject to certain maximum policy limits. Crusader’s obligations under the Reinsurance Agreement continue after termination for business in force at the time of termination, for policies with effective dates prior to the termination but issued after the termination date, and for policies that must be issued or renewed as a matter of law until the expiration of the policies.

 

 
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On August 31, 2021, as a result of the termination of the Reinsurance Agreement, the Surplus Line Broker Agreement (the “Broker Agreement”), effective April 1, 2020, by and between Unifax and USIC, automatically terminated. Pursuant to the Broker Agreement, USIC authorized Unifax to act as its broker for the purpose of producing and administering certain specified classes of insurance policies, which are the subject of the Reinsurance Agreement. Unifax’s obligations under the Broker Agreement continue after termination for insurance business reinsured under the Broker Agreement. Unifax’s obligations include handling and servicing of all policies until their expiration.

 

On August 31, 2021, as a result of the termination of the Broker Agreement, the Claims Administration Agreement (the “Claims Administration Agreement”), effective April 1, 2020, by and between U.S. Risk and USIC, automatically terminated. Pursuant to the Claims Administration Agreement, USIC appointed U.S. Risk to adjust and settle claims on its behalf in connection with the surplus lines policies issued by USIC in connection with the Reinsurance Agreement. Upon termination of the Claims Administration Agreement, U.S. Risk is obligated (unless revoked by USIC) to continue to manage claims during the runoff of the business reinsured.

 

The Reinsurance Agreement was mutually terminated by Crusader and USIC. There were no early termination penalties incurred as a result of the termination. The Reinsurance Agreement provides for a minimum ceding fee, and, upon termination of the Reinsurance Agreement, the minimum ceding fee was pro-rated to the date of termination unless there were policies issued after the termination of the Reinsurance Agreement. In such case, the minimum ceding fee will continue past the termination of the Reinsurance Agreement until such time as no further policies are issued. USIC waived any additional ceding fees payable under the Reinsurance Agreement under the agreement to terminate that agreement.

 

Under the Reinsurance Agreement, Crusader was required to secure its obligations to USIC for unearned premium reserves, if any, and loss reserves (losses incurred and not reported and loss reported but unpaid) in a security fund, trust agreement or letter of credit to permit USIC to receive credit for the reinsurance ceded to Crusader by USIC. Such security was required because Crusader is not authorized to transact insurance in Delaware, the domiciliary state of USIC. Initially, the security required to be provided by Crusader was 150% of the unearned premium and loss reserves. USIC was permitted to request additional security for the unearned premium and loss reserves in the event (i) the A.M. Best rating of Crusader is at any time reduced; or (ii) the A.M. Best rating of Crusader is at any time removed or withdrawn; or (iii) there is a reduction the capital and policyholder surplus of Crusader by 10% or more in any rolling 12-month period or (iv) Crusader fails to maintain its Cat excess of loss reinsurance coverage at certain levels. As of September 30, 2022 and December 31, 2021, respectively, certain securities were held as collateral with Comerica Bank & Trust, N. A. (“Comerica”), pursuant to the Reinsurance Trust Agreement among Crusader, USIC and Comerica (the “Reinsurance Trust Agreement”) to secure payment of Crusader’s liabilities and performance of its obligations under the Reinsurance Agreement with USIC. The estimated fair value and amortized cost of those securities was $7,612,474 and $7,612,474 and $8,243,758 and $8,162,053 on September 30, 2022 and December 31, 2021, respectively.

 

Outsourcing of Claims Processing to an Experienced Third-Party Administrator

 

In January 2022, Crusader engaged a Third-Party Administrator (“TPA”) to assist in the claims adjudication and settlement process. This outside TPA supplemented U.S. Risk as Crusader is in runoff and any increased claims activity will be outsourced to the TPA through the end of October 2022 to manage open claims inventory. The U.S. Risk staff adjust claims and oversee all outside claim services such as attorneys, independent or outside claim adjusters, and experts as necessary. Engagement of this TPA should allow for increased control over paid allocated loss adjustment expenses and reduction of the open claims inventory. Administration fees paid to the TPA are recoverable by our third-party reinsurers as an allocated loss adjustment expense to the extent the billed activities are allocated to a specific claim. The use of the TPA was terminated in the third quarter. All claims processing is now being performed by Crusader or U.S. Risk.

  

IT System Upgrade

In 2018 the Company determined it needed to upgrade or replace its legacy IT system, which it opted to upgrade because the cost was substantially less. The upgrade was completed in first quarter of 2021 at a cost of approximately $1,500,000, excluding costs of Unico’s employees involved in the upgrade, due to unexpected technical challenges. The Company started depreciating the associated capitalized costs, including the costs of Unico’s employees involved in the upgrade, during the second quarter of 2021.

 

Revenue and Income Generation

 

The Company historically received its revenues primarily from earned premium derived from the insurance company operations, commission and fee income generated from the insurance agency operations, finance charges and fee income from the premium finance operations, and investment income from cash generated primarily from the insurance company operation. However, in light of the runoff of Crusader, and the cessation of the premium finance operations provided by AAC, the Company’s revenues from these sources will decline significantly in the future. The insurance company operation generated approximately 86% and 93% of consolidated revenues for the three and nine months ended September 30, 2022, respectively, compared to 95% and 94% of consolidated revenues for the three and nine months ended September 30, 2021, respectively, excluding the gain on real estate and the intent-to-sell impairment. None of the Company’s other operations is individually material to consolidated revenues.

 

Insurance Company Operation

 

As of September 30, 2022, the Company’s subsidiary Crusader was licensed as an admitted insurance carrier in the states of Arizona, California, Nevada, Oregon, and Washington. Crusader’s business remains concentrated in California (100% of gross written premium during the three and nine months ended September 30, 2022, and 2021 originated in California). During the three and nine months ended September 30, 2022, 100.0% of Crusader’s business was CMP policies. During the three and nine months ended September 30, 2021, approximately 99.9% and 99.7%, respectively, of Crusader’s business was comprised of CMP policies.

 

 
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Crusader’s total gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties) as reported on Crusader’s statutory financial statements, was produced geographically from California.

 

Written premium is a non-GAAP financial measure that is defined, under statutory accounting principles (“SAP”) as the contractually determined amount charged by the insurance company to the policyholder for the effective period of the contract based on the expectation of risk, policy benefits, and expenses associated with the coverage provided by the terms of the policies. Written premium is a required statutory measure. Written premium is defined under GAAP in Accounting Standards Codification Topic 405, “Liabilities,” as “premiums on all policies an entity has issued in a period.” Earned premium, the most directly comparable GAAP measure to written premium, represents the portion of written premium that is recognized as income in the financial statements for the period presented and earned on a pro-rata basis over the terms of the policies. Written premium is intended to reflect production levels and is meant as supplemental information and not intended to replace earned premium. Such information should be read in connection with the Company’s GAAP financial results.

 

The following is a reconciliation of gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties) to net earned premium (after premium ceded to reinsurers under reinsurance treaties):

 

 

 

Three Months Ended September 30

 

 

Nine Months Ended September 30

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct written premium

 

$(29,234)

 

$10,321,267

 

 

$(215,800)

 

$31,279,667

 

Assumed written premium

 

 

(8,345)

 

 

2,358,840

 

 

 

(24,183)

 

 

3,450,104

 

Less: written premium ceded to reinsurers

 

 

(451,016)

 

 

(3,111,266)

 

 

(3,880,743)

 

 

(8,748,322)

Net written premium

 

 

(488,595)

 

 

9,568,841

 

 

 

(4,120,726)

 

 

25,981,449

 

Change in direct unearned premium

 

 

1,475,879

 

 

 

(136,817)

 

 

12,549,699

 

 

 

(2,129,893)

Change in assumed unearned premium

 

 

182,822

 

 

 

(1,657,746)

 

 

1,697,454

 

 

 

(2,452,217)

Change in ceded unearned premiums

 

 

(6,087)

 

 

(36,656)

 

 

(57,477)

 

 

(90,209)

Net earned premium

 

$1,164,019

 

 

$7,737,622

 

 

$10,068,950

 

 

$21,309,130

 

 

The Company’s insurance operational underwriting profitability is defined by pre-tax underwriting gain (loss), which is calculated as net earned premium less losses and loss adjustment expenses and policy acquisition costs.

 

 
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The negative gross written premiums are a result of the cancellation of policies in 2022 because Crusader stopped writing business in August 2021.

 

 

 

Three Months Ended September 30

 

 

Nine Months Ended September 30

 

 

 

2022

 

 

2021

 

 

Change

 

 

2022

 

 

2021

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net written premium

 

$(488,595 )

 

$9,568,841

 

 

$(10,057,436 )

 

$(4,120,726 )

 

$25,981,449

 

 

$(30,102,175 )

Change in net unearned premium

 

 

1,652,614

 

 

 

(1,831,219 )

 

 

3,483,833

 

 

 

14,189,676

 

 

 

(4,672,319 )

 

 

18,861,995

 

Net earned premium

 

 

1,164,019

 

 

 

7,737,622

 

 

 

(6,573,603 )

 

 

10,068,950

 

 

 

21,309,130

 

 

 

(11,240,180 )

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

1,328,347

 

 

 

6,851,898

 

 

 

(5,523,551 )

 

 

10,308,235

 

 

 

18,521,818

 

 

 

(8,213,583 )

Policy acquisition costs

 

 

(145,899 )

 

 

1,951,053

 

 

 

(2,096,952 )

 

 

(353,275 )

 

 

4,078,563

 

 

 

(4,431,838 )

Total underwriting expenses

 

 

1,182,448

 

 

 

8,802,951

 

 

 

(7,620,503 )

 

 

9,954,960

 

 

 

22,600,381

 

 

 

(12,645,421 )

Underwriting (loss) gain before income taxes

 

$(18,429 )

 

$(1,065,329 )

 

$1,046,900

 

 

$113,990

 

 

$(1,291,251 )

 

$1,405,241

 

 

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

 

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

 

 

 

Three Months Ended September 30

 

 

Nine Months Ended September 30

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting loss before income taxes

 

$(18,429 )

 

$(1,065,329 )

 

$113,990

 

 

$(1,291,251 )

Insurance company operation revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

 

236,978

 

 

 

427,244

 

 

 

947,556

 

 

 

1,470,846

 

Net realized investment gains (losses)

 

 

259,563

 

 

 

57,173

 

 

 

(210,503 )

 

 

3,912,840

 

Intent-to-sell impairments

 

 

(4,447,570 )

 

 

-

 

 

 

(4,447,570 )

 

 

-