UNICO AMERICAN CORPORATION OVERVIEW
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to provide an understanding of the Company's
financial condition and results of operations by focusing on changes in certain
key measures quarter over quarter. This MD&A should be read in conjunction with
the Company's 2021 Form 10-K/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 shortterm investments atSeptember 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 ofSeptember 7, 2021 , by and between Crusader and the CA DOI and other actions by the CA DOI in its review of the financial statements of Crusader. The CA DOI advised inApril 2021 , that Crusader was prohibited from paying dividends during the year 2021 and for the years 2022 through 2025. Any continued financial support from Crusader will be at the discretion of the Special Examiner appointed pursuant to the Supervision Agreement ("Special Examiner"). If the Special Examiner does not permit Crusader to continue to provide financial support to Unico, Unico will be unable to continue to fund its continued operations and expenses. The Special Examiner has recently informed Crusader that the CA DOI does not intend to continue to permit Crusader to fund certain expenses attributable to Unico's status as a public company, including certain legal and accounting expenses without an undertaking by the Company to repay payments made on its behalf by Crusader. The Company will have an account payable to Crusader and Crusader will have an intercompany account receivable due from the Company for such payments made by Crusader and authorized by the Special Examiner. The inability of Crusader to pay certain expenses of the Company will exacerbate Unico's lack of liquidity. Additionally, many of the potential strategic alternatives that the Unico Board of Directors is considering will also depend on continued financial support from Crusader to fund transaction expenses and other costs. If Crusader is not permitted to do so, Unico would be unable to pursue such alternatives, which may otherwise be in the best interests of its stockholders. These circumstances raise substantial doubt about Unico's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of the uncertainty of 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. 25 Table of Contents Supervision Agreement
OnSeptember 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'sCalifornia policyholders of any potential bankruptcy of Unico. The Supervision Agreement among other things, provides for the appointment by the CA DOI of a Special Examiner to provide supervision and regulatory oversight of Crusader. The Supervision Agreement imposes limitations on Crusader's ability to take certain actions without the prior written consent of theCalifornia 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 fromCalifornia . The Supervision Agreement provides that the Special Examiner will meet with Crusader to develop a list of recurring payments under items (i) and (ii) that may not require prior written approval. To date, the Special Examiner has permitted Crusader to provide significant financial support to Unico in the form of reimbursement and/or direct payment of certain operating and other expenses, but there can be no assurance that the Special Examiner will continue to permit Crusader to do so under the Supervision Agreement. If the Special Examiner does not continue to permit Crusader to financially support Unico in the future, Unico will be unable to continue to fund its ongoing operations. OnSeptember 13, 2021 , the Special Examiner advised Crusader, through its counsel, that a deficiency existed in certain funds that Unifax is required to maintain, in a fiduciary capacity, for Crusader's benefit. Pursuant to the provisions of California Insurance Code ("CIC") Sections 1733 and 1734, Unifax is required to hold premium payment funds received from policyholders as fiduciary funds in trust maintained for the benefit of Crusader. The Special Examiner informed Crusader that the CA DOI believed that the deficiency in such fiduciary funds was approximately$3,100,000 as ofSeptember 13, 2021 . InJanuary 2022 , Unico, Crusader, and Unifax agreed, with the pre-approval of the Special Examiner, to transfer a computer system, owned by Unico, to Crusader. Unico contributed the computer system at its book value of$1,991,956 to Unifax, and Unifax in turn contributed the computer system to Crusader at its book value of$1,991,956 as a direct reduction in the amount due to Crusader which resulted in a dollar-for-dollar reduction in the premium trust deficiency. The amount of such deficiency was$340,907 as ofSeptember 30, 2022 . The premium trust deficiency was paid to Crusader onNovember 18, 2022 . Independent Investigation
InOctober 2021 , the Audit Committee of Unico's Board of Directors retained independent outside counsel, who in turn engaged forensic accountants to work at their direction, to conduct an independent investigation and provide legal advice to the Audit Committee (the "Independent Investigation"), regarding the facts and circumstances relating to, and resulting in, the observed fiduciary funds deficiency. As a result of the Independent Investigation, the Company has determined that, over a period of multiple years, (i) Unifax did not comply with the requirements of the CIC to hold premium trust funds in separate accounts or segregate such funds in accordance with the CIC; (ii) the funds in question were improperly transferred to an operating account of Unifax and were subsequently transferred to a Unico operating account, and (iii) the funds in question were utilized by Unico and its consolidated subsidiaries for general corporate purposes. The independent investigation did not find any evidence that any of such funds had been stolen or used for non-corporate purposes. 26 Table of Contents
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. EffectiveSeptember 30, 2021 , Crusader ceased writing any new insurance policies and no longer renewed policies subsequent toDecember 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 24 25 33 38 employees Number of active 180 1,018 1,917 3,065 policies Number of open 752 865 907 803 claims New claims 83 137 228 217 opened during the quarter ended Claims closed 192 185 153 185 during the quarter ended 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, onOctober 7 andOctober 8, 2021 , the Company informed thirteen employees of the Company's determination to terminate their employment, effective as ofOctober 8, 2021 (the "October 2021 Work Force Reduction"). Additionally, onDecember 16, 2021 , andDecember 17, 2021 , the Company informed an additional twelve employees of the Company's determination to terminate their employment, effective as ofDecember 17, 2021 (the "December 2021 Work Force Reduction"). The terminated employees were primarily employed in the Company's underwriting and marketing groups. In connection with theOctober 2021 Work Force Reduction and theDecember 2021 Work Force Reduction, the Company expects to incur total pretax costs of$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
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
OnAugust 31, 2021 ,Crusader and United Specialty Insurance Company ("USIC"), terminated the Quota Share Reinsurance Agreement (the "Reinsurance Agreement"), effectiveApril 1, 2020 , by and between Crusader and USIC. Pursuant to the Reinsurance Agreement, Crusader agreed to reinsure all of USIC's liability for policies issued by USIC and produced by Unifax, for property, general liability, commercial multiple peril ("CMP"), liability and other miscellaneous coverages, subject to certain maximum policy limits. Crusader's obligations under the Reinsurance Agreement continue after termination for business in force at the time of termination, for policies with effective dates prior to the termination but issued after the termination date, and for policies that must be issued or renewed as a matter of law until the expiration of the policies. 28 Table of Contents OnAugust 31, 2021 , as a result of the termination of the Reinsurance Agreement, the Surplus Line Broker Agreement (the "Broker Agreement"), effectiveApril 1, 2020 , by and between Unifax and USIC, automatically terminated. Pursuant to the Broker Agreement, USIC authorized Unifax to act as its broker for the purpose of producing and administering certain specified classes of insurance policies, which are the subject of the Reinsurance Agreement. Unifax's obligations under the Broker Agreement continue after termination for insurance business reinsured under the Broker Agreement. Unifax's obligations include handling and servicing of all policies until their expiration. OnAugust 31, 2021 , as a result of the termination of the Broker Agreement, the Claims Administration Agreement (the "Claims Administration Agreement"), effectiveApril 1, 2020 , by and betweenU.S. Risk and USIC, automatically terminated. Pursuant to the Claims Administration Agreement, USIC appointedU.S. Risk to adjust and settle claims on its behalf in connection with the surplus lines policies issued by USIC in connection with the Reinsurance Agreement. Upon termination of the Claims Administration Agreement,U.S. Risk is obligated (unless revoked by USIC) to continue to manage claims during the runoff of
the business reinsured. The Reinsurance Agreement was mutually terminated by Crusader and USIC. There were no early termination penalties incurred as a result of the termination. The Reinsurance Agreement provides for a minimum ceding fee, and, upon termination of the Reinsurance Agreement, the minimum ceding fee was pro-rated to the date of termination unless there were policies issued after the termination of the Reinsurance Agreement. In such case, the minimum ceding fee will continue past the termination of the Reinsurance Agreement until such time as no further policies are issued. USIC waived any additional ceding fees payable under the Reinsurance Agreement under the agreement to terminate that agreement. Under the Reinsurance Agreement, Crusader was required to secure its obligations to USIC for unearned premium reserves, if any, and loss reserves (losses incurred and not reported and loss reported but unpaid) in a security fund, trust agreement or letter of credit to permit USIC to receive credit for the reinsurance ceded to Crusader by USIC. Such security was required because Crusader is not authorized to transact insurance inDelaware , the domiciliary state of USIC. Initially, the security required to be provided by Crusader was 150% of the unearned premium and loss reserves. USIC was permitted to request additional security for the unearned premium and loss reserves in the event (i) theA.M. Best rating of Crusader is at any time reduced; or (ii) theA.M. Best rating of Crusader is at any time removed or withdrawn; or (iii) there is a reduction the capital and policyholder surplus of Crusader by 10% or more in any rolling 12-month period or (iv) Crusader fails to maintain its Cat excess of loss reinsurance coverage at certain levels. As ofSeptember 30, 2022 andDecember 31, 2021 , respectively, certain securities were held as collateral withComerica Bank & Trust , N. A. ("Comerica"), pursuant to theReinsurance 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 onSeptember 30, 2022 andDecember 31, 2021 , respectively.
Outsourcing of Claims Processing to an Experienced Third-Party Administrator
InJanuary 2022 , Crusader engaged a Third-Party Administrator ("TPA") to assist in the claims adjudication and settlement process. This outside TPA supplementedU.S. Risk as Crusader is in runoff and any increased claims activity will be outsourced to the TPA through the end ofOctober 2022 to manage open claims inventory. TheU.S. Risk staff adjust claims and oversee all outside claim services such as attorneys, independent or outside claim adjusters, and experts as necessary. Engagement of this TPA should allow for increased control over paid allocated loss adjustment expenses and reduction of the open claims inventory. Administration fees paid to the TPA are recoverable by our third-party reinsurers as an allocated loss adjustment expense to the extent the billed activities are allocated to a specific claim. The use of the TPA was terminated in the third quarter. All claims processing is now being performed by Crusader orU.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 endedSeptember 30, 2022 , respectively, compared to 95% and 94% of consolidated revenues for the three and nine months endedSeptember 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 ofSeptember 30, 2022 , the Company's subsidiary Crusader was licensed as an admitted insurance carrier in the states ofArizona ,California ,Nevada ,Oregon , andWashington . Crusader's business remains concentrated inCalifornia (100% of gross written premium during the three and nine months endedSeptember 30, 2022 , and 2021 originated inCalifornia ). During the three and nine months endedSeptember 30, 2022 , 100.0% of Crusader's business was CMP policies. During the three and nine months endedSeptember 30, 2021 , approximately 99.9% and 99.7%, respectively, of Crusader's business was comprised of CMP policies. 29 Table of Contents
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
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
Three Months Ended September 30 Nine Months Ended
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 isnot 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 ) -
Net unrealized
investment
gains (losses)
on equity
securities - (147,722 ) - 18,559
Other income 19,748 95,330 144,039 123,044
Other insurance
operations
revenues:
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) 1 (5 ) 1,692 541
Less expenses:
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
Loss before
taxes $ (5,682,927 ) $ (2,450,619 ) $ (8,587,527 ) $ (1,339,114 )
Unearned premiums represent premium applicable to the unexpired terms of
policies in force. The Company evaluates its unearned premiums periodically for
premium deficiencies by comparing the sum of expected claim costs, unamortized
deferred policy acquisition costs, and maintenance costs partially offset by net
investment income to related unearned premiums. To the extent that any of the
Company's programs become unprofitable, a premium deficiency reserve may be
required. The Company has not recognized a premium deficiency reserve for the
nine months ended September 30, 2022 . The Company booked an allowance against
deferred acquisition costs of $848,711 as of September 30, 2021 .
The following table shows the loss ratios, expense ratios, and combined ratios
of Crusader:
Three Months Ended September 30 Nine Months
Ended
2022 2021 2022 2021
Loss ratio
(1) 114 % 89 % 102 % 87 %
Expense
ratio (2) 540 % 36 % 100 % 33 %
Combined
ratio (3) 654 % 125 % 202 % 120 %
(1) Loss ratio is defined as losses and loss adjustment expenses divided by net
earned premium.
(2) Expense ratio is defined as a sum of policy acquisition costs and portions of
indirect salaries and employee benefits and other operating expenses
allocation to the insurance company operations, reduced by allocation of
gross commissions and fees and other income, divided by net earned premium.
The calculation of this expense ratio is different from the one used for
computing the statutory accounting basis combined ratio.
(3) Combined ratio is defined as a sum of loss ratio and expense ratio. This
combined ratio is different from the statutory accounting basis combined
ratio.
The following table provides an analysis of losses and loss adjustment expenses:
Three Months Ended September 30 Nine Months Ended
2022 2021 Change 2022 2021 Change
Losses and
loss
adjustment
expenses:
Provision
for insured
events of
current
year $ 1,164,019 $ 8,017,701 $ (6,853,682 ) $ 10,068,950 $ 20,529,747 (10,460,797 )
Development
of insured
events of
prior years 164,328 (1,165,803 ) 1,330,131 239,285 (2,007,929 ) 2,247,214
Total
losses and
loss
adjustment
expenses $ 1,328,347 $ 6,851,898 $ (5,523,551 ) $ 10,308,235 $ 18,521,818 $ (8,213,583 ) For further analysis of losses and loss adjustment expenses, refer to "Results of Operations".
31
Table of Contents
Revenues from Other Insurance Operations
The Company's revenues from other insurance operations consist of commissions, fees and other income. These operations accounted for approximately 14% and 7% of total revenues in the three and nine months endedSeptember 30, 2022 , respectively, compared to approximately 5% and 6% of total revenues, excluding the realized gain on real estate sale and the Intent-to-sell impairment, in the three and nine months endedSeptember 30, 2021 , respectively. Investments The Company generated revenues from its total invested assets of$47,520,595 (fixed maturities at amortized cost, equity securities at cost and short-term investments at fair value) and$85,602,034 (fixed maturities at amortized cost, equity securities at cost and short-term investments at fair value) as ofSeptember 30, 2022 and 2021, respectively. Investment income (net of investment expenses) decreased$190,266 (-45%) and$523,290 (-36%) to$236,978 and$947,556 for the three and nine months endedSeptember 30, 2022 , respectively, compared to$427,244 and$1,470,846 for the three and nine months endedSeptember 30, 2021 , respectively. This decrease is the result of having less investments than in the past, as Crusader is in runoff and will be using the investments to satisfy future claims and operational needs. As ofSeptember 30, 2022 , all of the Company's investments are inU.S. Treasury securities, corporate fixed maturity securities, agency mortgage-backed securities,Federal Deposit Insurance Corporation ("FDIC") insured certificates of deposit, money market funds, and a savings account. The Company's investments inU.S. treasury securities, corporate fixed maturity securities, agency mortgage-backed securities, and money market funds are readily marketable. As ofSeptember 30, 2022 , the weighted average maturity of the Company's investments was approximately 3.1 years, and the effective duration for available-for-sale investments (investments managed under the investment guidelines) was 3.7 years.
LIQUIDITY AND CAPITAL RESOURCES
The Company prepared the condensed consolidated financial statements included elsewhere in this Form 10-Q on a going concern basis, which assumes that it will realize its assets and satisfy its liabilities in the normal course of business. Unico has a history of recurring losses from operations, negative cash flows from its operating activities which may continue in the future, and, as a holding company, does not independently generate significant revenue and is dependent on dividends and other cash distributions from Crusader and its other subsidiaries to fund its operations and expenses. Historically, Unico received dividends periodically from Crusader, but does not expect to receive any such dividends for the foreseeable future due to prohibitions on the payment of dividends imposed by the CA DOI pursuant to the Supervision Agreement, and other actions by the CA DOI in its review of the financial statements of Crusader. The CA DOI advised inApril 2021 that Crusader was prohibited from paying dividends during the year 2021 and for the years 2022 through 2025. Any continued financial support from Crusader will be at the discretion of the Special Examiner appointed pursuant to the Supervision Agreement. If the Special Examiner does not permit Crusader to continue to provide financial support to Unico, Unico will be unable to continue to fund its continued operations and expenses. The Special Examiner has recently informed Crusader that the CA DOI does not intend to permit Crusader to fund certain expenses attributable to Unico's status as a public company, including certain legal and accounting expenses, without an undertaking by the Company to repay payments made on its behalf by Crusader. The Company will have an account payable to Crusader and Crusader will have an intercompany account receivable due from the Company for such payments made by Crusader and authorized by the Special Examiner. The inability of Crusader to pay certain expenses of the Company will exacerbate Unico's lack of liquidity. Additionally, many of the potential strategic alternatives that the Board of Directors of Unico is considering will also depend on continued financial support from Crusader to fund transaction expenses and other costs. If Crusader is not permitted to do so, Unico would be unable to pursue such alternatives, which may otherwise be in the best interests of its stockholders. These circumstances raise substantial doubt about Unico's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of the uncertainty of Unico's ability to remain a going concern. No assurance can be given that the Company's estimate of ultimate loss and loss adjustment expense reserves will be sufficient but based on the Company's current loss and loss expense reserves and expected current and future payments, the Company believes that there are no current liquidity constraints for Crusader. However, as an insurance holding company, the Company does not independently generate significant revenue and is dependent on dividends and other cash distributions from Crusader and its other subsidiaries to fund its operations and expenses. As discussed below, the Company does not expect to receive any dividends from Crusader for the foreseeable future, and accordingly, its financial position and ability to pay operating expenses will be adversely impacted. 32 Table of Contents As a result of Crusader being placed into runoff, Crusader is no longer able to generate any premium and the holdings of unearned premium reserves will be depleted over time. As a result, Crusader will need to liquidate some of its investment holdings to support its operations. Accordingly, the size of Crusader's investment portfolio and investment income are expected to decrease. As ofDecember 31, 2021 , andDecember 31, 2020 , Crusader's RBC Level was less than 300% of its Authorized Control Level RBC, and its statutory accounting basis combined ratio was in excess of 120% for the years then ended. The RBC Level when coupled with the statutory accounting basis combined ratio triggered Company Action Level Events under the RBC for the years then ended. OnMarch 24, 2021 Crusader submitted to the CA DOI a 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. OnJuly 2, 2021 , the Company submitted a revised RBC Plan, which addressed issues raised by the CA DOI (the "2021 Revised RBC Plan"). No action was taken by the CA DOI regarding the 2021 Revised RBC Plan. As ofDecember 31, 2021 , a second Company Action Event occurred. AtDecember 31, 2021 , Crusader's RBC Level was less than 300%, with a combined ratio greater than 130%, which resulted in another Company Action Level event (the "2022 Company Action Level Event"). As a result of the 2022 Company Action Level Event, Crusader was required to submit another comprehensive Risk Based Capital Plan ("2022 RBC Plan") to the CA DOI. Crusader submitted its 2022 RBC Plan onMay 15, 2022 . OnJune 9, 2022 , the CA DOI requested additional information regarding the 2022 RBC Plan, which information was submitted onAugust 24, 2022 . OnSeptember 27, 2022 , the CA DOI requested additional information on the 2022 RBC Plan, which information was submitted onOctober 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, including the potential infusion of capital to Crusader. The Company continues to be engaged in discussions with the CA DOI on various strategic alternatives to address the RBC issues, including a potential loss portfolio transfer by Crusader. OnDecember 30, 2022 Crusader supplemented its 2022 RBC Plan to address the changes in its investment portfolio and decrease in its statutory policyholder surplus atSeptember 30, 2022 . Another liquidity risk faced by the Company is adverse development of Crusader's loss and loss adjustment expense reserves. Based on the Company's current loss and loss expense reserves and expected current and future payments, the Company believes that Crusader's loss and loss adjustment expense are adequate to address anticipated claims. However, no assurance can be given that the Company's estimate of ultimate loss and loss adjustment expense reserves will be sufficient. Crusader has a significant amount of cash, restricted cash, cash equivalents, and investments as a result of its holdings of unearned premium reserves, its reserves for loss and loss adjustment expense payments and its capital and surplus. Crusader's loss and loss adjustment expense payments are the most significant cash flow requirement of the Company. These payments are continually monitored and projected to ensure that the Company has the liquidity to cover these payments. Cash, restricted cash, and investments (at amortized cost) of Crusader atSeptember 30, 2022 , were$60,825,824 compared to$91,831,832 atDecember 31, 2021 .
Crusader's cash, cash equivalents, and investments were 100% and 99% of the
total cash and investments (at amortized cost) held by the Company for both
As ofSeptember 30, 2022 , all of the Company's investments are inU.S. Treasury securities,FDIC insured certificates of deposit, corporate fixed maturity securities, agency mortgage-backed securities, and short-term investments. All of the Company's investments, except for the certificates of deposit, are readily marketable.
The composition of Company's investment portfolio is as follows:
September 30, 2022 December 31, 2021
Fair Amortized Fair
Cost(1) Value Cost Value
Fixed maturities:
U.S. Treasury securities $ 3,177,903 $ 3,177,903 $ 6,278,764 $ 6,309,805
Corporate securities 29,868,309 29,868,309 44,370,193 45,249,973
Agency mortgage-backed
securities 14,074,383 14,074,383 20,569,448 20,853,627
Certificates of deposit 300,000 300,000 300,000 300,000
Total fixed maturity
investments 47,420,595 47,420,595 71,518,405 72,713,405
Equity securities - - 3,532,026 4,131,153
Short-term investments 100,000 100,000 1,154,750 1,154,750
Total investments $ 47,520,595 $ 47,520,595 $ 76,205,181 $ 77,999,308
(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.
33
Table of Contents
The Company is required to classify its investment securities into one of three
categories: heldtomaturity, availableforsale, or trading securities.
Historically, the Company's investment guidelines placed primary emphasis on
buying and holding highquality investments to maturity. It is expected the
Company will sell securities to support its operations.
The Company's Board of Directors approved investment guidelines which reflect the Company's risk, balance sheet, and profile.
Under the Company's investment guidelines, investments may only includeU.S. Treasury notes,U.S. government agency notes, mortgage-backed securities (including pass through securities and collateralized mortgage obligations) that are backed by agency and non-agency collateral, commercial mortgage-backed securities,U.S. corporate obligations, asset-backed securities, (including but not limited to credit card, automobile and home equity backed securities), tax-exempt bonds, preferred stocks, common stocks, commercial paper, repurchase agreements (treasuries only), mutual funds, exchange traded funds, bank certificates of deposits and time deposits. The investment guidelines provide for certain investment limitations in each investment category.
Unless agreed to in advance in writing by Crusader, investments in the following types of securities are prohibited:
? Mortgage loans, except for mortgage-backed securities issued by an agency
of the U.S. government.? Derivative mortgage-backed securities including interest only, principal
only and inverse floating rate securities.
? All fixed maturity real estate securities, except mortgage-backed
securities (including pass through securities and collateralized mortgage
obligations) that are backed by agency and non-agency collateral and
commercial mortgage-backed securities.
? Options and futures contracts.
? All non-U.S. dollar denominated securities.
? Any security that would not be in compliance with the regulations of
Crusader's state of domicile.
An independent investment advisor manages Crusader's investments. The advisor's
role currently is limited to maintaining Crusader's portfolio within the
investment guidelines and providing investment accounting services to the
Company. Through July 31, 2021 , the investments were held by Crusader's previous
custodian, Union Bank Global Custody Services ("Union Bank "). Effective August
2, 2021 , the investments are held by Crusader's current custodian, U.S Bank ,
Institutional Trust and Custody ("U.S. Bank "), as a result of sale of the
custodial business by Union Bank to U.S. Bank .
As of September 30, 2022 and December 31, 2021 , five securities and six
securities, respectively, were held as collateral with Comerica, pursuant to the
Reinsurance Trust Agreement among Crusader, USIC and Comerica to secure payment
of Crusader's liabilities and performance of its obligations under the
Reinsurance Agreement with USIC. The estimated fair value and amortized cost of
these securities was $7,612,474 and $7,612,474 on September 30, 2022 ,
respectively, and $8,243,758 and $8,162,053 on December 31, 2021 , respectively.
On August 10, 2020 , the Board authorized a share repurchase program (the "2020
Program") for the repurchase of up to $5,000,000 of the currently outstanding
shares of the Company's common stock. The 2020 Program was effective immediately
and replaced the Company's existing share repurchase program that was adopted by
the Board of Directors on December 19, 2008 (the "2008 Program") to acquire,
from time to time, up to an aggregate of 500,000 shares of the Company's common
stock. The purchases under the 2020 Program may be made, from time to time, in
the open market through block trades, 10b5-1 trading plans, privately negotiated
transactions or otherwise and in accordance with applicable laws, rules and
regulations. The timing and actual number of the shares repurchased under the
2020 Program will depend on a variety of factors including price, market
conditions and corporate and regulatory requirements. The Company intends to
fund the share repurchases under the 2020 Program from cash on hand. The 2020
Program does not commit the Company to repurchase shares of its common stock and
it may be amended, suspended, or discontinued at any time.
34
Table of Contents
The Company has remaining authority under the 2020 Program to repurchase up to$4,995,406 of the currently outstanding shares of the Company's common stock as ofSeptember 30, 2022 . The Company has retired or will retire all stock repurchased under the 2020 Program and 2008 Program. EffectiveJanuary 2022 , the Company suspended its 2020 Program and ceased any further repurchases of its shares from stockholders of the Company. The Company reported$26,954,531 net cash used by operating activities for the nine months endedSeptember 30, 2022 , compared to$111,442 net cash used by operating activities for the nine months endedSeptember 30, 2021 . Fluctuations in cash flows from operating activities relate to changes in loss and loss adjustment expense payments, unearned premium holdings, and the timing of the collection and the payment of insurance-related receivables and payables. The variability of the Company's losses and loss adjustment expenses is due primarily to its small population of claims which may result in greater fluctuations in claim frequency and/or severity. Crusader's statutory capital and surplus as ofSeptember 2022 was$14,972,592 , a decrease of$7,521,862 (-33%) compared to$22,494,454 as ofDecember 31, 2021 . The decrease is a result of Crusader being put into runoff and the cessation of writing new policies inSeptember 2021 , renewal policies onDecember 8, 2021 and the intent-to-sell impairment of$4,447,570 as ofSeptember 30, 2022 form the investment portfolio of Crusader.
No dividends were paid by Crusader to Unico in 2021 as a result of the
Supervision Agreement and other action by the CA DOI. The CA DOI advised
Crusader that no dividends may be paid by Crusader through
During the years endedDecember 31, 2021 and 2020, no cash dividends were declared or issued by the Company to its stockholders. Declaration of future cash dividends, if any, will be subject to the Company's profitability, cash requirements, capital requirements, and general business conditions, among other factors. Because of the inability of Crusader to pay dividends to the Company for the foreseeable future, it is highly unlikely that the Company can declare and pay dividends to its stockholders for the foreseeable future. As aCalifornia insurance company, Crusader is obligated to pay a premium tax on gross written premium in all states where Crusader is admitted. The premium tax is in lieu of state franchise taxes and is not included in the provision for state taxes. RESULTS OF OPERATIONS All comparisons made in this discussion compare the three and nine months endedSeptember 30, 2022 , to the three and nine months endedSeptember 30, 2021 , unless otherwise indicated. Because Crusader has been placed into runoff, some of the financial metrics will not be comparable now or in the future. For the three months endedSeptember 30, 2022 compared to the same period in 2021, total revenues decreased$11,125,538 (-129%) to ($2,529,890 ), and for the nine months endedSeptember 30, 2022 compared to the same period in 2021, total revenues decreased$20,910,967 (-74%) to$7,288,941 . The decrease in revenues for the nine months endedSeptember 30, 2022 compared to the same period in 2021 is due to Crusader's operations being placed in runoff, which began in September of 2021, coupled with the intent-to-sell impairment loss. The Crusader owned building was sold inFebruary 2021 , which resulted in a$3,693,858 realized gain. For the three months endedSeptember 30, 2022 there were no net unrealized investment gains on equity securities compared to$147,722 in net unrealized investment losses on equity securities during the three months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , there were no unrealized investment gains on equity securities compared to$18,559 in net unrealized investment gains on equity securities during the nine months endedSeptember 30, 2021 . For the three months endedSeptember 30, 2022 andSeptember 30, 2021 , the Company had net loss before taxes of$5,682,927 and net loss before taxes of$2,450,619 , respectively. For the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , the Company had a loss before taxes of$8,587,527 and loss before taxes of$1,339,114 , respectively. For the three months endedSeptember 30, 2022 andSeptember 30, 2021 , the Company had net loss of$5,046,323 compared to a net loss of$2,510,198 , respectively. For the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , the Company had net loss of$8,845,164 compared to a net loss of$1,649,305 , respectively. When compared to the nine months endedSeptember 30, 2021 , the change was due primarily to the$15,874,316 (-59%) decrease in the insurance company revenue and decrease in total expenses of$13,662,553 (-46%). As a result of the runoff of Crusader, revenues and losses in future periods may not be comparable to past periods because Crusader ceased writing new policies inSeptember 2021 and ceased renewing policies as ofDecember 8, 2021 . The effect of inflation on the Company for the nine months endedSeptember 30, 2022 was significant. As our Company's portfolio securities are primarily comprised of fixed income instruments, the fair value of these fixed income instruments will typically decrease in an inflationary environment as yields increase. Also, employee salary and employee benefits expense increases tend to be higher than normal than in inflationary times. Crusader premium Crusader's primary lines of business are CMP policies. These policies represented approximately 100% and 99.7% of Crusader's total written premium for the nine months endedSeptember 30, 2022 , and 2021, respectively. These policies represented approximately 100% and 99.9% of Crusader's total written premium for the three months endedSeptember 30, 2022 , and 2021, respectively. Gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties) reported on Crusader's statutory financial statements decreased to$(239,983) , compared to$34,729,771 for the nine months endedSeptember 30, 2021 . The decrease in gross written premium was attributable to Crusader's operations now being in runoff and policy cancellations. Gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties) reported on Crusader's statutory financial statements decreased to$(37,579) , compared to$12,680,108 for the three months endedSeptember 30, 2021 . The decrease in gross written premium was attributable to Crusader's operations now being in runoff. As a result of the runoff of Crusader, Crusader will not generate significant levels of written premium in the future. Crusader ceased writing new policies inSeptember 2021 and ceased renewing policies as ofDecember 8, 2021 as Crusader was obligated by regulatory requirements to offer renewal policies through
that
date.
35
Table of Contents
Written premium
Written premium is a non-GAAP financial measure that is defined, under statutory
accounting principles ("SAP") as the contractually determined amount charged by
the insurance company to the policyholder for the effective period of the
contract based on the expectation of risk, policy benefits, and expenses
associated with the coverage provided by the terms of the policies. Written
premium is a required statutory measure. Written premium is defined under GAAP
in Accounting Standards Codification Topic 405, "Liabilities," as "premiums on
all policies an entity has issued in a period." Earned premium, the most
directly comparable GAAP measure to written premium, represents the portion of
written premium that is recognized as income in the financial statements for the
period presented and earned on a pro-rata basis over the terms of the policies.
Written premium is intended to reflect production levels and is meant as
supplemental information and not intended to replace earned premium. Such
information should be read in connection with the Company's GAAP financialresults. Gross earned premium Gross earned premium decreased$9,264,422 (-85%) to$1,621,122 and decreased$16,140,491 (-54%) to$14,007,170 , respectively for the three and nine months endedSeptember 30, 2022 , compared to$10,885,544 and$30,147,662 for the three and nine months endedSeptember 30, 2021 . Historically, and prior to Crusader being placed into runoff, all policies were written on an annual basis. Earned premium represents a portion of written premium that is recognized as income in the condensed consolidated financial statements for the period presented and earned daily on a pro-rata basis over the terms of the policies, and, therefore, premiums earned in the current year are related to policies written during both the current year and immediately preceding year. The decrease in gross earned premium was due primarily to decrease in the gross written premium as a result of the Crusader runoff.
As a result of the runoff of Crusader, the gross earned premium is expected to gradually decrease over time. Crusader does not expect any gross earned premium in 2023. Ceded earned premium Ceded earned premium (premium ceded to reinsurers under reinsurance treaties) decreased$2,690,819 (-86%) and$4,900,311 (-55%) to$457,103 and$3,938,220 for the three and nine months endedSeptember 30, 2022 , respectively, compared to$3,147,922 and$8,838,532 for the three and nine months endedSeptember 30, 2021 , respectively. Ceded earned premium as a percentage of gross earned premium was 28% for the three and nine months endedSeptember 30, 2022 , respectively, and 29% for the three and nine months endedSeptember 30, 2021 . The decrease in the ceded earned premium as a percentage of gross earned premium for the three and nine months endedSeptember 30, 2022 , compared to the three and nine months endedSeptember 30, 2021 , was due primarily to a reduction of premiums ceded to reinsurers related to the Company excess of loss treaties.
Ceded earned premium is based on gross earned premium. As a result of the runoff of Crusader, the ceded earned premium will gradually decrease over time. Crusader does not expect any ceded earned premium in 2023.
Reinsurance treaties are generally structured in layers, with different negotiated economic terms and retention of participation, or liability, in each layer. In calendar years 2022 and 2021, Crusader retained a participation in its excess of loss reinsurance treaties of 0% in its 1st layer (reinsured losses between$500,000 and$1,000,000 ), 0% in its 2nd layer (reinsured losses between$1,000,000 and$4,000,000 ), and 0% in its property and casualty clash treaty. Crusader also has catastrophe ("CAT") reinsurance treaties from various highly ratedCalifornia authorized andCalifornia unauthorized reinsurance companies. These reinsurance treaties help protect Crusader against losses in excess of certain retentions from catastrophic events that may occur on property risks which Crusader insures. In calendar years 2021 and 2020, Crusader retained a 5% participation in its catastrophe excess of loss reinsurance treaties in its 1st layer (reinsured losses between$1,000,000 and$10,000,000 ) and 0% in its 2nd layer (reinsured losses between$10,000,000 and$46,000,000 ). In 2022 the catastrophe excess of loss reinsurance treaties were reduced to$16,000,000 with a$1,000,000 retention. Also, Crusader has not had a single CAT claim since 1992. Crusader also has facultative reinsurance treaties from a highly ratedCalifornia authorized reinsurance company. Unlike the excess of loss treaties which cover all risks underwritten by Crusader, the facultative reinsurance treaties cover specific risks for properties with total insured values in excess of$4,000,000 , or property coverage limit of the excess of loss treaties. In calendar year 2020 and during the first five months of 2021, the facultative reinsurance treaties provided coverage for reinsured losses between$4,000,000 and$8,000,000 . FromJune 2021 through 2022, the facultative reinsurance treaties had two sections which provide coverage for reinsured losses between$4,000,000 and$9,000,000 (Section A) and$4,000,000 and$15,000,000 (Section B) depending on location of the insured risk. Crusader evaluates each of its ceded reinsurance contracts at its inception to determine if there is a sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting literature. As ofSeptember 30, 2022 , all such ceded contracts are accounted for as risk transfer reinsurance. 36 Table of Contents
A tabular presentation of Crusader's direct, assumed, ceded and net earned premium is as follows:
Three Months Ended September 30 Nine Months Ended September 30
2022 2021 2022 2021
Direct earned
premium $ 1,446,645 $ 10,184,451 $ 12,333,899 $ 29,149,775
Assumed earned
premium 174,477 701,093 1,673,271 997,887
Ceded earned
premium (457,103 ) (3,147,922 ) (3,938,220 ) (8,838,532 )
Net earned
premium $ 1,164,019 $ 7,737,622 $ 10,068,950 $ 21,309,130
Ratio of ceded
earned premium
to gross earned
premium (direct
and assumed
earned premium) 28 % 29 % 28 % 29 %
Net Investment Income, Net Realized Gains and Losses, and Net Unrealized
Investment Losses on
Investment income decreased$190,266 (-45%) and$523,290 (-36%) to$236,978 and$947,556 for the three and nine months endedSeptember 30, 2022 , compared to$427,244 and$1,470,846 for the three and nine months endedSeptember 30, 2021 . This decrease in investment income was due primarily to a smaller overall portfolio than in 2022 as investments were sold to pay claims and for operational uses. In 2022, our third-party investment advisor was instructed by management to not invest in matured bonds or dividends so the portfolio remains relatively liquid, which will limit net investment income. For the three and nine months endedSeptember 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 ofDecember 31, 2021 were determined to be temporary. The Company had$4,188,007 in net realized losses and$4,658,073 in net realized losses for the three and nine months endedSeptember 30, 2022 , respectively, compared to net realized gains of$57,173 and$3,912,840 , respectively, for the three and nine months endedSeptember 30, 2021 . The Company did not own any equity securities and therefore had no net unrealized investment gains on equity securities for the three and nine months endedSeptember 30, 2022 , compared to net unrealized losses of$147,722 and gains of$18,559 , respectively, for the three and nine months
endedSeptember 30, 2021 . Average yields on the Company's average invested assets and investment income, excluding net realized investment gain and losses and net unrealized investment losses on equity securities, are as follows: Three Months Ended September 30 Nine Months Ended September 30 2022 2021 2022 2021 Average invested assets (1) - at amortized cost$ 53,322,367 $ 89,173,860 $ 61,812,888 $ 83,570,810 Net investment income from: Invested assets (2)$ 228,988 $ 427,222 $ 939,527 $ 1,470,405 Invested Cash 7,990 22 8,029 441 Total investment income$ 236,978 $ 427,244 $ 947,556 $ 1,470,846 Average yield on average invested assets (3) 1.7 % 1.9 % 4.6 % 2.3 %
(1) The average is based on the beginning and ending balance of the amortized
cost of the invested assets for each respective period.
(2) Investment income from insurance company operation included
30, 2022, compared to
three and nine months ended
(3) Average yield on average invested assets did not include the investment
income from cash equivalents.
37
Table of Contents
As Crusader entered into runoff, it will need to liquidate some of its investment holdings to support its operations. Accordingly, the size of Crusader's investment portfolio and investment income are expected to decrease.
The amortized cost, estimated fair value (adjusted for YTD unrealized gains and
losses) and weighted average yield of fixed maturity investments by contractual
maturity are as follows:
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 for
$4,447,570 on its fixed maturities, available-for sale portfolio and a new cost basis for
these securities was established.
Weighted
Amortized Average
Maturities by Year at Cost Fair Value Yield
December 31, 2021
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
3.1 years as of
A summary of estimated fair value, gross unrealized losses, and number of securities in a gross unrealized loss position by the length of time in which the securities have continually been in that position is shown below:
38
Table of Contents
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
The fair value of the Company's investment portfolio atSeptember 30, 2022 was significantly impacted by higher market interest rates caused by the tightening of monetary policy by theFederal Reserve and the economic impact ofRussia's invasion ofUkraine . The Company closely monitors its investments. If an unrealized loss is determined to be other-than-temporary, it is written off as a realized loss through the Condensed Consolidated Statements of Operations. The Company's methodology of assessing other-than-temporary impairments is based on security-specific analysis as of the balance sheet date and considers various factors including the length of time to maturity and the extent to which the fair value has been less than the cost, the financial condition and the near-term prospects of the issuer, and whether the debtor is current on its contractually obligated interest and principal payments. The 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 endedSeptember 30, 2022 , the Company recorded an intent-to-sell impairment loss of$4,447,570 as a reduction to the amortized cost of fixed maturities, available-for-sale. The unrealized losses on all securities as ofDecember 31, 2021 were determined to be temporary. The Company may sell investment securities from time to time in response to cash flow requirements, economic, regulatory, and/or market conditions or investment securities may be called by their issuers prior to the securities' maturity
The fixed maturity securities previously held by the Company were sold and called prior to maturity as follows:
Three Months Ended September 30 Nine Months Ended September 30
Fixed
maturities
securities
sold 2022 2021 2022 2021
Number of
securities
sold 2 - 2 3
Amortized
cost of soldsecurities$ 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 $ 0$ 2,929,834 $ 4,194,899 $ 5,323,613 Realized gains (losses) gains 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.
Other income
Other income included in Insurance Company Revenues and Other Insurance
Operations was
39
Table of Contents
Gross commissions and fees
Gross commissions and fees decreased 148,177 (-38%) and$456,963 (-37%) to$237,371 and$777,757 for the three and nine months endedSeptember 30, 2022 , respectively, compared to gross commissions and fees of$385,548 and$1,234,720 for the three and nine months endedSeptember 30, 2021 , respectively.
The comparison in gross commission and fee income for the three and nine months
ended
Three Months Ended September 30 Nine
Months Ended
(Restated) (Restated)
2022 2021 Change 2022 2021 Change
Brokerage
fee income $ 28,332 $ 46,018 $ (17,686 ) $ 221,938 $ 352,335 $ (130,397 )
Health
insurance )
program 198,936 323,121 (124,185 527,944 838,132 (310,188 )
Membership
and fee )
income 10,103 16,409 (6,306 27,875 44,253 (16,378 )
Gross
commissions
and fees $ 237,371 $ 385,548 $ (148,177 ) $ 777,757 $ 1,234,720 $ (456,963 )
Unifax sold insurance policies for Crusader until it was put into runoff and for
USIC until its contract with USIC was terminated on August 31, 2021 . Unifax
continues to service the Crusader and USIC insurance policies. For these
brokerage services, Unifax received commissions from insurance companies and
fees from policyholders. The commissions paid by Crusader to Unifax are
eliminated as intercompany transactions and are not reflected as income in the
condensed consolidated financial statements. Policy fee income received by
Unifax is related to the Crusader policies and service fee income received by
Unifax is related to the USIC policies. For financial statement reporting
purposes, brokerage fees are earned ratably over the life of the related
insurance policy. The unearned portion of the brokerage fees is recorded as a
liability on the Condensed Consolidated Balance Sheets under "Accrued expenses
and other liabilities." The earned portion of the brokerage fees charged to the
policyholder by Unifax is recognized as income in the condensed consolidated
financial statements.
Brokerage fee income decreased $17,686 (-38%) and $130,397 (-37%) in the three
and nine months ended September 30, 2022 , compared to $46,018 and $352,335 for
the three and nine months ended September 30, 2021 , due primarily to reduction
in policy counts. As a result of Crusader's entering into runoff, the brokerage
fee income, which is generated from production of Crusader and USIC insurance
policies, is expected to gradually decrease over time. The Company does not
expect any brokerage fee income in 2023.
American Insurance Brokers, Inc. , ("AIB") marketed health insurance in
California through non-affiliated insurance companies for individuals and
groups. For these services, AIB received commissions based on the premiums that
it wrote. Commission income of $198,936 and $527,944 decreased $124,185 (-38%)
and decreased $310,188 (-37%) for the three and nine months ended September 30,
2022 , respectively, compared to $323,121 and $838,132 for the three and nine
months ended September 30, 2021 . The decrease in the commissions during the
three and nine months ended September 30, 2022 , was due to the decrease in
override commissions for health and life business and a decrease in commission
income from individual, group, and other health and life policies. In October
2022 , Unico's subsidiaries, AIB, Insurance Club, Inc. and National Insurance
Brokers, Inc. , sold substantially all of their assets and business, which
comprised Unico's life and health business.
AAQHC is a third-party administrator for contracted insurance companies and is a
membership association that provides various consumer benefits to its members,
including participation in group health care insurance policies that AAQHC
negotiates for the association. For these services, AAQHC receives membership
and fee income from its members. Membership and fee income of $10,103 and
$27,875 decreased $6,306 (-38%) and decreased $16,378 (-37%) for the three and
nine months ended September 30, 2022 respectively, compared to $16,409 and
$44,253 , respectively for the three and nine months ended September 30, 2021 .
The decrease in the membership and fee income during the three and nine months
ended September 30, 2022 , is due primarily to the cancellation of a few large
groups.
Finance charges and fees earned
EffectiveAugust 8, 2021 , the Company decided to discontinue loan issuance through AAC. Finance charges and fees earned consist of finance charges, late fees, returned check fees and payment processing fees. These charges and fees earned by AAC decreased$40,458 (-100%) and$123,208 (-95%) to$0 and$7,020 for the three and nine months endedSeptember 30, 2022 , compared to$40,458 and$130,228 , respectively, in fees earned during the three and nine months endedSeptember 30, 2021 , due primarily to the discontinuation of loan issuance through AAC inAugust 2021 . During the three and nine months endedSeptember 30, 2022 , AAC issued no loans and had 5 loans outstanding as ofSeptember 30, 2022 . During the three and nine months endedSeptember 30, 2021 , AAC issued 131 and 563 loans, respectively, and had 572 loans outstanding as ofSeptember 30, 2021 . AAC provided premium financing for Crusader and USIC policies produced by Unifax inCalifornia . The Company continued servicing existing loans through their
expiration inJune 2022 . 40 Table of Contents
Losses and loss adjustment expenses
Loss and loss adjustment expenses are the Company's largest expense item. The loss ratio, which is calculated by dividing losses and loss adjustment expenses by net earned premium, was 114% and 102% for the three and nine months endedSeptember 30, 2022 , compared to 89% and 87% for the three and nine months endedSeptember 30, 2021 . The loss ratio is expected to increase as the Company settles additional claims and net earned premium continues to decrease.
Losses and loss adjustment expenses and loss ratios are as follows:
Three Months Ended September 30
Loss Loss
2022 Ratio 2021 Ratio Change
Net earned premium$ 1,164,019 $ 7,737,622 $ (6,573,603 ) Losses and loss adjustment expenses: Provision for insured events of current year 1,164,019 100 % 8,017,701
104 % (6,853,682 ) Development of insured events of prior years 164,328 14 % (1,165,803 ) (15 )% 1,330,131 Total losses and loss adjustment
expenses$ 1,328,347 114 %$ 6,851,898 89 %$ (5,523,551 ) Nine Months Ended September 30 Loss Loss 2022 Ratio 2021 Ratio Change Net earned premium$ 10,068,950 $ 21,309,130 $ (11,240,180 ) Losses and loss adjustment expenses: Provision for insured events of current year 10,068,950 100 % 20,529,747 96 % (10,460,797 ) Development of insured events of prior years 239,285 2 % (2,007,929 ) (9 )% 2,247,214 Total losses and loss adjustment expenses$ 10,308,235 102 %$ 18,521,818
87 %$ (8,213,583 ) Some lines of insurance are commonly referred to as "long-tail" lines because of the extended time required before claims are ultimately settled. Lines of insurance in which claims are settled relatively quickly are called "short-tail" lines. It is generally more difficult to estimate loss reserves for long-tail lines because of the long period of time that elapses between the occurrence of a claim and its final disposition and the difficulty of estimating the settlement value of the claim. Crusader's short-tail lines consist of its property coverages, and its long-tail lines consist of its liability coverages. However, Crusader's long-tail liability claims tend to be settled relatively quicker than other long-tail lines not underwritten by Crusader, such as workers' compensation, professional liability, umbrella liability, and medical malpractice. Since trends develop over longer periods of time on long-tail lines of business, the Company generally gives credibility to those trends more slowly than for short-tail or less volatile lines of business. The$1,164,019 provision for insured events of current year for the three months endedSeptember 30, 2022 , was$6,853,682 less than the$8,017,701 provision for insured events of current year for the three months endedSeptember 30, 2021 , because there are less policies and premiums. The loss ratios in the third quarter were comparable at 100% and 104% for the three months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. There was adverse loss development of$164,328 for the prior accident years for the three months endedSeptember 30, 2022 compared to favorable development of$1,165,803 due primarily to increases in direct IBNR associated with the Transportation business. The$10,068,950 provision for insured events of current year for the nine months endedSeptember 30, 2022 , was$10,460,797 less than the$20,529,747 provision for insured events for the nine months endedSeptember 30, 2021 , due primarily to decreases in the amount of premiums written and policies in force. The loss ratio for the current accident year is recorded at 100% which is 4% higher than the prior comparable period. The prior accident years' experience has been in line with the IBNR expectations at the end ofSeptember 30, 2022 with only$239,285 of prior accident years' development, compared to favorable development for the period endedSeptember 30, 2021 . Crusader has received several COVID-19-related business interruption claims. All claims were denied after the individual circumstances of each claim were reviewed to determine whether insurance coverage applied. Like many companies in the property casualty insurance industry, Crusader was named as defendant in lawsuits seeking insurance coverage under the policies issued by Crusader for alleged economic losses resulting from the shutdown or suspension of their businesses due to COVID-19. Although the allegations vary, the plaintiffs generally seek a declaration of insurance coverage, damages for breach of contract in unspecified amounts for claim denials, interest and attorney fees. Some of the lawsuits also allege that the insurance claims were denied in bad faith or otherwise in violation of state laws and seek extra-contractual or punitive damages. Only one of these suits remains active. 41 Table of Contents While the Company does not believe it is exposed to substantial risk from those claims under the insurance policies written by Crusader, the individual circumstances of each such claim are reviewed to fulfill Crusader's obligation to its policyholders if coverage applies. Further, there may be impacts to the timing of loss emergence and ultimate loss ratios for certain Crusader's products due to postponements of civil court cases, extensions of various statutes of limitations, changes in settlement trends and other new legislative, regulatory or judicial developments which could result in loss reserve deficiencies and negative impact on results of operations. Crusader has no claims related to civil unrest throughSeptember 30, 2022 .
The following table breaks out adverse (favorable) development from total losses
and loss adjustment expenses quarterly since
Adverse
(Favorable)
Provision for Development Total Losses
Insured of Insured and Loss
Events of Events of Adjustment
Current Year Prior Years Expenses
Three Months Ended:
September 30, 2022 $ 1,164,019 $ 164,328 $ 1,328,347
June 30, 2022 2,783,820 (635,436 ) 2,148,384
March 31, 2022 6,121,111 710,393 6,831,504
December 31, 2021 6,290,918 1,160,104 7,451,022
September 30, 2021 8,017,701 (1,165,803 ) 6,851,898
June 30, 2021 5,754,482 330,225 6,084,707
March 31, 2021 6,757,564 (1,172,351 ) 5,585,213
December 31, 2020 6,758,848 (202,270 ) 6,556,578
September 30, 2020 9,385,389 7,934,662 17,320,051
At the end of each fiscal quarter, Crusader's loss and loss adjustment expense
reserves for each accident year (i.e., for all claims incurred within each year)
are re-evaluated independently by the Company's president, the Company's chief
financial officer, and by an independent consulting actuary. Generally accepted
actuarial methods, including the widely used Bornhuetter-Ferguson and loss
development methods, are employed to estimate ultimate claims costs. An
actuarial central estimate of the ultimate claims costs and IBNR reserves is
ultimately determined by management and tested for reasonableness by the
independent consulting actuary.
The variability of Crusader's losses and loss adjustment expenses for the
periods presented is primarily due to the small and diverse population of
Crusader's policyholders and claims, which may result in greater fluctuations in
claim frequency and/or severity. In addition, Crusader's reinsurance retention,
which is relatively high in relationship to its net earned premium, can result
in increased loss ratio volatility when large losses are incurred in a
relatively short period of time. Nevertheless, management believes that its
reinsurance retention is reasonable given the amount of Crusader's surplus and
its goal to minimize ceded premium.
42
Table of Contents
The preparation of the Company's condensed consolidated financial statements
requires that management makes an estimation of certain liabilities, most
significantly the liability for unpaid losses and loss adjustment expenses.
Management makes its best estimate of the liability for these unpaid claims
costs as of the end of each fiscal quarter. Due to the inherent uncertainties in
estimating Crusader's unpaid claims costs, actual loss and loss adjustment
expense payments are expected to vary, perhaps significantly, from any estimate
made prior to the settling of all claims. Variability is inherent in
establishing loss and loss adjustment expense reserves, especially for a small
insurer such as Crusader. For any given line of insurance, accident year, or
other group of claims, there is a continuum of possible loss and loss adjustment
expense reserve estimates, each having its own unique degree of propriety or
reasonableness. Due to the complexity and nature of the insurance claims
process, there are potentially an infinite number of reasonably likely
scenarios. Management draws on its collective experience to judgmentally
determine its best estimate. In addition to applying a variety of standard
actuarial methods to the data, an extensive series of diagnostic tests are
applied to the resultant loss and loss adjustment expense reserve estimates to
determine management's best estimate of the unpaid claims liability. The
statistics reviewed for each accident year include loss and loss adjustment
expense development patterns, frequencies, severities; and ratios of loss to
premium, loss adjustment expense to premium, and loss adjustment expense to
loss.
When there is clear evidence that the actual claims costs emerged are different
than expected for any prior accident year, the claims cost estimates for that
year are revised accordingly. If the claims costs that emerge are less favorable
than initially anticipated, generally, Crusader increases its loss and loss
adjustment expense reserves immediately. However, if the claims costs that
emerge are more favorable than initially anticipated, generally, Crusader
reduces its loss and loss adjustment expense reserves over time while it
continues to assess the validity of the observed trends based on the subsequent
emerged claim costs.
The establishment of loss and loss adjustment expense reserves is a detailed
process as there are many factors that can ultimately affect the final
settlement of a claim. Estimates are based on a variety of industry data and on
Crusader's current and historical accident year claims data, including but not
limited to reported claim counts, open claim counts, closed claim counts, closed
claim counts with payments, paid losses, paid loss adjustment expenses, case
loss reserves, case loss adjustment expense reserves, earned premiums and policy
exposures, salvage and subrogation, and unallocated loss adjustment expenses
paid. Many other factors, including changes in reinsurance, changes in pricing,
changes in policy forms and coverage, changes in underwriting and risk
selection, legislative changes, results of litigation and inflation are also
considered.
Policy acquisition costs
Policy acquisition costs consist of commissions, premium taxes, inspection fees,
and certain other underwriting costs that are directly related to the production
of Crusader insurance policies. These costs include both Crusader expenses and
the allocated expenses of other Unico subsidiaries. Crusader's reinsurers pay
Crusader a ceding commission, which is primarily a reimbursement of the
acquisition cost related to the ceded premium. No ceding commission is received
on facultative or catastrophe ceded premium. Policy acquisition costs, net of
ceding commission, are deferred and amortized as the related premiums are
earned. The Company annually reevaluates its acquisition costs to determine that
costs related to successful policy acquisition are capitalized and deferred.
Policy acquisition costs and the ratio to net earned premium are as follows:
Three Months Ended September 30 Nine
Months Ended September 30
2022 2021 Change 2022 2021 Change
Policy
acquisition
costs $ (145,899 ) $ 1,951,053 $ (2,096,952 ) $ (353,275 ) $ 4,078,563 $ (4,431,838 )
Ratio to
net earned
premium
(GAAP
ratio) -13 % 25 % -4 % 19 %
Policy acquisition costs decreased during the three and nine months ended
September 30, 2022 , as compared to the three and nine months ended September 30,
2021 , due to the cessation of underwriting operations, which resulted in an
overall decrease in the ratio for nine months ended September 30, 2022 . The
Company expensed all of its capitalized expenses in the first quarter of 2022.
The decrease in the acquisition costs is a result of cancelled policies, which
we receive a refund of the ceded commission, and the payment of premium taxes,
which are paid a year in advance.
As a result of the runoff of Crusader, policy acquisition costs, which are
related to production of Crusader insurance policies, are expected to gradually
decrease over time. The Company does not expect any policy acquisition costs in
2023.
Salaries and employee benefits
Salaries and employee benefits decreased$1,145,898 (-98%) to$26,046 and$2,369,747 (-68%) to$1,135,918 for the three and nine months endedSeptember 30, 2022 , compared to$1,171,944 and$3,505,665 for the three and nine months endedSeptember 30, 2021 , respectively, because there are fewer employees as the Company is in runoff. 43 Table of Contents Salaries and employee benefits incurred and charged to operating expenses are as follows: Three Months EndedSeptember 30 Nine
Months Ended September 30
2022 2021 Change 2022 2021 Change
Total
salaries
and
employee
benefits
incurred $ 1,138,361 $ 2,283,485 $ (1,145,124 ) $ 4,617,774 $ 6,607,768 $ (1,989,994 )
(Less)
charged to
losses and
loss
adjustment
expenses (1,112,315 ) (803,902 ) (308,413 ) (3,481,856 ) (1,965,895 ) (1,515,961 )
Less:
capitalized
to policy
acquisition
costs - (307,639 ) 307,639 - (967,891 ) 967,891
Less:
charged to
IT system
upgrade - - - - (168,317 ) 168,317
Net amount
charged to
operating
expenses $ 26,046 $ 1,171,944 $ (1,145,898 ) $ 1,135,918 $ 3,505,665 $ (2,369,747 )
The decrease in the total salaries and employee benefits incurred for the three
and nine months ended September 30, 2022 , compared to the three and nine months
ended September 30, 2021 , was due primarily to reductions in headcount of
non-claims personnel, partially offset by increases in employee benefits costs
as a result of higher medical insurance rates.
As a result of the runoff of Crusader, salaries and employee benefits are
expected to decrease over time as the Company reduces its employee headcount to
adequately support the diminished operations. The decrease in the salaries and
employee benefits is expected to be partially offset by costs of severance paid
to terminated employees and retention bonuses paid to remaining employees.Commissions to agents/brokers
Commissions to agents/brokers (not including commissions on Crusader and USIC policies that are reflected in policy acquisition costs) are generally related to gross commission income from the health insurance program. Commissions to agents/brokers on the health insurance program decreased$7,836 (-39%) and$4,394 (-7%) to$12,186 and$56,630 for the three and nine months endedSeptember 30, 2022 , compared to$20,022 and$61,024 for the three and nine months endedSeptember 30, 2021 . Other operating expenses Other operating expenses increased$881,007 (84%) to$1,932,357 and$1,357,008 (40%) to$4,728,960 for the three and nine months endedSeptember 30, 2022 , respectively, compared to$1,051,350 and$3,371,952 , respectively, for the three and nine months endedSeptember 30, 2021 . The total expenses increase in the current period compared to the comparable period was primarily due to increases in regulatory legal fees paid to attorneys and examination fees paid to the CA DOI partially offset by a decrease in lease expense. Income tax expense Income tax benefit was$636,604 (-11% of pre-tax loss) and income tax expense was$257,637 (3% of pre-tax loss) for the three and nine months endedSeptember 30, 2022 , respectively. This compared to a tax expense of$59,579 (2% of pre-tax loss) and$310,191 (23% of pre-tax loss) for the three and nine months endedSeptember 30, 2021 , respectively. As ofSeptember 30, 2022 andDecember 31, 2022 , 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 in 2028. In connection with the preparation of its condensed consolidated financial statements, the Company periodically performs an analysis of future income projections to determine the adequacy of the valuation allowance. In light of the net losses that were generated in recent years, and for the periods endedSeptember 30, 2022 andDecember 31, 2021 , the Company has established a full valuation allowance against all deferred tax assets for the periods endedSeptember 30, 2022 andDecember 31, 2021 in the amount of$12,643,818 and$11,093,602 , respectively, and in management's judgement they will not more-likely-than-not be realized.
Critical Accounting Policies and Estimates
The condensed consolidated financial statements included elsewhere in this report have been prepared in accordance with accounting principles generally accepted inthe United States which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies and estimates which we believe could have the most significant effect on our reported results and require subjective or complex judgments by Management is contained in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2021 Form 10-K/A. There have been no significant changes from the information discussed therein.
OFF-BALANCE SHEET ARRANGEMENTS
During the periods presented, there were no off-balance sheet transactions, unconditional purchase obligations or similar instruments and the Company was not a guarantor of any other entities' debt or other financial obligations.
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