UNICO AMERICAN CORP - Annual Report: 2021 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2021 

Commission File No. 000-03978 

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

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

Securities registered pursuant to section 12(g) of the Act:

None

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐      No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐      No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐     No ☒

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

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

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

The aggregate market value of the registrant’s common equity held by non-affiliates of the registrant at June 30, 2021 was $13,916,355 (which represents 2,942,147 shares of common equity held by non-affiliates multiplied by $4.73, the closing sales price on the Nasdaq Global Market for such date, as reported by the Wall Street Journal).

At May 31, 2022, the registrant had issued and outstanding an aggregate of 5,304,863 shares of its Common Stock.

UNICO AMERICAN CORPORATION

INDEX TO FORM 10-K

Forward Looking Statements

This Form 10-K, and the documents incorporated by reference in this document, the Company’s press releases, and oral statements made from time to time by the Company or on the Company’s behalf, may contain “forward-looking statements” within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended (or “the Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended. In this context, forward-looking statements are not historical facts and include statements about the Company’s plans, objectives, beliefs, and expectations. Forward-looking statements include statements preceded by, followed by, or that include the words “believes,” “expects,” “anticipates,” “seeks,” “plans,” “estimates,” “intends,” “projects,” “targets,” “should,” “could,” “may,” “will,” “can,” “hope,” “can have,” “likely,” the negatives thereof or similar words and expressions. These forward-looking statements are contained throughout this Form 10-K, including, but not limited to, statements found in Part I, and Part II  – Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

Please see Part I – Item 1A – “Risk Factors” and Part II – Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10-K, as well as other documents the Company files with the U.S. Securities and Exchange Commission (“SEC”), from time-to-time, for other important factors that could cause the Company’s actual results to differ materially from the Company’s current expectations and from the forward-looking statements discussed herein. Because of these and other risks, uncertainties, and assumptions, you should not place undue reliance on these forward-looking statements. In addition, these statements speak only as of the date of this Form 10-K and, except as may be required by law, the Company undertakes no obligation to revise or update publicly any forward-looking statements for any reason of this Form 10-K, as well as other documents the Company files.

PART I

Item 1.  Business.

OVERVIEW

General   

Unico American Corporation is an insurance holding company. Unico’s insurance company subsidiary Crusader Insurance Company (“ Crusader”) has historically underwritten commercial property and casualty insurance. The Company’s subsidiaries Unifax Insurance Systems, Inc. (“ Unifax”) and American Insurance Brokers, Inc. (“ AIB”) provides marketing (except for Crusader) and continues to provide various underwriting support services related to property, casualty, health and life insurance. The Company’s subsidiary American Acceptance Company (“AAC”) provided insurance premium financing through August 2021, the Company’s subsidiary Insurance Club, Inc., dba AAQHC, an Administrator (“AAQHC”) provides membership association services. The Company’s subsidiary U.S. Risk Managers, 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 30, 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 California Department of Insurance (“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 its subsidiary AAC, which activity is reflected on the Statements of Operations under “Other insurance operations.” 

Going Concern 

Based on Unico’s current cash and short‑term investments at December 31, 2021, as well as the other factors described herein, there is substantial doubt that Unico will have sufficient cash to meet its operating and other liquidity requirements when they become due during the next twelve months from the date of issuance of the accompanying consolidated financial statements.

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

Unico needs to improve its consolidated operating results, continue to receive financial support from Crusader, and/or raise substantial additional capital to continue to fund its operations.  Unico has taken actions to cause Crusader to enter into runoff and to wind down operations that support the writing of insurance policies. To address its liquidity concerns and meet its capital obligations, Unico has announced a review of strategic alternatives and, with the assistance of a financial advisor, is considering multiple alternatives, including, but not limited to, strategic financing, further scaling back, or eliminating some or all of its remaining business operations, expense reductions, reorganization, merger with another entity, filing for bankruptcy or cessation of operations.  There can be no assurances that capital will be available when needed or that, if available, it will be obtained on terms favorable to the Company and its stockholders, particularly in light of the effects that the coronavirus COVID-19 pandemic has 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.

Supervision Agreement  

Crusader and the CA DOI entered into the “Supervision Agreement,” dated September 7, 2021, at the request of the CA DOI. The Supervision Agreement was requested by the CA DOI because of the CA DOI’s expressed concerns regarding the financial stability of Crusader and the potential effects on Crusader and Crusader’s California policyholders of any potential bankruptcy of Unico. The Supervision Agreement among other things, provides for the appointment by the CA DOI of a Special Examiner to provide supervision and regulatory oversight of Crusader. The Supervision Agreement imposes limitations on Crusader’s ability to take certain actions without the prior written consent of the California Insurance Commissioner (the “Commissioner”), the Special Examiner, or the Special Examiner’s appointed representative. Among the actions that Crusader is prohibited from making without such prior written consent are the following: (i) making payments, engaging in any transaction with or entering into any agreement with, any affiliated or otherwise related person or entity if the cost to Crusader is an individual payment of more than $5,000 or aggregate payments of more than $20,000; (ii) making payments, engaging in any transaction with or entering into any agreement with, any non-affiliated or otherwise unrelated person or entity if the cost to Crusader is an individual payment of more than $5,000 or aggregate payments of more than $20,000; (iii) paying any dividend of any amount; (iv) except as provided in (i) and (ii), making any payments to or on behalf of the Company in connection with any agreement entered into between Crusader and the Company; (v) making any loans to affiliates, officers, directors, stockholders or third parties; (vi) incurring any debt, obligation or liability greater than $5,000; (vii) entering into any new reinsurance contract or treaty or amending any existing reinsurance contract or treaty; (viii) making any material changes in management and essential staffing; (ix) increasing salaries or benefits of officers or directors or making any preferential payment of bonuses or other payments considered legally preferential; and (x) making any other material changes in its normal course of operations, including but not limited to, entering into new lines of business, making major corporate reorganizations, or redomesticating from California. The Supervision Agreement provided that the Special Examiner meet with Crusader and develop a list of recurring payments under items (i) and (ii) that may not require prior written approval, which occurred. 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. The Special Examiner has recently informed Crusader that it 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. If the Special Examiner does not continue to permit Crusader to financially support Unico in the future, Unico will be unable to continue to fund its ongoing operations.

On September 13, 2021, the Special Examiner advised Crusader, through its counsel, that a deficiency existed in certain funds that Unifax is required to maintain, in a fiduciary capacity, for Crusader's benefit. Pursuant to the provisions of California Insurance Code (“CIC”) Sections 1733 and 1734, Unifax is required to hold premium payment funds received from policyholders as fiduciary funds in trust maintained for the benefit of Crusader.  The Special Examiner informed Crusader that the CA DOI believed that the deficiency in such fiduciary funds was approximately $3,100,000 as of September 13, 2021. The Company believes that as of September 30, 2021, the amount of such deficiency was $2,452,835. In January 2022 Unico, Crusader, and Unifax agreed, with the pre-approval of the Special Examiner, to transfer a computer system, owned by Unico, to Crusader. Unico contributed the computer system at its book value of $1,991,956, to Unifax, and Unifax in turn contributed the computer system to Crusader at its book value of $1,991,956 as a direct reduction in the amount due to Crusader which resulted in a dollar-for-dollar reduction in the premium trust deficiency. The amount of such deficiency was $275,901 as of March 31, 2022, and $432,900 as of May 31, 2022. 

Independent Investigation 

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

Work Force Reduction 

In connection with the runoff of Crusader, on October 7 and October 8, 2021, the Company informed thirteen employees of the Company’s determination to terminate their employment, effective as of October 8, 2021 (the “October 2021 Work Force Reduction”). Additionally, on December 16, 2021, and December 17, 2021, the Company informed an additional twelve employees of the Company's determination to terminate their employment, effective as of December 17, 2021 (the “December 2021 Work Force Reduction”).  The terminated employees were primarily employed in the Company’s underwriting and marketing groups. In connection with the October 2021 Work Force Reduction and the December 2021 Work Force Reduction, the Company expects to incur total pre-tax costs of $968,139, consisting of severance payments under the Company’s existing policy. In addition, the Company has offered retention bonuses to certain of the Company’s employees that were not subject to the October 2021 Work Force Reduction and the December 2021 Work Force Reduction, in connection with which, depending on employee participation, the Company expects to incur total pre-tax costs of $62,269. The Company implemented another retention bonus plan to certain employees and expects to incur total pre-tax costs of $193,731 related to the plan, which will be recognized ratably over the last three quarters of 2022. The Company may incur additional costs in connection with the runoff of Crusader, including additional costs associated with workforce reductions.

In 2021, the Company paid $331,331 in severance payments and $0 in retention bonus payments. In 2022, the Company has paid $270,705 in severance payments and $284,810 in retention bonus payments.

COVID-19

As a result, of the ongoing COVID-19 pandemic, economic uncertainties have arisen which can impact the fair value of investments and day-to-day administration of the business. 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, however, the investment portfolio recovered in value in subsequent quarters. The overall response to the pandemic contributed to the recent decline in investment yields, compared to previous years, which will cap the Company’s investment portfolio’s ability to generate higher levels of investment income, absent a larger invested asset base or a change in investment philosophy.

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

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

In addition to the inherent difficulty in predicting litigation outcomes, the COVID-19 pandemic business income coverage lawsuits present a number of uncertainties and contingencies that are not yet known, including how many policyholders will ultimately file claims, the number of lawsuits that will be filed, the extent to which any class may be certified, and the size and scope of any such classes. The legal theories advanced by plaintiffs vary by case. These lawsuits are in the early stages of litigation; many complaints continue to be amended; several have been dismissed voluntarily and may be refiled; and others have been dismissed by trial courts. Some early decisions on motion filings have been appealed.

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, 1^st Appellate District, Division 2 (A164412). The opening brief of Anchors & Whales LLC is due to be filed by August 12, 2022. The Company cannot predict the actions of the Court of Appeals.

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

Termination of Reinsurance Arrangement

On August 31, 2021, Crusader and United Specialty Insurance Company (“ USIC”), terminated the Quota Share Reinsurance Agreement (the “New Reinsurance Agreement”), effective April 1, 2020, by and between Crusader and USIC. Pursuant to the New 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 New 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.

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

On August 31, 2021, as a result of the termination of the Broker Agreement, the Claims Administration Agreement (the “Claims Administration Agreement”), effective April 1, 2020, by and between U.S. Risk and USIC, automatically terminated. Pursuant to the Claims Administration Agreement, USIC appointed U.S. Risk to adjust and settle claims on its behalf in connection with the surplus lines policies issued by USIC in connection with the New 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 New Reinsurance Agreement was mutually terminated by Crusader and USIC. There were no early termination penalties incurred as a result of the termination. The New Reinsurance Agreement provides for a minimum ceding fee, and, upon termination of the New Reinsurance Agreement, the minimum ceding fee was pro-rated to the date of termination unless there were policies issued after the termination of the New Reinsurance Agreement. In such case, the minimum ceding fee will continue past the termination of the New Reinsurance Agreement until such time as no further policies are issued. USIC waived any additional ceding fees payable under the New Reinsurance Agreement under the agreement to terminate that agreement.

Under the New Reinsurance Agreement, Crusader was required to secure its obligations to USIC for unearned premium reserves, if any, and loss reserves (losses incurred and not reported and loss reported but unpaid) in a security fund, trust agreement or letter of credit to permit USIC to receive credit for the reinsurance ceded to Crusader by USIC. Such security was required because Crusader is not authorized to transact insurance in Delaware, the domiciliary state of USIC. Initially, the security required to be provided by Crusader was 150% of the unearned premium and loss reserves. USIC was permitted to request additional security for the unearned premium and loss reserves in the event (i) the A.M. Best rating of Crusader is at any time reduced; or (ii) the A.M. Best rating of Crusader is at any time removed or withdrawn; or (iii) there is a reduction the capital and policyholder surplus of Crusader by 10% or more in any rolling 12-month period or (iv) Crusader fails to maintain its Cat excess of loss reinsurance coverage at certain levels. As of December 31, 2021, six securities were held as collateral with Comerica Bank & Trust, N. A. (“Comerica”), pursuant to the reinsurance trust agreement among Crusader, USIC and Comerica to secure payment of Crusader’s liabilities and performance of its obligations under the reinsurance arrangement with USIC. The estimated fair value and amortized cost of those securities was $8,243,758 and $8,162,053 on December 31, 2021, respectively. The estimated aggregate fair value and amortized cost of these securities was $7,944,916 and $7,836,756, on March 31, 2022, respectively. As of April 30, 2022, the estimated market value decreased to $7,663,701. Such market values are used in the trust fund calculation by USIC. Because of Crusader’s loss of the AM Best rating and the decline in policyholder surplus, along with a decline in the market value of the securities there is an increase in the security requested by USIC to 325%.. If Crusader fails to provide the additional security requested by USIC, USIC may draw down the full amount of the funds in the reinsurance trust agreement. Crusader is reviewing the request of USIC. Any increase to the reinsurance trust account by Crusader will require the consent of the Special Examiner. Any drawdown of the reinsurance trust account by USIC may have a materially adverse effect on the financial condition of Unico. As of December 31, 2020, one corporate security, included in available-for-sale fixed maturities, was held as collateral with Comerica, pursuant to the reinsurance trust agreement among Crusader, USIC and Comerica to secure payment of Crusader’s liabilities and performance of its obligations under the reinsurance arrangement with USIC. On December 31, 2020, the estimated fair value and amortized cost of that security was $824,500 and $787,653, respectively.

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 have and will continue to decline significantly in the future. The insurance company operation revenues generated approximately 95.2% of consolidated revenues for the fiscal year ended December 31, 2021, compared to 93.6% of consolidated revenues for the fiscal year ended December 31, 2020. None of the Company’s other operations is individually material to consolidated revenues.

Description of Operations—General 

Descriptions of the Company’s operations in the following paragraphs are categorized between the Company’s primary segment, the insurance company operation, and “Other insurance operations.” The insurance company operation is conducted through Crusader, Unico’s property and casualty insurance company. Revenues from insurance company operation and other insurance operations for the years ended December 31, 2021 and 2020 were as follows:

INSURANCE COMPANY OPERATION

General

The Company’s insurance company operation is conducted through Crusader.  Crusader is a multiple line property and casualty insurance company that began transacting business on January 1, 1985.  From 2004 until June 2014, all of Crusader’s business was written in the state of California. Crusader’s business remains concentrated in California which was 100%, and 99.9%, in 2021, and 2020, respectively, of gross written premium before reinsurance ceded under reinsurance treaties.  Crusader underwrote three statutory annual statement lines of business: (1) CMP, (2) liability other than automobile commercial auto, and (3) fire. During the years ended December 31, 2021 and 2020, CMP policies comprised 99.7% and 99.6% of Crusader’s gross written premium, respectively.  CMP policies include both property and liability coverages.  Commercial property coverage insures against loss or damage to buildings, inventory, and equipment from natural disasters, including hurricanes, windstorms, hail, water, explosions, severe winter weather, and other events such as theft and vandalism, fires, storms, and financial loss due to business interruption resulting from covered property damage.  However, Crusader does not write earthquake coverage.  Commercial liability coverage insures against third-party liability from accidents occurring on the insured’s premises or arising out of its operation.  In addition to CMP policies, Crusader also writes separate policies to insure commercial property and commercial liability risks on a mono-line basis which provides either commercial property or commercial liability coverage, but not both.  Crusader is domiciled in California; and, as of December 31, 2021, Crusader is licensed as an admitted insurance carrier in the states of Arizona, California, Nevada, Oregon, and Washington.

Production and Servicing of Policies

Prior to being placed into runoff, Crusader historically sold its insurance policies through Unifax, a subsidiary of the Company and Crusader’s sister corporation and exclusive general agent.  All policies were produced by a network of independent brokers and agents.  

Adjusting of Claims 

Effective April 2020, the management and adjustment of Crusader claims is managed by U.S. Risk, a subsidiary of the Company and sister corporation of Crusader. U.S. Risk currently manages all of the claims of Crusader with a staff of in-house claim adjusters. This staff adjusts claims and oversees all outside claim services such as attorneys, independent or outside claim adjusters, investigators, and experts, as necessary. On April 23, 2020, the CA DOI advised Crusader of its non-disapproval of the move from Crusader’s claims adjusting function to U.S. Risk. All claims services being provided by U.S. Risk to Crusader are subject to the ultimate control of Crusader. In January 2022, the Company engaged a third-party administrator to assist in the adjustment of claims.

Reinsurance

A reinsurance transaction occurs when an insurance company transfers (cedes) a portion of its exposure on policies written to a reinsurer that assumes that risk for a premium (ceded premium).  Reinsurance does not legally discharge Crusader from primary liability under its policies.  If the reinsurer fails to meet its obligations, Crusader must nonetheless pay its policy obligations.  Crusader’s primary excess of loss reinsurance agreements, or treaties, during the years ended December 31, 2021 and 2020, with Renaissance Reinsurance U.S. Inc. & Hannover Ruck SE which are both A+ rated.  Crusader’s retention on losses is $500,0000 under these contracts.  Reinsurance treaties are generally structured in layers, with different negotiated economic terms and retention of participation, or liability, in each layer. 

Crusader’s primary excess of loss reinsurance agreements, or treaties, during the years ended December 31, 2021 and 2020, are with Renaissance Reinsurance U.S. Inc. & Hannover Ruck SE, both A+ rated. In calendar years 2021 and 2020, Crusader retained a participation in its excess of loss reinsurance treaties of 0% in its 1^st layer (reinsured losses between $500,000 and $1,000,000), 0% in its 2^nd layer (reinsured losses between $1,000,000 and $4,000,000), and 0% in its clash layer (reinsured losses between $4,000,000 and $8,000,000).  Crusader’s retention on losses is $500,000 under these contracts.

Crusader also has catastrophe (“CAT”) reinsurance treaties from various highly rated California authorized and California unauthorized reinsurance companies. These reinsurance treaties help protect Crusader against losses in excess of certain retentions from catastrophic events that may occur on property risks which Crusader insures. In calendar years 2021 and 2020, Crusader retained a participation in its catastrophe excess of loss reinsurance treaties of 5% in its 1^st layer (reinsured losses between $1,000,000 and $10,000,000) and 0% in its 2^nd layer (reinsured losses between $10,000,000 and $46,000,000).  Crusader’s retention on losses is $1,000,000 under these contracts. In 2022 the catastrophe excess of loss reinsurance treaties was reduced to $16,000,000 with 0% participation and 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 rated California 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, (the 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.  From June 2021, 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.

The following tables present coverage limits and terms of Crusader’s reinsurance treaties

Crusader has no reinsurance recoverable balances in dispute.

Crusader evaluates each of its ceded reinsurance treaties at its inception to determine if there is sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting literature.  As of December 31, 2021, and 2020, all such ceded contracts are accounted for as risk transfer reinsurance.

The aggregate amount of ceded earned premium to Crusader’s reinsurers was $11,693,756 and $8,096,701, for the years ended December 31, 2021 and, 2020 respectively

The reinsurer pays a commission to Crusader on the portion of the premium that is ceded.  The commission includes reimbursement of the costs to acquire the policy.  The unpaid losses ceded to the reinsurer are recorded as an asset on the balance sheet.

In 2020, Crusader entered into a 100% Quota Share Agreement with USIC in which Crusader produced by Unifax assumed reinsurance ceded to it by USIC for commercial property and liability insurance written by USIC on a surplus lines’ basis. The assumed premium ceded to Crusader was $3,395,010 and $304,030 for years ended December 31, 2021 and 2020, respectively. The assumed losses for the business ceded to Crusader by USIC were $836,622 and $89,204 for the years ended December 31, 2021 and 2020, respectively. As disclosed above, in August 2021, Crusader and USIC terminated their Reinsurance Agreement. As a result of the termination of the Reinsurance Agreement, the Broker Agreement by and between Unifax and USIC, automatically terminated. As a result of the termination of the Broker Agreement, the Claims Administration Agreement by and between U.S. Risk and USIC, automatically terminated. 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.

Unpaid Losses and Loss Adjustment Expenses

Crusader maintains reserves for losses and loss adjustment expenses with respect to both reported and unreported losses.  When a claim for loss is reported to Crusader, a reserve is established for the expected cost to settle the claim, including estimates of any related legal expense and other costs associated with resolving the claim.  These reserves are called “case” reserves.  In addition, Crusader also establishes reserves at the end of each reporting period for losses that have occurred but have not yet been reported to Crusader.  These incurred but not reported losses are referred to as “IBNR” reserves.

Crusader establishes reserves for reported losses based on historical experience, upon case‑by‑case evaluation of facts surrounding each known loss, and upon the related policy provisions.  The amount of reserves for unreported losses is estimated by analysis of historical and statistical information.  The ultimate liability of Crusader may be greater or less than estimated reserves.  Reserves are monitored and adjusted when appropriate and are reflected in the statement of operations in the period of adjustment.  Reserves for losses and loss adjustment expenses are estimated to cover the future amounts needed to pay claims and related expenses with respect to insured events that have occurred.

Crusader does not discount to a present value the portion of loss and loss adjustment expense reserves expected to be paid in future periods.  Federal tax law, however, requires Crusader to discount loss and loss adjustment expense reserves for federal income tax purposes.

In 2020, Crusader experienced a significant increase in loss and loss adjustment expense reserves due to a $9,399,547 strengthening of IBNR reserves.  In 2021, there was positive loss development in total direct IBNR in six accident years. 

Net Written Premium to Statutory Surplus Ratio

The following table shows, for the periods indicated, Crusader's statutory ratio of net written premium (after reinsurance ceded) to statutory surplus.  Since each property and casualty insurance company has different capital needs, an "acceptable" ratio of net written premium to statutory surplus for one company may be inapplicable to another.  While there is no statutory requirement applicable to Crusader that establishes a permissible net premium to surplus ratio, guidelines established by the National Association of Insurance Commissioners (“NAIC”) provide that such ratio should generally be no greater than 3 to 1.  The following is Crusader’s ratios: 

Crusader’s results herein are reported in accordance with U.S. generally accepted accounting principles (“GAAP”).  These results differ from Crusader’s financial results reported in accordance with Statutory Accounting Principles (“SAP”) as prescribed or permitted by insurance regulatory authorities.  Crusader is required to file financial statements with insurance regulatory authorities prepared on an SAP basis.

SAP differs in certain respects from GAAP.  The more significant of these differences that apply to Crusader are:

Primary State Regulator

Crusader is regulated by the CA DOI and by the insurance departments of other states in which Crusader is authorized to transact insurance.  The insurance departments have broad regulatory, supervisory, and administrative powers over insurers that transact business in their states.  These powers relate primarily to the standards of solvency which must be met and maintained; the licensing of insurers and their agents; the nature and limitation of insurers' investments; the prior approval of rates, rules, and forms; the issuance of securities by insurers; periodic financial and market conduct examinations of the affairs of insurers; the annual and other reports required to be filed on the financial condition and results of operations of such insurers or for other purposes; and the establishment of reserves required to be maintained for unearned premium, losses, and other purposes.  The regulations and supervision by the insurance departments are designed principally for the benefit and protection of policyholders of insurance companies and not for the stockholders of the insurance companies or stockholders of the Company.  The insurance departments may perform market conduct examinations of Crusader to ensure compliance with applicable laws and regulations with respect to rating, underwriting and claims handling practices. A market conduct examination was last performed, and a report was adopted by the CA DOI on January 9, 2017. All issues identified during the examination were resolved to the satisfaction of the CA DOI and Crusader. None of the issues identified during the examination had any material effect on Crusader.

The CA DOI also conducts periodic financial examinations of Crusader. The CA DOI recently completed an examination of the financial statements and financial condition as of December 31, 2020, and for the period January 1, 2016 through December 31, 2020. The draft report of examination received by Crusader on May 23, 2022 did not contain significant findings except those related to the premium trust deficiency, which is discussed elsewhere in this report.

As described above, on September 10, 2021, Crusader and the CA DOI entered into the Supervision Agreement, dated September 7, 2021, at the request of the CA DOI, and Crusader continues to operate subject to the provisions of the Supervision Agreement.

Crusader is subject to risk-based capital (“RBC”) requirements.  RBC is a method developed by the NAIC and adopted in the California Insurance Code to determine the minimum amount of statutory capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile.  

The RBC provides standards for calculating a variable regulatory capital requirement related to a company's current operations and its risk exposures (asset risk, underwriting risk, credit risk and off‑balance sheet risk). These standards are intended to serve as a diagnostic solvency tool for insurance regulators that establish uniform capital levels and specific authority levels for actions when an insurer falls below minimum capital levels. The RBC specifies four distinct action levels at which either the insurance company or its domiciliary regulator must take certain actions. Generally, if a company’s RBC is at the Company Action Level, a heightened level of regulatory supervision will occur. A regulator can intervene with increasing degrees of authority over a domestic insurer if its RBC is equal to or less than 200% of its computed authorized control level RBC. A company's RBC is required to be disclosed in its statutory annual statement. The RBC is not intended to be used as a rating or ranking tool nor is it to be used in premium rate making or approval. Crusader’s adjusted capital at December 31, 2021 and 2020, was 214% and 278%, respectively, of the authorized control level RBC.

On December 31, 2021 and December 31, 2020, Crusader’s RBC Level was less than 300% of its Authorized Control Level RBC, and its statutory accounting basis combined ratio was in excess of 120% for the years then ended. The RBC Level when coupled with the statutory accounting basis combined ratio triggered Company Action Level Events under the RBC for the years then ended. On March 24, 2021 Crusader submitted to the CA DOI a comprehensive Risk Based Capital Plan (the "RBC Plan") to increase the adjusted capital above 300% and to address the actions that Crusader would take to correct the conditions that resulted in the Company Action Level Event. The CA DOI found the RBC Plan to be deficient and requested that a revised RBC Plan be submitted. On July 2, 2021, the Company submitted a revised RBC Plan, which addressed issues raised by the CA DOI (the “2021 Revised RBC Plan”). No action was taken by the CA DOI regarding the 2021 Revised RBC Plan. As of December 31, 2021, a second Company Action Event occurred. At December 31, 2021, Crusader’s RBC Level was less than 300%, with a combined ratio greater than 130%, which resulted in another Company Action Level event (the “2022 Company Action Level Event”). As a result of the 2022 Company Action Level Event, Crusader was required to submit another comprehensive Risk Based Capital Plan (“ 2022 RBC Plan”) to the CA DOI. Crusader submitted its 2022 RBC Plan on May 15, 2022. The CA DOI may accept Crusader’s 2022 RBC Plan to correct the conditions that lead to the 2022 Company Action Event, or it may request that a revised plan be submitted, or it may take no action with respect to the 2022 RBC Plan. On June 9, 2022, the CA DOI requested additional information regarding the 2022 RBC Plan, which information is to be submitted by July 24, 2022. After the Plans are submitted, the CA DOI may request additional changes to the revised RBC Plan to address various corrective actions that Crusader and/or the Company will take, including, without limitation, increasing the capital of Crusader. Depending on the scope and nature of any such requests from the CA DOI, regarding the 2022 RBC Plan the Company and Crusader may not be able to implement certain corrective actions, including the potential infusion of capital to Crusader. The Company continues to be engaged in discussions with the CA DOI on various strategic alternatives to address the RBC issues.

The following table sets forth the different levels of risk-based capital that may trigger regulatory involvement and the corresponding actions that may result.

Insurance Regulatory Information System (“IRIS”) was developed by a committee of state insurance regulators primarily to assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies.  IRIS helps those companies that merit highest priority in the allocation of the regulators’ resources on the basis of 13 financial ratios that are calculated annually.  The analytical phase is a review of statutory annual statements and the financial ratios.  The ratios and trends are valuable in pointing to companies likely to experience financial difficulties but are not themselves indicative of adverse financial condition.  The ratio and benchmark comparisons are mechanically produced and are not intended to replace the state insurance departments’ own in-depth financial analysis or on-site examinations.

An unusual range of ratio results has been established from studies of the ratios of companies that have become insolvent or have experienced financial difficulties.  In the analytical phase, companies that receive four or more financial ratio values outside the usual range are analyzed in order to identify those companies that appear to require immediate regulatory action.  Subsequently, a more comprehensive review of the ratio results and an insurer’s statutory annual statement is performed to confirm that an insurer’s situation calls for increased or close regulatory attention.  

For the year ended December 31, 2021, Crusader’s IRIS values were unusual values in four ratios.  Those unusual values were caused by the continuing losses which Crusader sustained in 2021 as well as factors such as its investment yield on its portfolio.

For the year ended December 31, 2020, Crusader was outside the usual value range on IRIS ratio 5, 7 and 8 due primarily to Crusader’s statutory net loss of $12,862,588.  Crusader’s statutory net loss during the year ended December 31, 2020, was due primarily to increases in IBNR reserves associated with the Apartments & Commercial Buildings and Transportation Business resulting from higher estimates for expected claims frequency, claims severity and ultimate incurred losses and loss adjustment expenses.

California Insurance Guarantee Association 

The California Insurance Guarantee Association (“CIGA”) was created to provide for payment of claims for which insolvent insurers of mostly casualty lines are liable because such insurers’ assets are insufficient to satisfy the claims.  The Company is subject to assessment by CIGA for its pro-rata share of such claims based on written premium in the specific lines of business in the year preceding the assessment by insurers writing that line of insurance in California.  Such assessments are based upon estimates of losses to be incurred in liquidating an insolvent insurer.  Assessments are recouped through a mandated surcharge to policyholders the year after the assessment.  No assessment was made by CIGA for the 2021 and 2020 calendar years.

Holding Company Act

In addition to the Supervision Agreement discussed above, Crusader is also subject to regulation by the CA DOI pursuant to the provisions of the California Insurance Holding Company System Regulatory Act (the “Holding Company Act”).  Pursuant to the Holding Company Act, the CA DOI may examine the affairs of Crusader at any time.  Certain transactions defined to be of an extraordinary type may not be implemented without the prior approval of the CA DOI.  Such transactions include, but are not limited to, sales, purchases, exchanges, loans and extensions of credit, and investments made within the immediately preceding 12 months involving the lesser of 3% of admitted assets or 25% of statutory surplus as of the preceding December 31.  An extraordinary transaction also includes a dividend which, together with other dividends or distributions made within the preceding 12 months, exceeds the greater of 10% of the insurance company's statutory surplus as of the preceding December 31 or the insurance company's net income for the preceding calendar year.  An insurance company is also required to notify the CA DOI of any dividend after declaration, but prior to payment.

The Holding Company Act also provides that the acquisition or change of control of a California domiciled insurance company or of any person who controls such an insurance company cannot be consummated without the prior approval of the insurance commissioner.  In general, a presumption of control arises from the ownership of voting securities and securities that are convertible into voting securities, which in the aggregate constitute 10% or more of the voting securities of a California insurance company or a person who controls a California insurance company, such as Crusader.  A person seeking to acquire control, directly or indirectly of the Company must generally file with the insurance commissioner an application for change of control containing certain information required by statute and published regulations and provide a copy of the application to the Company.  The Holding Company Act also effectively restricts the Company from consummating certain reorganizations or mergers without prior regulatory approval.  The Company is in compliance with the Holding Company Act.

Rating

Insurance companies are rated to provide both industry participants and insurance consumers with meaningful information on specific insurance companies.  Higher ratings generally indicate financial stability and a strong ability to pay claims.  These ratings are based upon factors relevant to policyholders and are not directed toward protection of investors.  Such ratings are neither a rating of securities nor a recommendation to buy, hold or sell any security and may be revised or withdrawn at any time.  Ratings focus primarily on the following factors:  capital resources, financial strength, demonstrated management expertise in the insurance business, credit analysis, systems development, market segment position and growth opportunities, marketing, sales conduct practices, investment operations, enterprise risk management, minimum statutory surplus requirements and capital sufficiency to meet projected growth, as well as access to such traditional capital as may be necessary to continue to meet standards for capital adequacy.  

The claims-paying abilities of insurers are rated to provide both insurance consumers and industry participants with comparative information on specific insurance companies.  Claims-paying ratings are important for the marketing of certain insurance products.  

On September 24, 2021, A.M. Best (“A.M. Best”) downgraded Crusader’s Financial Strength Rating to C++ (Marginal) from B (Fair) and its Long-Term Issuer Credit Rating (Long-Term ICR) to “b” (Marginal) from “bb+” (Fair).  A.M. Best also downgraded Unico’s Long-Term ICR to “ccc-” (Weak) from “b” (Marginal). In addition, A.M. Best maintained the “under review with negative implications” status for these Credit Ratings.  On September 24, 2021, A.M. Best’s ratings reflected concerns regarding Crusader’s balance sheet strength, which A.M. Best assessed as weak, as well as its weak operating performance, limited business profile and marginal enterprise risk management.  A.M. Best stated that, while Crusader maintains sufficient liquidity, and its risk-adjusted capital levels remain at the strongest level, as measured by A.M. Best’s Capital Adequacy Ratio, the downgrades reflect the lowered assessment of the balance sheet strength given the enterprise’s diminished financial flexibility and the constraints imposed on Crusader by the CA DOI under the Supervision Agreement.  The A.M Best rating was withdrawn by the Company on September 24, 2021.

Some of Crusader’s policyholders, or the lenders, landlords or clients of Crusader’s policyholders, require insurance from a company that has an A.M. Best FSR of “A-” or higher, and the A.M. Best’s changed ratings of Crusader may also have a negative impact on Crusader’s reputation. Therefore, Crusader’s and Unico’s changed ratings and the ultimate withdrawal of these ratings would have a negative impact on the Company’s revenue and results of operations if Crusader’s operations were not in runoff. In addition, certain policyholders of Crusader may have cancelled their policies because of the change in the rating and ultimate withdrawal of these ratings. The Company cannot quantify the impact that the rating changes or the withdrawal of the ratings have had or will have on its revenue and results of operations.

Terrorism Risk Insurance Act of 2002

The Terrorism Risk Insurance Act (“TRIA”) was enacted by Congress in 2002 following the attacks on September 11, 2001 to address coverage for terrorism that largely became unavailable or prohibitively expensive by creating a Federal program under which the Federal government would share monetarily losses with insurers on commercial property and casualty losses due to a terrorist attack.  TRIA was initially enacted for a three-year term.  It has been reauthorized four times in 2005, 2007, 2015 and 2019.  The current reauthorization of TRIA will expire in 2027 unless further extended by action of Congress.  TRIA requires insurers to make terrorism insurance available to commercial policyholders but does not require purchase of such insurance by those policyholders.

Federal participation will be triggered when the Secretary of the Treasury, in concurrence with the Secretary of State and the Attorney General of the United States, certifies an act to be an act of terrorism.  Acts of terrorism must result in total insurance losses for such acts to be at least $200,000,000 for an act of terrorism to be certified under the Federal program.  Insurers have a deductible of 20% of any terrorism loss with the Federal government paying the remaining 80% of such losses.   Payments under the Federal program are subject to an aggregate retention of all insurers participating in the program of $37.5 billion. Under TRIA, all losses in any one program year are capped for both insurers and the Federal government at $100 billion.

All property and casualty insurance companies are required to participate in the program to the extent that they must make available property and casualty insurance coverage for terrorism that does not differ materially from the terms, amounts and other coverage limitations applicable to losses arising from events other than acts of terrorism. Policyholders of commercial insurance may waive coverage for terrorism in whole or in part. If a policyholder accepts coverage for terrorism, the Company must clearly state the premium charges resulting from coverage for certified acts of terrorism.  If coverage is declined or waived; the Company may add terrorism exclusions to the policy of such commercial policyholder.

The Company believes that its exposure to acts of terrorism is not substantial.  The Company does not write policies on commercial properties considered targets of terrorist activities such as airports, large hotels, large office structures, amusement parks, landmark defined structures, or other large-scale public facilities. The Company does not offer terrorism coverage on personal lines of insurance since it does not write personal lines of insurance.

In addition, the Company does not have a concentration of policies in any one area within California where increased exposure to terrorist threats may exist. Crusader received $42,910 and $56,975, in terrorism coverage premium from approximately 5% of its policyholders during the years ended December 31, 2021 and 2020, respectively. Crusader’s terrorism deductible was $7,252,974 and $6,791,640 during the years ended December 31, 2021 and, 2020, respectively.

Coverage for acts of terrorism under TRIA by the Company will cease as the current policies of insurance expire without renewal as a result of the runoff described in this report.

Data Privacy and Security

The Company may be subject to a range of complicated, diverse, and expanding federal, state, and local laws and regulations governing the collection, use, storage, and transfer of personal information.  In California, where the Company is headquartered and conducts business, certain laws such as the California Consumer Privacy Act of 2018 (“CCPA”), the California Privacy Rights Act (“CPRA”), and California Insurance Information Privacy and Protection Act (“CIIPPA”) may directly impact the Company’s operations.  At the federal level, standards set forth by the Federal Trade Commission (“FTC”), the privacy and security rules under the Gramm-Leach Bliley Act (“GLBA”), and the privacy and security rules under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and their respective implementing regulations may, from time to time, impact the Company depending on the nature of the Company’s operations and the types of suppliers and vendors utilized by the Company.

OTHER INSURANCE OPERATIONS

General Agency Operations

Unifax primarily sold and services CMP business insurance policies for Crusader in California. As a general agent, this subsidiary marketed, rated, underwrote, inspected and issues policies, bills and collects insurance premiums, and maintains accounting and statistical data.  Unifax is the exclusive general agent for Crusader.  The Company’s marketing was conducted through advertising to independent insurance agents and brokers.  For its services, the general agent received a commission (based on the written premium) from the insurance company and, in some cases, a policy fee from the customer.  This subsidiary holds licenses issued by the CA DOI and other states where applicable.

Insurance Premium Finance Operation

American Acceptance Corporation (“AAC”), a subsidiary of the Company, is a licensed insurance premium finance company that provided insurance purchasers with the ability to pay their insurance premium on an installment basis.  The premium finance company pays the insurance premium to the insurance company in return for a premium finance note from the insured.  These notes are paid off by the insured in nine monthly installments and are secured by the unearned premium held by the insurance company.  AAC provided premium financing solely for Crusader and assumed USIC policies that were produced by Unifax in California.  In August 2021, Unico discontinued its premium financing operations formerly conducted through its subsidiary AAC, which activity is reflected on the Statements of Operations under “Other insurance operations”. AAC had an outstanding receivable balance of $753,426 as of December 31, 2021 related to the premium financing arranged prior to August 2021.

Association Operation

AAQHC, Unico’s wholly owned subsidiary, is a membership association and a third-party administrator.  AAQHC provides various consumer benefits to its members, including participation in group dental, vision, and life insurance policies that it negotiates.  AAQHC also provides services as a third-party administrator and is licensed by the CA DOI.  For these services, AAQHC receives membership and fee income from its members.

Health Insurance Operation

American Insurance Brokers, Inc. (“AIB”), a subsidiary of the Company, markets health insurance in California as a general agency and an independent broker through non-affiliated insurance companies for individuals and groups.  The services provided consist of marketing, sales, and customer service.  For these services AIB receives commissions from insurance companies.  AIB holds licenses issued by the CA DOI.

Claims Management

In March 2020, the Company re-activated its U.S. Risk subsidiary so that in addition to handling Crusader’s claims it can provide claims adjustment services to non-affiliated insurers and to self-insurers on a fee-for-service basis (i.e., where Crusader will not be underwriting the risk), providing the potential for an alternative revenue source to the Company.

INVESTMENTS

The Company’s Board of Directors approved investment guidelines which reflect the Company’s risk, balance sheet, and profile.

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

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

An independent investment advisor manages Crusader’s investments. The advisor’s role currently is limited to maintaining Crusader’s portfolio within the investment guidelines and providing investment accounting services to the Company.  Through July 31, 2021, the investments were held by Crusader’s previous custodian, Union Bank Global Custody Services (“Union Bank”). Effective August 2, 2021, the investments were held by Crusader’s current custodian, U.S. Bank, Institutional Trust and Custody (“U.S. Bank”), as a result of the sale of the custodial business by Union Bank to U.S. Bank.  

COMPETITION

Insurance Company and General Agency Operations (Property and Casualty)

The property and casualty markets in which the Company operates are highly competitive.  Property and casualty insurers generally compete on many factors, including price, commission rates, consumer recognition, coverages offered, financial stability, customer service and geographic coverage.  Competition is also affected by the pace of technological developments.  An insurer’s ability to innovate, develop and implement new applications and other technology can affect its competitive position.  The Company invested in technology in order to compete more effectively in the insurance marketplace.  The marketplace is highly cyclical, characterized by periods of high premium rates and shortages of underwriting capacity followed by periods of severe price competition and excess underwriting capacity.

The profitability of insurers is affected by many factors including premium adequacy, the frequency and severity of claims, state regulations, interest rates, general business conditions, and court decisions redefining and expanding the extent of coverage.  One of the challenging and unique features of the property and casualty insurance business is the fact that since premiums are collected before losses are paid, its products are normally priced before its costs are known.

Additional information regarding competition in the insurance marketplace is discussed in Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Insurance Premium Financing Operation

AAC’s insurance premium financing operation financed policies produced only through its sister company, Unifax.  Consequently, AAC’s growth was primarily dependent on the growth of Crusader and Unifax business.  From July 2010 to March 1, 2018, AAC offered 0% financing on policies produced by Unifax for Crusader.  Effective March 1, 2018, the annual percentage rate charged on AAC new loans increased from 0% to a single fixed interest rate.  Effective April 1, 2019, the Company converted from the single fixed interest rate for all financed policies to a tiered interest rate structure under which different fixed interest rates are charged based on amount of underlying financed premium.  The Company believes the interest rates charged by AAC were competitive and did not have a negative impact on its business.  As discussed above premium financing was discontinued and stopped being offered to policyholders in September 2021.

Health Insurance Operation

The health insurance market is uncertain due to changes in healthcare insurance mandated by recent federal legislation.  AIB markets a variety of health and life insurance products to individuals and groups.  These same products are offered by most of the Company’s competitors; thus service, reliability and stability are important to obtain and retain customers.

Employees

As of December 31, 2021, the Company had 38 employees.  As of June 24, 2022, the Company employed 26 full-time employees at its facility located in Calabasas, California. The Company has no collective bargaining agreements and believes its relations with its employees are excellent.

CONCENTRATION OF RISKS

100% and 99.9% of Crusader’s gross written premium was derived from California during the years ended December 31, 2021 and 2020, respectively. In 2021, approximately 26% and 58% of the $732,852 commission income from the Company’s health insurance program was from Guardian Life Insurance Company of America dental and group life plan programs and Blue Shield Care Trust health and life insurance programs, respectively. In 2020, approximately 30% and 56% of the $727,515 commission income from the Company’s health insurance program was from Guardian Life Insurance Company of America dental and group life plan programs and Blue Shield Care Trust health and life insurance programs, respectively.

Item 1A.  Risk Factors.

An investment in the Company’s securities involves a high degree of risk. The Company operates in a dynamic and rapidly changing industry that involves numerous risks and uncertainties. The risks and uncertainties described below are not the only ones the Company faces. Other risks and uncertainties, including those that the Company does not currently consider material, may impair the Company’s business. If any of the risks discussed below actually occur, the Company’s business, financial condition, operating results, or cash flows could be materially adversely affected. This could cause the value of the Company’s securities to decline, and you may lose all or part of your investment.

RISKS RELATED TO THE COMPANY’S BUSINESS AND INDUSTRY

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

Based on Unico’s current cash and short‑term investments at December 31, 2021, as well as the factors described elsewhere in this Annual Report on Form 10-K, there is substantial doubt that Unico will have sufficient cash to meet its operating and other liquidity requirements when they become due during the next 12 months from the date of issuance of the accompanying consolidated financial statements.

Unico needs to improve its 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 by Crusader. 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 reduction, reorganization, merger with another entity, filing for bankruptcy or cessation of operations. There can be no assurances that capital will be available when needed or that, if available, it will be obtained on terms favorable to the Company and its stockholders, particularly considering the effects that the COVID-19 pandemic has 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 gross unrealized loss position. These actions may cause Unico’s stockholders to lose all or part of their investment in Unico’s common stock.

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

Unico has a history of recurring losses from operations, negative cash flows from its operating activities which may continue in the future, and as an insurance holding company, Unico does not independently generate significant revenue, and is dependent on dividends and other cash distributions from Crusader and its other subsidiaries to fund its operations and expenses. Historically, Unico received dividends periodically from Crusader but does not expect to receive any such dividends for the foreseeable future due to prohibitions on dividends imposed by the CA DOI pursuant to the Supervision Agreement, Crusader’s decreased policyholder surplus caused by additional underwriting losses during 2021, and the need to preserve policyholder surplus at Crusader. The CA DOI advised in April 2021, that Crusader was prohibited from paying dividends during the year 2021 and for the years 2022 through 2025. Any continued financial support from Crusader will be at the discretion of the Special Examiner appointed pursuant to the Supervision Agreement. If the Special Examiner does not permit Crusader to continue to provide significant 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 it 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. This 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.

Crusader is subject to extensive supervision by the CA DOI and may be subject to further regulatory action. 

On September 10, 2021, Crusader and the CA DOI entered into a Supervision Agreement, at the request of the CA DOI. The Supervision Agreement was requested by the CA DOI because of the CA DOI’s expressed concerns regarding the financial stability of Crusader and the potential effects on Crusader and Crusader’s California policyholders of any potential bankruptcy of Unico. The Supervision Agreement imposes extensive restrictions on Crusader’s ability to take certain actions without the prior written consent of the California Insurance Commissioner, the Special Examiner appointed under the Supervision Agreement, or the Special Examiner’s appointed representative, including, without limitation, the ability for Crusader to pay any dividends or otherwise make any payments in excess of $5,000 individually or $20,000 in the aggregate. The CA DOI advised in April 2021, that Crusader was prohibited from paying dividends during the year 2021 and for the years 2022 through 2025. As a result, Unico has very limited flexibility to supervise or manage the operations of Crusader, its primary operating subsidiary. In addition, any future financial support from Crusader to Unico will be at the discretion of the Special Examiner. Under applicable California insurance law, the CA DOI has extensive powers, and can impose further restrictions on Crusader. In addition, the CA DOI could place Crusader into conservation, rehabilitation, or liquidation proceedings, if Crusader becomes insolvent or if it is deemed to be hazardous to policyholders or the public.

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

As a property and casualty insurance company, Crusader is subject to Risk Based Capital (“RBC”) requirements. RBC is a method developed by the NAIC and adopted in the California Insurance Code to determine the minimum amount of statutory capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. The RBC requirements require Crusader to report the results of RBC calculations to the Commissioner of the CA DOI and the NAIC. If Crusader fails to meet certain standards related to its RBC Authorized Control Level and its RBC total adjusted capital standards and requirements, the CA DOI may require specified actions to be taken, which could have a material and adverse impact on the Company’s competitiveness, operational flexibility, and operations.

As of December 31, 2021, and December 31, 2020, Crusader’s RBC Level was less than 300% of its Authorized Control Level RBC, and its statutory accounting basis combined ratio was in excess of 120% for the years then ended.  The RBC Level when coupled with the statutory accounting basis combined ratio triggered Company Action Level Events under the RBC for the years then ended.  On March 24, 2021  Crusader submitted to the CA DOI a comprehensive Risk Based Capital Plan (the "RBC Plan") to increase the adjusted capital above 300% and to address the actions that Crusader would take to correct the conditions that resulted in the Company Action Level Event. The CA DOI found the RBC Plan to be deficient and requested that a revised RBC Plan be submitted.  On July 2, 2021, the Company submitted a revised RBC Plan, which addressed issues raised by the CA DOI (the “2021 Revised RBC Plan”). No action was taken by the CA DOI regarding the 2021 Revised RBC Plan. As of December 31, 2021, a second Company Action Event occurred.  At December 31, 2021, Crusader’s RBC Level was less than 300%, with a combined ratio greater than 130%, which resulted in another Company Action Level event (the “2022 Company Action Level Event”). As a result of the 2022 Company Action Level Event, Crusader was required to submit another comprehensive Risk Based Capital Plan (“2022 RBC Plan”) to the CA DOI. Crusader submitted its 2022 RBC Plan on May 15, 2022.  On June 9, 2022, the CA DOI requested additional information regarding the 2022 RBC Plan, which information is to be submitted by July 24, 2022. The CA DOI may accept Crusader’s 2022 RBC Plan to correct the conditions that lead to the 2022 Company Action Event,  or it may request that a revised plan be submitted, or it may take no action with respect to the 2022 RBC Plan. After the Plans are submitted, the CA DOI may request additional changes to the revised RBC Plan to address various corrective actions that Crusader and/or the Company will take, including, without limitation, increasing the capital of Crusader.  Depending on the scope and nature of any such requests from the CA DOI, regarding the 2022 RBC Plan the Company and Crusader may not be able to implement certain corrective actions, including the potential infusion of capital to Crusader. The Company continues to be engaged in discussions with the CA DOI on various strategic alternatives to address the RBC issues.

Crusader may be adversely affected if it cannot obtain additional capital for its business and operations. The strength of an insurer is measured in large part by its policyholder surplus. Crusader has sustained net losses for several years which have decreased its policyholder surplus, which has fallen from $26,893,515 at December 31, 2020, to $22,494,454 at December 31, 2021. The Company does not have current resources to infuse additional capital into Crusader to increase its policyholder surplus.

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

The Company must retain current employees to handle its operations. The failure of the Company to retain a sufficient number of skilled employees could have an adverse effect on the Company’s business. In recent months, the Company’s management team underwent significant changes, including the resignation of its former Chief Financial Officer and Treasurer, who was replaced by Jennifer Ziegler, as well as the removal of the Company’s former Chief Executive Officer, President, and Chief Operations Officer, who was replaced by Steven Shea, the Company’s Chairman of the Board. The Company’s current and future success is dependent to a large extent on the retention and continued service of its key personnel, which includes its executive officers and directors, as well as employees in areas that will be important to the Company during the runoff of Crusader, such as information technology, claims adjustment and core insurance operations.  The loss or unavailability of any key personnel could have an adverse effect on the Company’s financial condition and ability to continue its operations.

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

As reported in “Item 9A. Controls and Procedures” of this Annual Report on Form 10-K, the Company has concluded that there was a material weakness in our internal control over financial reporting and that our disclosure controls and procedures were not effective as of December 31, 2021. While the Company has developed and implemented steps to remediate this material weakness, the Company cannot assure you that the processes undertaken to address this material weakness will be effective in identifying and correcting all errors in our historical financial statements. Any failure in the effectiveness of internal control over financial reporting, particularly if it results in material misstatements in our financial statements, could cause us to fail to meet our reporting obligations and result in litigation, regulatory examinations, and negative investor perceptions of our company, any of which could have a material adverse effect on our business, liquidity, financial condition, and stock price. Further, the material weakness in our internal control over financial reporting could lead to reduced confidence in our financial data or financial performance, which could also adversely impact our reputation.

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

The Company has incurred recurring net losses on an annual basis over the last several years. The Company incurred net losses of $5,673,251 and $21,491,113 for the years ended December 31, 2021 and 2020, respectively. Because Crusader is in runoff, the Company will not generate significant revenues in the future and could continue to incur substantial net losses in the future. 

The principal driver of the Company’s losses to date is its insured losses and loss adjustment expenses associated with insured events by its customers.  Establishing adequate premium rates is necessary to generate sufficient revenue to offset losses, loss adjustment expenses and other costs. If the Company did not accurately assess the risks that it underwrote, the premiums that it charged may not have been adequate to cover its losses and expenses, which would continue to adversely impact its results of operations and profitability. Moreover, as the Company continues to runoff the business, it expects certain expenses to continue to increase in the near term. Such expenses may occur in the areas of information technology, claims adjusting, legal fees and core insurance operations services. If the Company fails to manage its losses to keep pace with its investments and other expenses, its business will be seriously harmed.

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

Many factors can affect the Company’s ability to adjust claims accurately, including the following: 

Additionally, as a result of the runoff of Crusader, the Company may experience challenges in retaining sufficient qualified personnel to adjust claims accurately and efficiently.  The Company’s failure to pay claims fairly, accurately, and in a timely manner, or to deploy claims resources appropriately, could result in unanticipated costs, lead to material litigation, undermine customer goodwill and the Company’s reputation in the marketplace, impair its brand image and, as a result, materially adversely affect its financial results, prospects, and liquidity.

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

Loss and loss adjustment expense reserves represent an estimate of amounts needed to pay and administer claims with respect to insured events that have occurred, including events that have occurred but have not yet been reported to Crusader. If claims exceed the related reserves, the Company may not have sufficient funds available to satisfy all such claims, and in any event, the Company’s operating results, and financial condition would be adversely affected. There is a high level of uncertainty inherent in the evaluation of the required loss and loss adjustment expense reserves for Crusader. The long-tailed nature of liability claims, and the volatility of jury awards exacerbate that uncertainty.

During the twelve months ended December 31, 2020, the Company reevaluated certain assumptions used in its process for estimating loss and loss adjustment reserves due to its experiences in Crusader’s Apartments & Commercial Buildings and Transportation Business as well as changes in market conditions.  This reevaluation resulted in a $9,399,547 increase in Crusader’s IBNR reserves, net of reinsurance. Crusader sets loss and loss adjustment expense reserves at each balance sheet date based upon management’s best estimate of the ultimate payments that it anticipates will be made to settle all losses incurred and related loss adjustment expenses incurred as of that date for both reported and unreported losses. The ultimate cost of claims is dependent upon future events, the outcomes of which are affected by many factors. Crusader’s claim reserving procedures and settlement philosophy, current and perceived social and economic inflation, current and future court rulings and jury attitudes, improvements in medical technology, and many other economic, scientific, legal, political, and social factors all can have significant effects on the ultimate costs of claims. Changes in Crusader’s operations and management philosophy also may cause actual developments to vary from the past. Since the emergence and disposition of claims are subject to uncertainties, the net amounts that will ultimately be paid to settle claims may vary significantly from the estimated amounts provided for in the accompanying consolidated financial statements. Any adjustments to reserves are reflected in the operating results of the periods in which they are made.

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

The Company recognizes deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases, and for tax credits.  The Company evaluates its deferred tax assets for recoverability based on available evidence, including assumptions about future profitability, reversal patterns of recorded deferred tax assets and deferred tax liabilities, and capital gain generation.

If the Company determines it is more-likely-than-not that it would not be able to realize all or a portion of its deferred tax assets in the future, the Company will reduce the deferred tax asset through a charge to earnings in the period in which the determination is made. This charge could have a materially adverse effect on the Company’s results of operations and financial condition. In light of the net losses that were generated in recent years, as of  December 31, 2021, the Company has established a valuation allowance in the amount of $11,939,459 for the aggregate amount of the federal and state net operating losses and other deferred tax assets that, in management’s judgment, it is not more-likely-than-not to be realized.  After giving effect to this valuation allowance, the Company has no remaining deferred tax assets that are expected to be realized.  In addition, the assumptions used to make this determination are subject to change from period to period based on changes in tax laws or variances between the Company’s projected operating performance and actual results. As a result, management’s judgment is required in assessing the possible need for a deferred tax asset valuation allowance.

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

As insurance industry practices and legal, judicial, and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge, including new or expanded theories of liability. These or other changes could impose new financial obligations on the Company by extending coverage beyond its underwriting intent or otherwise require the Company to make unplanned modifications to the services that the Company provides or cause the delay or cancellation of products and services that the Company provides.  Examples of emerging claims and coverage issues include, without limitation: 

In some instances, these changes may not become apparent for some time after the Company has issued insurance policies that are affected by the changes.  As a result, the full extent of liability under the Company’s insurance policies may not be known for many years after a policy is issued.  For example, litigation trends have resulted in significantly larger verdicts awarded by juries in recent years in connection with altercations in bars and taverns, and in significantly larger settlements on cases which do not go to trial in connection with tenants-rights, rent-control, property-utilization, and property-maintenance laws, as well as other forms of social inflation, and these trends may continue.  In addition, the potential passage of new legislation designed to expand the right to sue, to remove limitations on recovery, to extend the statutes of limitations or otherwise to repeal or weaken tort reforms could have an adverse impact on the Company’s business.

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

Crusader is in runoff and is not currently writing new insurance policies.  However, the Company’s financial condition, liquidity and results of operations largely depend on the extent to which the Company accurately underwrote risks and set premium during the periods when Crusader was writing policies.  Premium rate adequacy is necessary to generate sufficient premium to offset losses, loss adjustment expenses, underwriting expenses, and to earn a profit.  In order to price its products accurately, the Company was required to collect and properly analyze a substantial volume of data; develop, test and apply appropriate rating formulas; closely monitor and timely recognize changes in trends; and project both severity and frequency of losses with reasonable accuracy.  The Company’s ability to undertake these efforts successfully was and is subject to a number of risks and uncertainties, including, without limitation:

Such risks may have resulted in the Company’s pricing being based on outdated, inadequate, or inaccurate data, or inappropriate analyses, assumptions, or methodologies, and may have caused the Company to estimate incorrectly future changes in the frequency or severity of claims.  As a result, the Company could have underpriced risks, which would negatively affect the Company’s margins and profitability.  The Company’s ability to accurately underwrite risks in insurance contracts depended in part on its ability to forecast such changes and trends.  If it was not successful in doing so during the periods when Crusader was writing policies, the Company’s future operating results, financial condition, and cash flow could be materially adversely affected.

Inability to obtain reinsurance or to collect ceded losses and loss adjustment expenses could adversely affect Crusader’s ability to write new policies.

The availability, amount and cost of reinsurance depend on market conditions and may vary significantly.  Any decrease in the amount of Crusader’s reinsurance will increase the risk of loss and could materially adversely affect its business and financial condition.  Lack of reasonably priced reinsurance may reduce Crusader’s underwriting profit due to higher cost of reinsurance, which could materially adversely affect its business and financial condition.  Ceded reinsurance does not discharge Crusader’s direct obligations under the policies it writes, which exposes Crusader to credit risk with regard to its reinsurance counterparties.  Crusader remains liable to its policyholders even if it is unable to make recoveries that it believes it is entitled to under the reinsurance contracts.  Losses may not be recovered from the reinsurers until claims are paid, which may create timing and liquidity risk. Additionally, any losses in excess of Crusader’s reinsurance limits would remain direct obligations of Crusader and would therefore have a negative impact on the Company’s financial condition and results of operations.

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

Crusader is subject to extensive regulations and supervision in the states in which it operates or is licensed to conduct business. These regulations are generally designed to protect the interests of policyholders and not necessarily the interests of insurers, their stockholders, or other investors. The regulations relate to authorization for lines of business, capital and surplus requirements, investment limitations, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, premium rates, and a variety of other financial and nonfinancial components of an insurance company’s business.  These powers include, among other things, the ability to: 

Federal legislation currently does not directly impact the property and casualty business, but the business can be indirectly affected by changes in federal regulations.  From time to time, the U.S. Congress and certain federal agencies investigate the current condition of the insurance industry to determine whether federal regulation is necessary. The Company cannot predict whether, and to what extent, new laws and regulations that would affect its business will be adopted, the timing of any such adoption and what effects, if any, they may have on the Company’s business, financial condition, and results of operations. The Company is unable to predict whether such laws will be enacted and how and to what extent this could affect the Company.

Crusader, along with other licensed insurers, is required to bear a portion of the losses suffered by some insureds as the result of impaired or insolvent insurance companies. In addition, Crusader must participate in mandatory arrangements to provide various types of insurance coverage to individuals or other entities that otherwise are unable to purchase that coverage from private insurers. The effect of these and similar arrangements could reduce its profitability in any given period or limit its ability to grow the business. The NAIC and state insurance regulators are continually reexamining existing laws and regulations, specifically focusing on modifications to statutory accounting principles, interpretations of existing laws and the development of new laws and regulations.

Many states have adopted measures related to the NAIC’s Solvency Modernization Initiative (“SMI”), which have included model regulations that require insurers to summarize their key risks and risk management strategies to regulators. The SMI resulted in a 2010 amendment to the NAIC’s Model Insurance Holding Company System Regulatory Act, which requires the ultimate controlling person in an insurer’s holding company structure to identify and report material enterprise risks to the state insurance regulator.  The SMI also produced the NAIC Risk Management and Own Risk Solvency Model Act (“ORSA”), which requires insurers meeting premium thresholds to maintain a risk management framework, and annually submit a comprehensive report designed to assess the adequacy of an insurer’s risk management practices, including risks related to the insurer’s future solvency position.  The Company is currently exempt from providing an ORSA summary report as it does not meet the minimum premium requirements.  On the federal level, the Dodd-Frank Act, enacted in July 2010, mandated significant changes to the regulation of U.S. insurance effective as of July 21, 2011. Currently, the impact of these regulations has not materially affected the Company’s business. Any proposed or future state or federal legislation or NAIC initiatives, if adopted, may be more restrictive on the ability of Crusader to conduct business and/or may result in higher costs.

The extensive regulation to which the Company is subject may affect the cost of or demand for the Company’s products and may limit the ability to obtain rate increases or to take other actions that the Company might desire to do in order to increase its profitability.

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

The Company’s risk management framework is designed to identify, monitor, and mitigate risks that could have a negative impact on the Company’s financial condition or reputation. This framework includes departments or groups dedicated to risk management, information security, disaster recovery and other information technology-related risks, business continuity, legal and compliance, compensation structures and other human resource matters, vendor management and internal audit, among others. Many of the processes are overseen by these departments function at the enterprise level, but many also function through, or rely to a certain degree upon, risk mitigation efforts in local operating groups. Similarly, with respect to the risks the Company assumes in the ordinary course of its business the Company employs localized as well as centralized risk mitigation efforts. If the Company’s risk mitigation efforts prove inadequate, the Company could be adversely affected.

The Company’s earnings may be affected by changes in interest rates.

Investment income is an important component of the Company’s revenues and net income.  The ability to achieve investment objectives is affected by factors that are beyond the Company’s control.  Many of the instruments in which the Company may invest are subject to interest rate risk.  Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions.  Any significant decline in investment income as a result of falling interest rates or general market conditions may have an adverse effect on net income and, as a result, on the Company’s stockholders’ equity and statutory surplus.

The outlook for the Company’s investment income is dependent on the composition of its investment portfolio, the future direction of interest rates and the amount of cash flows from operations that are available for investment.  The fair values of fixed maturity investments that are available-for-sale fluctuate with changes in interest rates and cause fluctuations in stockholders’ equity.

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

The Company’s investment guidelines allow investing in classes of securities which are subject to additional risks.  Rating errors by agencies, such as Moody’s, Standard & Poor’s, and Fitch, and/or economic downturn may create credit risk, a decline in interest rates may create prepayment risk, and a decrease in tax rates may reduce attractiveness of state and municipal bonds and may impact their market valuation.  Any significant loss on investments or general market downturn may have an adverse effect on the Company’s stockholders' equity and statutory surplus and its business.

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

The Company’s insurance business is concentrated in California (100% and 99.9% of gross written premium (before reinsurance ceded) in 2021 and 2020, respectively).  Accordingly, unfavorable business, economic or regulatory conditions in the state of California could negatively impact the Company’s performance.  In addition, California is exposed to severe natural perils, such as earthquakes and fires along with the possibility of terrorist acts.  Accordingly, the Company could suffer losses as a result of catastrophic events, and such losses could be magnified as a result of its business concentration in California.

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

The Company conducts its business from a single facility located in Calabasas, California.  The Company may not be able to access the building due to natural disasters, civil unrests, closures of public roads or utilities, or other unforeseen events.  While the Company has procedures and insurance in place to mitigate short-term access limitations to the building, an extended building access limitation may have an adverse impact on the Company’s results of operation.

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

The Company may not be able to collect the premiums it estimates are collectible from its agents and brokers and, therefore, the Company’s reserve for doubtful accounts may not be sufficient.

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

The Company is routinely involved in litigation, which can be unpredictable and costly, and may result in negative effects on the Company’s business, reputation, financial condition, or results of operations. By virtue of the nature of its business, the Company is subject to numerous legal proceedings in which it may be named as either plaintiff or defendant. Such disputes may concern the issuance or non-issuance of individual insurance policies, coverage disputes or other matters. In addition, the insurance industry is the target of class action lawsuits and other types of litigation, some of which involve claims for substantial and/or indeterminate amounts and the outcomes of which are unpredictable.  This litigation can be based on a variety of issues including insurance and claim settlement practices.  Although the Company has not been the target of any specific class action lawsuits, it is possible that a lawsuit of this type could have a negative impact on the Company’s business.

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

Many of the Company’s policies include exclusions or other conditions that define and limit coverage; these exclusions and conditions are designed to manage the Company’s exposure to certain types of risks and expanding theories of legal liability.  In addition, many of the Company’s policies limit the period during which a policyholder may bring a claim under the policy; this period in many cases is shorter than the statutory period under which these claims can be brought by the policyholders.  While these exclusions and limitations help the Company assess and control its loss exposure, it is possible that a court or regulatory authority could nullify or void an exclusion or limitation, or legislation could be enacted modifying or barring the use of these exclusions and limitations.  This could result in higher than anticipated losses and loss adjustment expenses by extending coverage beyond the Company’s underwriting intent or increasing the number or size of claims, which could have a materially adverse effect on the Company’s operating results.  In some instances, these changes may not become apparent for some time after the Company has issued the insurance policies that are affected by the changes.  As a result, the full extent of liability under the Company’s insurance policies may not be known for many years after a policy is issued.

The Company may find it difficult to acquire necessary data.

Certain data used and supplied by the Company are subject to regulation at the federal, state, and local level. Compliance with these emerging laws and regulations has not had a material adverse effect on the Company’s operations to date. However, federal, state, and local laws and regulations in the United States designed to protect the public from the misuse of personal information in the marketplace and adverse publicity or potential litigation concerning the commercial use of such information may affect the Company’s operations and could result in substantial regulatory compliance expense, litigation expense, and loss of revenue. The vendors and suppliers of the Company face similar burdens. As a result of these and other factors, the Company may find it financially difficult or burdensome to acquire necessary data.

The Company relies on its information technology systems, and the data within those systems, to manage many aspects of its business. Cybersecurity risks, the failure of these systems to operate properly, and/or the failure to maintain the confidentiality, integrity, and availability of policyholder and claims data, including personal identifying information, could result in a materially adverse effect on the Company’s business, reputation, financial condition, and results of operations.

The Company collects and retains large volumes of internal and policyholder data, including personal identifying information.  The Company uses this information for a variety of business purposes, including but not limited to underwriting, claims, billing, and administration.  The Company also collects and retains the personal identifying information of its employees and job applicants. The Company therefore depends on the security, accuracy, reliability, and proper functioning of its information technology systems to effectively manage many aspects of its business, including underwriting, policy acquisition, claims processing and handling, accounting, reserving and actuarial processes and policies, job applications, employee management, and maintaining its policyholder data.

The failure of hardware or software that supports the Company’s information technology systems or the loss of data contained in the systems could disrupt its business and could result in decreased premiums, increased overhead costs, and inaccurate reporting, all of which could have a materially adverse effect on the Company’s business, financial condition, and results of operations.  In addition, despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for the Company’s information technology systems, these systems are vulnerable to damage or interruption from events such as:

It is possible that a system failure, accident, security breach, or unauthorized internal or external knowledge, or misuse of confidential Company data could result in a material disruption to the Company’s business and reputation, as well as an increased risk of remedial and other expenses, fines, or lawsuits.

Although the Company seeks to mitigate the impact and severity of potential cyber threats more generally, not every risk or liability can be mitigated against. To the extent that a critical system fails or is not properly implemented, and the failure cannot be corrected in a timely manner, the Company may experience disruptions to the business that could have a materially adverse effect on the Company’s results of operations.  In addition, the costs associated with the development or acquisition of new computer software, such as in the case of the Company’s planned replacement of its policy administration system, may result in impairment charges if such acquisition or development is not successfully implemented. Any such impairment charges may adversely impact the Company’s results of operation.

During the first quarter of 2020, the Company concluded an investigation regarding potential unauthorized access to non-public personal information as a result of a vulnerability in one of the Company’s websites. The investigation identified non-public personal information pertaining to approximately 15 individuals that likely were accessed without authorization. These 15 individuals were notified and offered complimentary credit monitoring services, and the vulnerability was remediated. While the incident did not have a material impact on the Company’s business, it increases the risk associated with future incidents, investigations, and lawsuits, particularly the risk of damage to the Company’s reputation.

In conducting its business and delivering its products and services, the Company also uses various third-party vendors and service providers.  These service providers and the systems they utilize are typically subject to the same types of security-related risks the Company faces.  The Company provides certain of these vendors with data, including non-public personal identifying information.  There is no guarantee that the Company’s due diligence or ongoing vendor oversight will be sufficient to ensure the integrity and security of the systems used by these vendors or the protection of information that resides thereon.  Adverse consequences for the Company in the event of a significant event involving the systems of its vendors or the information provided to the vendors, among others, could delay the Company’s delivery of products and services, result in a direct or indirect financial loss, and/or result in loss of business and/or reputational damage.

Certain laws and contracts the Company has entered into require it to notify various parties, including consumers or customers, in the event of certain actual or potential data breaches or systems failures, including those of the Company’s service providers. These notifications can result, among other things, in the loss of customers, lawsuits, adverse publicity, diversion of management’s time and energy, the attention of regulatory authorities, fines and disruptions in sales. If the Company or its service providers fail to comply with applicable regulations and contractual requirements, the Company could be exposed to lawsuits, governmental proceedings, or the imposition of fines, among other consequences.

Any inability to prevent or adequately respond to the issues described above could disrupt the Company’s business, inhibit its ability to retain existing customers or attract new customers, otherwise harm its reputation and/or result in financial losses, litigation, increased costs, or other adverse consequences that could be material to the Company.

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

The legal and regulatory environment in the United States governing data privacy and security is becoming increasingly complex and continues to evolve.  An increasing number of federal and state laws and regulations apply to the collection, use, retention, protection, disclosure, transfer, and otherwise processing of personal data, including HIPAA, HITECH, the GLBA, the CCPA, CPRA, and IIPPA. The effects of these laws, including the cost of compliance and required changes in the manner in which the Company conducts its business, are not fully known and are potentially significant, and the failure to comply could adversely affect the Company. The Company has and continues to incur costs to comply with these laws and to respond to inquiries about its compliance with the same.  Maintaining compliance with applicable data privacy and security laws and regulations may increase the Company’s operating costs and adversely impact its ability to market products and service policyholders.  Any inability to prevent or adequately respond to these legal and regulatory challenges could disrupt the Company’s business, inhibit its ability to retain existing customers or attract new customers, otherwise harm its reputation and/or result in financial losses, litigation, increased costs, or other adverse consequences that could be material to the Company.

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

The Company’s financial condition and results of operations may be negatively impacted by national and local economic conditions, such as recessions, increased levels of unemployment and disruption in financial markets.  The Company is not able to predict the effect of these factors or their duration and severity.  The Company may also be adversely affected if economic conditions result in either inflation or deflation.  In an inflationary environment, established reserves may become inadequate and increase the Company’s loss ratio, and market interest rates may rise and reduce the value of the Company’s fixed maturity portfolio. In a deflationary environment, some fixed maturity issuers may have difficulty meeting their debt service obligations and thereby reduce the value of the Company’s fixed maturity portfolio; equity investments may decrease in value, and policyholders may experience difficulties paying their premiums to the Company, which could adversely affect premium revenue.

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

The Company faces a significant risk of loss in the ordinary course of its business for property damage resulting from climate change, natural disasters, man-made catastrophes, and other catastrophic events, particularly hurricanes, earthquakes, hailstorms, explosions, tropical storms, fires, sinkholes, war, acts of terrorism, severe winter weather and other natural and man-made disasters.  Such events typically increase the frequency and severity of commercial property claims.  Because catastrophic loss events are by their nature unpredictable, historical results of operations may not be indicative of future results of operations, and the occurrence of claims from catastrophic events may result in substantial volatility in the Company’s financial condition and results of operations from period to period.  In addition, catastrophic events could harm the financial condition of issuers of obligations the Company holds in its investment portfolio, resulting in impairments to these investments, and the financial condition of the Company’s reinsurers, thereby increasing the probability of default on reinsurance recoveries.  Although the Company attempts to manage its exposure to such events, the occurrence of one or more major catastrophes in any given period could have a material and adverse impact on the Company’s financial condition and results of operations and could result in substantial outflows of cash as losses are paid.

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

The Company is subject to risks associated with public health threats and epidemics, including the global health concerns related to the COVID-19 pandemic.  The COVID-19 pandemic and any preventative or protective actions that the Company, its clients, their respective suppliers, or governments may take in respect of COVID-19 may disrupt the Company’s business and the business of its clients.   Any resulting financial impact will depend on future developments which are highly uncertain and difficult to predict.  These developments include, but are not limited to, the duration and the spread of the outbreak (including new variants of COVID-19), its severity, the actions to contain the virus or address its impact, the timing, distribution, and efficacy of vaccines and other treatments, United States, and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal operating conditions can resume.  Any of these developments may materially affect the business, financial condition, and results of operations of the Company.  The Company in 2020 and 2021, through the date of the decision to put the insurance operations into runoff, experienced a decrease in new business submissions and renewals related to the pandemic in its Bars/Taverns market sector niche as a result of government regulations, such as shelter-in-place orders and in-door dining limitations, which adversely impacted the gross written premium for that niche.

Additionally, the continued pandemic has led to severe disruption and volatility in the global capital markets, which could increase the Company’s cost of capital, and adversely affect the Company’s ability to access the capital and debt markets, and adversely affect the value of the Company’s investment portfolio. It is possible that the continued spread of the coronavirus could cause an economic slowdown or recession (which could adversely affect the investment portfolio of the Company and increase delinquencies and defaults by its customers) or cause other unpredictable events, each of which could adversely affect the business, results of operations or financial condition of the Company.

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

The Company’s business is dependent on the performance by third parties of their responsibilities under various contractual or services arrangements.  These include, for example, contracts for the acquisition of goods and services (such as telecommunications and information technology facilities, equipment and support, and other systems and services that are integral to its operations), agreements with independent or outside claim adjusters, and arrangements for transferring certain risks (including reinsurance used in connection with certain insurance products and corporate insurance policies).  The Company is also dependent on its dealings with banks and other financial institutions.  If one or more of these parties were to default in the performance of their obligations or determine to abandon or terminate support for a system, product, or service that is significant to the Company’s business, it could suffer significant financial losses and operational interruptions or other problems, which could in turn adversely affect its financial performance, cash flows, or results of operations and cause damage to its brand and reputation.

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

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

RISKS RELATED TO THE COMPANY’S STOCK

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

The Company has not and does not manage its business to maximize short-term stock performance.  It also does not provide earnings estimates to the market and does not comment on earnings estimates by analysts.  As a result, its reported results for a particular period may vary, perhaps significantly, from investors’ expectations, which could result in significant volatility in the price of its common shares.

In addition, due to the runoff of Crusader and the Company’s ongoing review of strategic alternatives, the Company’s operations will be focused on controlling expenses, managing claims, and attempting to preserve value for its stockholders, and the actions taken by the Company may exacerbate the volatility of the Company’s stock price.

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

A small number of holders of the Company’s stock own a majority of the voting power of the Company. Accordingly, those holders have the ability to exert significant influence on the outcome of corporate actions, involving the Company requiring stockholder approval, including the election of directors, change of control transactions or any other significant corporate transactions. This concentration of ownership may conflict with the interests of the Company’s other stockholders.

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

To acquire control of a U.S. insurance company or any holding company of a U.S. insurance company, prior written approval must be obtained from the Department of Insurance in the state where the insurer is domiciled.  The Department of Insurance of the state will consider a number of factors relating to the acquirer and the transaction prior to granting approval of the application to acquire control of the insurer or the holding company.  These laws and regulations may discourage potential acquisition proposals and may delay, deter, or prevent a change of control of the Company or the sale by the Company of its insurance subsidiary, including transactions that some or all of the Company’s stockholders might consider to be desirable.

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

The Company is experiencing significant liquidity issues and intends to conserve its available cash and does not expect to declare or pay any cash dividends for the foreseeable future.  Any return to stockholders will therefore be limited to appreciation in value of their stock, if any.

In addition, any determination to declare or pay future dividends to the Company’s stockholders will be at the discretion of the Company’s Board and will depend on a variety of factors, including (1) the Company’s financial condition, liquidity, results of operations (including its ability to generate cash flow in excess of expenses and its expected or actual net income), retained earnings and collateral and capital requirements, (2) general business conditions, (3) legal, tax and regulatory limitations, (4) contractual prohibitions and other restrictions, (5) the effect of a dividend or dividends upon the Company’s financial strength ratings and (6) any other factors that the Board deems relevant.

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

There has been relatively limited trading volume in the market for the Company’s common stock, and a more active, liquid public trading market may not develop or may not be sustained. Limited liquidity in the trading market for the Company’s common stock may adversely affect stockholders’ ability to sell their shares of common stock at the time they wish to sell them or at a price that they consider acceptable.

GENERAL RISK FACTORS

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

The Company’s consolidated financial statements are subject to the application of GAAP, which is periodically revised and/or expanded.  Accordingly, the Company is required to adopt new or revised accounting standards from time to time issued by recognized authoritative bodies, including the FASB.  It is possible that future changes the Company is required to adopt could change the current accounting treatment that the Company applies to its consolidated financial statements and that such changes could have a material effect on the Company’s financial condition and results of operations.

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

The Company’s financial condition and results of operations are dependent, in part, on tax policy implemented at the federal and/or state level. The Company’s results are also subject to federal and state tax rules applicable to dividends received from its subsidiaries. Additionally, changes in tax laws could have an adverse effect on deferred tax assets with an allowance against them included in the Company’s consolidated balance sheets and results of operations.  The Company cannot predict whether any tax legislation will be enacted in the near future or whether any such changes to existing federal or state tax law would have a material adverse effect on the Company's financial condition and results of operations.

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

The Company’s disclosure controls and procedures are designed to reasonably ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act is accumulated and communicated to management and is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.  The Company’s management believes that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented or detected.  These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of a simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by an unauthorized override of the controls.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and the Company cannot ensure that any design will succeed in achieving its stated goals under all potential future conditions.  Accordingly, because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

Changes in general economic conditions may have an adverse effect on the Company’s revenues and profitability.

The Company’s financial condition and results of operations may be negatively impacted by national and local economic conditions, such as recessions, increased levels of unemployment, inflation, changes in interest rates and the disruption in the financial markets.  The Company is not able to predict the effect of these factors or their duration and severity.

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

As a public company, the Company incurs significant legal, accounting, and other expenses that it did not incur as a private company.  In addition, the Company is subject to the reporting requirements of the Exchange Act, which require, among other things, that it files with the SEC, annual, quarterly, and current reports with respect to its business and financial condition.  The Company is also subject to other reporting and corporate governance requirements, including certain requirements of Nasdaq and provisions of the Sarbanes‑Oxley Act and the regulations promulgated thereunder, which imposes significant compliance obligations upon it.

The Sarbanes‑Oxley Act and the Dodd‑Frank Act, as well as rules subsequently implemented by the SEC and Nasdaq, have increased regulation of, and imposed enhanced disclosure and corporate governance requirements on, public companies.  Our efforts to comply with these laws, regulations and standards have increased the Company’s operating costs and may divert management’s time and attention from revenue‑generating activities.

Item 1B.  Unresolved Staff Comments.

None.

Item 2.  Properties.

On September 26, 2013, Crusader purchased land and a two-story building located at 26050 Mureau Road, Calabasas, California (the “Headquarters”).  The Company moved its home office to this location on October 9, 2015 and occupied the building through January 31, 2022.  On February 12, 2021, Crusader sold the Headquarters, the leasehold improvements and substantially all existing furniture, fixtures, and equipment to a third party for a sale price of $12,695,000 and leased back a portion of the Headquarters for continued use as the Company’s home office through January 31, 2022, at which time the Company moved to a smaller space in the same area.

Item 3.  Legal Proceedings.

The Company, by virtue of the nature of the business conducted by it, becomes involved in numerous legal proceedings in which it may be named as either plaintiff or defendant.  Incidental actions are sometimes brought by customers or others that relate to disputes concerning the issuance or non‑issuance of individual insurance policies or other matters.  In addition, the Company resorts to legal proceedings from time to time in order to enforce collection of premiums, commissions, or fees for the services rendered to customers or to their agents.  These routine items of litigation do not materially affect the Company’s operations and are handled on a routine basis through independent counsel.

In addition to routine legal proceedings, the Company is subject to two other proceedings that are not routine in nature.

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). The opening brief of Anchors & Whales LLC is due to be filed by August 12, 2022.   The Company cannot predict the actions of the Court of Appeals.

On May 9, 2022, Donald Esparza filed an action in the Superior Court of California, County of Los Angeles, against the Company, Michael Budnitsky and Steven L. Shea (22VECV00627) relating to the termination of the employment of Mr. Esparza by the Company.  The action is entitled Donald Esparza v. Unico American Corporation, Michael Budnitsky and Steven Shea ( The action alleges that the Company (i) failed to timely pay wages upon termination of employment in violation of the California Labor Code (ii) failure to provide accurate itemized wage statements in violation of the California Labor Code (iii) violated the California unfair competition law by the forgoing alleged violations of the California Labor Code; and (iv) failure to provide the personnel file of Mr. Esparza after written demand in violation of the California Labor Code.  The action seeks general and statutory damages, including without limitation lost wages, back pay, front pay, and lost earning capacity; special damages, statutory penalties and other relief, including reasonable attorneys’ fees.   The employment of Mr. Esparza, a former officer, director and employee of Crusader, was terminated in connection with a reduction in force of employees in connection with the runoff of Crusader.  Defendant Budnitsky is a former officer of the Company and Crusader. Defendant Shea is the current Chairman of the Board, President and Chief Executive Officer of the Company and Crusader.  The Company cannot predict the eventual outcome of the Esparza litigation, whether there will be an ultimate resolution, or any eventual loss, fines or penalties related to the action.  It is the intent of the Company to vigorously defend the action brought against it by Mr. Esparza.

Item 4.  Mine Safety Disclosures.

Not applicable.

PART II

Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company's common stock is traded on the Nasdaq Global Market under the symbol “UNAM.”  As of May 31, 2022, the number of stockholders of record of the Company's common stock was 170.  That number does not include beneficial owners of the Company’s common stock held in the name of nominees.

There were no cash dividends declared or paid by the Company in the years ending December 31, 2021 and 2020. The Company considers its profitability, cash requirements, capital requirements, general business conditions and other factors prior to the declaration of cash dividends.  

On August 10, 2020, the Board authorized a share repurchase program (the “2020 Program”) for up to $5,000,000 of the currently outstanding shares of the Company’s common stock.  The 2020 Program was effective immediately and replaced the Company’s existing share repurchase program that was adopted by the Board 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.  During the years ended December 31, 2021, and 2020, the Company repurchased shares under the 2020 Program and 2008 Program in unsolicited transactions as follows:

The Company has remaining authority under the 2020 Program to repurchase up to $4,995,406 of the currently outstanding shares of the Company’s common stock as of December 31, 2021. The Company has retired or will retire all stock repurchased under the 2020 Program and 2008 Program.  Effective January 2022, the Company suspended the 2020 Program and ceased any further repurchases of its shares from stockholders of the Company.

Item 6.  Reserved.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

This Management's Discussion and Analysis (“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 from year to year. This MD&A should be read in conjunction with the Company’s 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 Annual Report on Form 10-K, particularly in Item 1A – “Risk Factors.”

Overview

General

Unico American Corporation is an insurance holding company.  Unico’s insurance company subsidiary Crusader Insurance Company (“Crusader”) underwrote commercial property and casualty insurance.  The Company’s subsidiaries Unifax Insurance Systems, Inc. (“Unifax”) and American Insurance Brokers, Inc. (“AIB”) provided marketing and continues to provide various underwriting support services related to property, casualty, health and life insurance. The Company’s subsidiary American Acceptance Company (“AAC”) provided insurance premium financing, and the Company’s subsidiary Insurance Club, Inc., dba AAQHC, an Administrator”) provides membership association services.  The Company’s subsidiary U.S. Risk Managers, 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.

This overview discusses some of the relevant factors that management considers in evaluating the Company’s performance, prospects, and risks.  It is not all inclusive and is meant to be read in conjunction with the entirety of the MD&A, the Company’s Consolidated financial statements and notes thereto, and all other items contained within this Annual Report on Form 10-K.

Total revenues for the year ended December 31, 2021, were $36,388,384 compared to $32,560,111 for the year ended December 31, 2020, an increase of $3,828,273. The increase in revenues was primarily due to an increase in policies written in the Transportation line of business. The Company’s net loss for the year ended December 31, 2021 was $5,673,251 compared to net loss of $21,491,113 for the year ended December 31, 2020, a decrease in net loss of $15,817,862. On February 12, 2021, the Company through Crusader, completed the sale of the Company’s headquarters at 26050 Mureau Road, Calabasas, California 91302, for $12,695,000, which netted $12,028,876. The Company recognized a gain of $3,693,858 on the sale in 2021. The large decrease in net loss from 2020 compared to 2021 was primarily due to the substantial increase in IBNR as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which generated much of the 2020 loss. The loss in 2021 is primarily attributable to the increases in legal fees, supervision fees, and severance payments and the payment of retention bonuses during 2021.

In connection with the Company’s previously announced review of strategic alternatives, during the quarter ended September 30, 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 California Department of Insurance (“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 its subsidiary AAC, which activity is reflected on the Statement of Operations under “Other insurance operations.” 

Going Concern

Based on Unico's current cash and short‑term investments at December 31, 2021, as well as the other factors described herein, there is substantial doubt that Unico will have sufficient cash to meet its operating and other liquidity requirements when they become due during the next twelve months from the date of issuance of the accompanying consolidated financial statements.

Unico has a history of recurring losses from operations, negative cash flows from its operating activities which may continue in the future and as an insurance holding company, Unico does not independently generate significant revenue, and is dependent on dividends and other cash distributions from Crusader and its other subsidiaries to fund its operations and expenses. Historically, Unico received dividends periodically from Crusader, but does not expect to receive any such dividends for the foreseeable future due to prohibitions on dividends imposed by the CA DOI pursuant to the Administration Supervision Agreement (the “ Supervision Agreement”), dated as of September 7, 2021, by and between Crusader and CA DOI and other actions by the CA DOI in its review of the financial statements of Crusader. Any continued financial support from Crusader will be at the discretion of the Special Examiner appointed pursuant to the Supervision Agreement.  The CA DOI advised in April 2021, that Crusader was prohibited from paying dividends during the year 2021 and for the years 2022 through 2025. 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 reclassification of assets or the amounts and classifications of liabilities that may result from the outcome of the uncertainty of our ability to remain a going concern.

Unico needs to improve its consolidated operating results, continue to receive financial support from Crusader, and/or raise substantial additional capital to continue to fund its operations.  Unico has taken actions to cause Crusader to enter into runoff and to wind down operations that support the writing of insurance policies. To address its liquidity concerns and meet its capital obligations, Unico has announced a review of strategic alternatives and, with the assistance of a financial advisor, is considering multiple alternatives, including, but not limited to, strategic financing, further scaling back, or eliminating some or all of its remaining business operations, expense reductions, reorganization, merger with another entity, filing for bankruptcy or cessation of operations.  There can be no assurances that capital will be available when needed or that, if available, it will be obtained on terms favorable to the Company and its stockholders, particularly in light of the effects that the coronavirus COVID-19 pandemic has 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 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.

On September 13, 2021, the Special Examiner advised Crusader, through its counsel, that a deficiency existed in certain funds that Unifax is required to maintain, in a fiduciary capacity, for Crusader's benefit. Pursuant to the provisions of California Insurance Code Sections 1733 and 1734, Unifax is required to hold premium payment funds received from policyholders as fiduciary funds in trust maintained for the benefit of Crusader.  The Special Examiner informed Crusader that the CA DOI believed that the deficiency in such fiduciary funds was approximately $3,100,000 as of September 13, 2021. The Company believes that as of September 30, 2021, the amount of such deficiency was $2,452,835. In January 2022 Unico, Crusader, and Unifax agreed, with the pre-approval of the Special Examiner, to transfer a computer system, owned by Unico, to Crusader. Unico contributed the computer system at its book value of $1,991,956, to Unifax, and Unifax in turn contributed the computer system to Crusader at its book value of $1,991,956 as a direct reduction in the amount due to Crusader which resulted in a dollar-for-dollar reduction in the premium trust deficiency. The amount of such deficiency was $275,901 as of March 31, 2022, and $432,900 as of May 31, 2022.

Supervision Agreement 

On September 10, 2021, Crusader and the CA DOI entered into the “Supervision Agreement”, dated September 7, 2021, at the request of the CA DOI.  The Supervision Agreement was requested by the CA DOI because of the CA DOI’s expressed concerns regarding the financial stability of Crusader and the potential effects on Crusader and Crusader’s California policyholders of any potential bankruptcy of Unico.   The Supervision Agreement among other things, provides for the appointment by the CA DOI of a Special Examiner to provide supervision and regulatory oversight of Crusader. The Supervision Agreement imposes limitations on Crusader’s ability to take certain actions without the prior written consent of the California Insurance Commissioner (the “Commissioner”), the Special Examiner, or the Special Examiner’s appointed representative. Among the actions that Crusader is prohibited from making without such prior written consent are the following: (i) making payments, engaging in any transaction with or entering into any agreement with, any affiliated or otherwise related person or entity if the cost to Crusader is an individual payment of more than $5,000 or aggregate payments of more than $20,000; (ii) making payments, engaging in any transaction with or entering into any agreement with, any non-affiliated or otherwise unrelated person or entity if the cost to Crusader is an individual payment of more than $5,000 or aggregate payments of more than $20,000; (iii) paying any dividend of any amount; (iv) except as provided in (i) and (ii), making any payments to or on behalf of the Company in connection with any agreement entered into between Crusader and the Company; (v) making any loans to affiliates, officers, directors, stockholders or third parties; (vi) incurring any debt, obligation or liability greater than $5,000; (vii) entering into any new reinsurance contract or treaty or amending any existing reinsurance contract or treaty; (viii) making any material changes in management and essential staffing; (ix) increasing salaries or benefits of officers or directors or making any preferential payment of bonuses or other payments considered legally preferential; and (x) making any other material changes in its normal course of operations, including but not limited to, entering into new lines of business, making major corporate reorganizations, or redomesticating from California. The Supervision Agreement provides that the Special Examiner will meet with Crusader to develop a list of recurring payments under items (i) and (ii) that may not require prior written approval.  To date, the Special Examiner has permitted Crusader to provide significant financial support to Unico in the form of reimbursement and/or direct payment of certain operating and other expenses, but there can be no assurance that the Special Examiner will continue to permit Crusader to do so under the Supervision Agreement.  If the Special Examiner does not continue to permit Crusader to financially support Unico in the future, Unico will be unable to continue to fund its ongoing operations.

Independent Investigation 

In October 2021, the Audit Committee of Unico’s Board of Directors retained independent outside counsel, who in turn engaged forensic accountants to work at their direction, to conduct an independent investigation and provide legal advice to the Audit Committee (the “Independent Investigation”), regarding the facts and circumstances relating to, and resulting in, the observed fiduciary funds deficiency.  As a result of the Independent Investigation, the Company has determined that, over a period of multiple years, (i) Unifax did not comply with the requirements of the California Insurance Code (“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.

Work Force Reduction

In connection with the runoff of Crusader, on October 7 and October 8, 2021, the Company informed thirteen employees of the Company’s determination to terminate their employment, effective as of October 8, 2021 (the “October 2021 Work Force Reduction”). Additionally, on December 16, 2021, and December 17, 2021, the Company informed an additional twelve employees of the Company's determination to terminate their employment, effective as of December 17, 2021 (the “December 2021 Work Force Reduction”). The terminated employees were primarily employed in the Company’s underwriting and marketing groups.  In connection with the October 2021 Work Force Reduction and the December 2021 Work Force Reduction, the Company expects to incur total pre-tax costs of $968,139, consisting of severance payments under the Company’s existing policy. In addition, the Company has offered retention bonuses to certain of the Company’s employees that were not subject to the October 2021 Work Force Reduction and the December 2021 Work Force Reduction, in connection with which, depending on employee participation, the Company expects to incur total pre-tax costs of $62,269.  The Company implemented another retention bonus plan to certain employees and expects to incur total pre-tax costs of $193,731 related to the plan, which will be recognized ratably over the last three quarters of 2022. The Company may incur additional costs in connection with the runoff of Crusader, including additional costs associated with workforce reductions.

In 2021, the Company paid $331,331 in severance payments and $0 in retention bonus payments. In 2022, the Company has paid $270,705 in severance payments and $284,810 in retention bonus payments.

COVID-19 

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

The effects of the ongoing COVID-19 pandemic were a major contributor to the variability in fair value of the Company’s fixed income and equity investments during the first half of 2020, however, the investment portfolio recovered in value in subsequent quarters. The overall response to the pandemic contributed to the recent decline in investment yields, compared to previous years, which will cap the Company’s investment portfolio’s ability to generate higher levels of investment income, absent a larger invested asset base or a change in investment philosophy.

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

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

In addition to the inherent difficulty in predicting litigation outcomes, the COVID-19 pandemic business income coverage lawsuits present a number of uncertainties and contingencies that are not yet known, including how many policyholders will ultimately file claims, the number of lawsuits that will be filed, the extent to which any class may be certified, and the size and scope of any such classes.  The legal theories advanced by plaintiffs vary by case; many complaints continue to be amended; several have been dismissed voluntarily and may be refiled; and others have been dismissed by trial courts. Some early decisions on motion filings have been appealed.

On March 23, 2021, ten policyholders sued Crusader in a putative class action entitled Anchors & Whales LLC et al. v. Crusader Insurance Company, Superior Court of the State of California for the County of San Francisco (CGC-21-590999). The action alleges that Crusader wrongly denied claims for business interruption coverage made by bars and restaurants related to the COVID-19 pandemic and related government orders that limited or halted operations of bars and restaurants. The action further alleges that Crusader acted unreasonably in denying the claims, and it seeks as damages the amounts allegedly due as contract benefits under the insurance policies, attorneys’ fees and costs, punitive damages, and other unspecified damages. The lawsuit alleges a putative class of all bars and restaurants in California that were insured by Crusader for loss of business income, who made such a claim as a result of “one or more Governmental Orders and the presence of the COVID-19 virus on the property,” and whose claim was denied by Crusader. 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).  The opening brief of Anchors & Whales LLC is due to be filed by August 12, 2022.   The Company cannot predict the actions of the Court of Appeals.

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

Termination of Reinsurance Arrangement

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

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

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

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

Under the Reinsurance Agreement, Crusader was required to secure its obligations to USIC for unearned premium reserves, if any, and loss reserves (losses incurred and not reported and loss reported but unpaid) in a security fund, trust agreement or letter of credit to permit USIC to receive credit for the reinsurance ceded to Crusader by USIC. Such security was required because Crusader is not authorized to transact insurance in Delaware, the domiciliary state of USIC. Initially, the security required to be provided by Crusader was 150% of the unearned premium and loss reserves. USIC was permitted to request additional security for the unearned premium and loss reserves in the event (i) the A.M. Best rating of Crusader is at any time reduced; or (ii) the A.M. Best rating of Crusader is at any time removed or withdrawn; or (iii) there is a reduction the capital and policyholder surplus of Crusader by 10% or more in any rolling 12-month period or (iv) Crusader fails to maintain its Cat excess of loss reinsurance coverage at certain levels. As of December 31, 2021, six securities were held as collateral with Comerica Bank & Trust, N. A. (“Comerica”), pursuant to the reinsurance trust agreement among Crusader, USIC and Comerica to secure payment of Crusader’s liabilities and performance of its obligations under the reinsurance arrangement with USIC. The estimated fair value and amortized cost of those securities was $8,243,758 and $8,162,053 on December 31, 2021, respectively. The estimated aggregate fair value and amortized cost of these securities was $7,944,916 and $7,836,756, on March 31, 2022, respectively. As of April 30, 2022, the estimated market value decreased to $7,663,701. Such market values are used in the trust fund calculation by USIC. The increase in the security request is a result of a decline in the market value of the securities and an increase in the collateral from 150% to 325% because of Crusader’s loss of the AM Best rating and the decline in policyholder surplus. If Crusader fails to provide the additional security requested by USIC, USIC may draw down the full amount of the funds in the reinsurance trust agreement. Crusader is reviewing the request of USIC and believes that the asserted loss reserves used in their calculation may be incorrect. Any increase to the reinsurance trust agreement by Crusader will require the consent of the Special Examiner. Any drawdown of the reinsurance trust agreement by USIC may have a materially adverse effect on the financial condition of Unico. As of December 31, 2020, one corporate security, included in available-for-sale fixed maturities, was held as collateral with Comerica, pursuant to the reinsurance trust agreement among Crusader, USIC and Comerica to secure payment of Crusader’s liabilities and performance of its obligations under the reinsurance arrangement with USIC. The estimated fair value and amortized cost of that security was $824,500 and $787,653 on December 31, 2020, respectively.

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 have and will continue to decline significantly in the future. The insurance company operation revenues generated approximately 95.2% of consolidated revenues for the fiscal year ended December 31, 2021, compared to 93.6% of consolidated revenues for the fiscal year ended December 31, 2020.  None of the Company’s other operations is individually material to consolidated revenues. 

Insurance Company Operation

As of December 31, 2021, Crusader was licensed as an admitted insurance carrier in the states of Arizona, California, Nevada, Oregon, and Washington.  From 2004 until June 2014, all of Crusader’s business was written in the state of California. Crusader’s business remains concentrated in California (100% and 99.9% of gross written premium, which represents written premium before cession to reinsurers, in the years ended 2021 and 2020, respectively).  During the years ended December 31, 2021 and 2020, 99.7% and 99.6% of Crusader’s business was CMP policies, respectively.

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

Crusader previously focused its business in three underwriting businesses: (1) Transportation, (2) Mainstreet, and (3) Buildings.  The Company reorganized its underwriting businesses for proper staffing and business focus during the first quarter of 2021.  The former Food, Beverage and Entertainment and Garage and Mercantile businesses became Mainstreet, and the former Apartments & Commercial Buildings business was renamed Buildings.  The Company’s Board of Directors decided to put Crusader into run off in September 2021 and now Crusader's business is in runoff.

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):

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

Crusader’s underwriting loss before income taxes is as follows

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 Consolidated Statements of Operations but is not subtotaled.  

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

Unearned premiums represent premium applicable to the unexpired terms of policies in force.  The Company evaluates its unearned premiums periodically for premium deficiencies by comparing the sum of expected claim costs, unamortized deferred policy acquisition costs, and maintenance costs partially offset by net investment income to related unearned premiums. To the extent that any of the Company’s programs become unprofitable, a premium deficiency reserve may be required.  The Company recognized an allowance against its deferred acquisition costs of $1,409,654 and $0 for the years ended December 31, 2021 and 2020, respectively.   

The insurance company operation combined ratio is the sum of (1) the ratio of net losses and loss adjustment expenses incurred (including a provision for IBNR) to net earned premium (loss ratio) and (2) the ratio of policy acquisition costs to net earned premium (expense ratio).  If the combined ratio is below 100%, an insurance company has an underwriting profit; if it is above 100%, the company has an underwriting loss.

The following table shows the loss ratios, expense ratios, and combined ratios of Crusader: 

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

On September 24, 2021, A.M. Best Company (“A.M. Best”) downgraded Crusader's Financial Strength Rating (“FRB”) to “C++” (Marginal) from “B” (Fair) and its Long-Term Issuer Credit Rating (“Long-Term ICR”) to “b” (Marginal) from “bb+” (Fair). A.M. Best also downgraded Unico's Long-Term ICR to “ccc-” (Weak) from “b” (Marginal). In addition, A.M. Best maintained the “under review with negative implications” status for these Credit Ratings. On September 24, 2021, A.M. Best’s ratings reflected concerns regarding Crusader’s balance sheet strength, which A.M. Best assessed as weak, as well as its weak operating performance, limited business profile and marginal enterprise risk management.  A.M. Best stated that, while Crusader maintains sufficient liquidity, and its risk-adjusted capital levels remain at the strongest level, as measured by A.M. Best’s Capital Adequacy Ratio, the downgrades reflect the lowered assessment of the balance sheet strength given the enterprise’s diminished financial flexibility and the constraints imposed on Crusader by the CA DOI under the Supervision Agreement.  The A.M Best rating was withdrawn by the Company on September 24, 2021.

Some of Crusader’s policyholders, or the lenders, landlords or clients of Crusader’s policyholders, require insurance from a company that has an A.M. Best FSR of “A-” or higher, and the A.M. Best’s changed ratings of Crusader may also have a negative impact on Crusader’s reputation. Therefore, Crusader’s and Unico’s changed ratings and the ultimate withdrawal of these ratings would have a negative impact on the Company’s revenue and results of operations if Crusader’s operations were not in runoff. In addition, certain policyholders of Crusader may have cancelled their policies because of the change in the rating and ultimate withdrawal of these ratings. The Company cannot quantify the impact that the rating changes or the withdrawal of the ratings have had or will have on its revenue and results of operations.

Revenues from Other Insurance Operations

The Company’s revenues from “Other insurance operations” consist of commissions, fees, investment, and other income.  Excluding investment and other income, these operations accounted for approximately 5% and 6% of total revenues for the years ended December 31, 2021 and 2020, respectively.

Investments

The Company generated revenues from its total invested assets of $76,205,181 (fixed maturities at amortized cost, equity securities at cost and short-term investments at fair value) and $83,617,720 (fixed maturities at amortized cost, equity securities at cost and short-term investments at fair value) as of December 31, 2021 and 2020, respectively.

Net investment income (net of investment expenses) decreased $55,250 (-3%) for the year ended December 31, 2021, as compared to the year ended December 31, 2020.  This decrease in net investment income was due primarily to a  decrease in average invested assets and  increases in interest rates impacting the Company’s portfolio.  Average invested assets are expected to continue to decrease in future periods because Crusader is in runoff and will be using the investments to satisfy future claims.

Due to the current interest rate environment, the current target effective duration for the Company’s investment portfolio is between 2.0 and 4.0 years.  As of December 31, 2021, all of the Company’s investments are in U.S. Treasury securities, corporate fixed maturity securities, agency mortgage-backed securities, equity securities, Federal Deposit Insurance Corporation (“FDIC”) insured certificates of deposit, and short-term investments.  All of the Company’s investments, except for the certificates of deposit, are readily marketable.  As of December 31, 2021, the weighted average maturity of the Company’s investments was approximately 6.7 years, and the effective duration for available-for-sale investments (investments managed under the investment guidelines) was 2.4 years.

Liquidity and Capital Resources

The Company prepared the accompanying consolidated financial statements on a going concern basis, which assumes that it will realize its assets and satisfy its liabilities in the normal course of business. Unico has a history of recurring losses from operations, negative cash flows from its operating activities which may continue in the future, and, as a holding company, 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 generally received dividends periodically from Crusader, but does not expect to receive any such dividends for the foreseeable future due to prohibitions on dividends imposed by the CA DOI pursuant to the Supervision Agreement, Crusader’s decreased policyholder surplus caused by additional underwriting losses during 2021, and the need to preserve policyholder surplus at Crusader. 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 significant financial support to Unico, Unico will be unable to continue to fund its continued operations and expenses. The Special Examiner has recently informed Crusader that the CA DOI does not intend to continue to permit Crusader to fund certain expenses attributable to Unico’s status as a public company, including certain legal and accounting expenses without an undertaking by the Company to repay payments made on its behalf by Crusader. The Company will have an account payable to Crusader and Crusader will have an intercompany account receivable due from the Company for such payments made by Crusader and authorized by the Special Examiner. The inability of Crusader to pay certain expenses of the Company will exacerbate Unico’s lack of liquidity. Additionally, many of the potential strategic alternatives that the Unico Board of Directors is considering will also depend on continued financial support from Crusader to fund transaction expenses and other costs.  If Crusader is not permitted to do so, Unico would be unable to pursue such alternatives, which may otherwise be in the best interests of its stockholders. These circumstances raise substantial doubt about Unico’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of the uncertainty of our ability to remain a going concern.

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.

As a result of Crusader being placed into runoff, Crusader is no longer able to generate any significant amounts of premium and the holdings of unearned premium reserves will be depleted over time. As a result, Crusader will need to liquidate some of its investment holdings to support its operations. Accordingly, the size of Crusader’s investment portfolio and investment income are expected to decrease.

On December 31, 2021 and December 31, 2020, Crusader’s RBC Level was less than 300% of its Authorized Control Level RBC, and its statutory accounting basis combined ratio was in excess of 120% for the years then ended.  The RBC Level when coupled with the statutory accounting basis combined ratio triggered Company Action Level Events under the RBC for the years then ended.  On March 24, 2021  Crusader submitted to the CA DOI a comprehensive Risk Based Capital Plan (the "RBC Plan") to increase the adjusted capital above 300% and to address the actions that Crusader would take to correct the conditions that resulted in the Company Action Level Event.  The CA DOI found the RBC Plan to be deficient and requested that a revised RBC Plan be submitted.  On July 2, 2021, the Company submitted a revised RBC Plan, which addressed issues raised by the CA DOI (the “2021 Revised RBC Plan”).  No action was taken by the CA DOI regarding the 2021 Revised RBC Plan. As of December 31, 2021 a second Company Action Event occurred. At December 31, 2021, Crusader’s RBC Level was less than 300%, with a combined ratio greater than 130%, which resulted in another Company Action Level event (the “2022 Company Action Level Event”).  As a result of the 2022 Company Action Level Event, Crusader was required to submit another comprehensive Risk Based Capital Plan (“2022 RBC Plan”) to the CA DOI. Crusader submitted its 2022 RBC Plan on May 15, 2022.  On June 9, 2022, the CA DOI requested additional information regarding the 2022 RBC Plan, which information is to be submitted by July 24, 2022. The CA DOI may accept Crusader’s 2022 RBC Plan to correct the conditions that lead to the 2022 Company Action Event,  or it may request that a revised plan be submitted, or it may take no action with respect to the 2022 RBC Plan. After the Plans are submitted, the CA DOI may request additional changes to the revised RBC Plan to address various corrective actions that Crusader and/or the Company will take, including, without limitation, increasing the capital of Crusader.  Depending on the scope and nature of any such requests from the CA DOI, regarding the 2022 RBC Plan the Company and Crusader may not be able to implement certain corrective actions, including the potential infusion of capital to Crusader. The Company continues to be engaged in discussions with the CA DOI on various strategic alternatives to address the RBC issues.

Another liquidity risk faced by the Company is adverse development of Crusader’s loss and loss adjustment expense reserves.  Based on the Company’s current loss and loss expense reserves and expected current and future payments, the Company believes that Crusader’s loss and loss adjustment expense reserves are adequate to address anticipated claims.  However, no assurance can be given that the Company’s estimate of ultimate loss and loss adjustment expense reserves will be sufficient.

Crusader has a significant amount of cash, restricted cash, cash equivalents, and investments as a result of its holdings of unearned premium reserves, its reserves for loss and loss adjustment expense payments and its capital and surplus.  Crusader's loss and loss adjustment expense payments are the most significant cash flow requirement of the Company.  These payments are continually monitored and projected to ensure that the Company has the liquidity to cover these payments. Cash, restricted cash, and investments (at amortized cost) of the Company at December 31, 2021, were $91,831,832 compared to $87,575,700 at December 31, 2020.  Crusader's cash, restricted cash, and investments were 99% and 98% of the total cash, restricted cash, and investments (at amortized cost) held by the Company as of December 31, 2021 and 2020, respectively.

As of December 31, 2021, all the Company’s investments are in U.S. Treasury securities, FDIC insured certificates of deposit, corporate fixed maturity securities, agency mortgage-backed securities, equity securities and short-term investments. All the Company’s investments except for the certificates of deposit, are readily marketable.  

The composition of Company’s investment portfolio is as follows:

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

The Company is required to classify its debt securities into one of three categories: held‑to‑maturity, available‑for‑sale, or trading securities.  Although part of the Company's investments in fixed maturity securities is classified as available‑for‑sale and, while the Company may sell investment securities from time to time in response to cash flow requirements, economic, regulatory, and/or market conditions or investment securities may be called by their issuers prior to the securities’ maturity, its investment guidelines place primary emphasis on buying and holding high‑quality investments to maturity.  Historically, the Company’s investment guidelines placed primary emphasis on buying and holding high-quality investments to maturity.  It is expected the Company will sell securities to support its operations.

The Company’s Board of Directors has approved investment guidelines which reflect the Company’s risk, balance sheet, and profile.

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

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

An independent investment advisor manages Crusader’s investments. The advisor’s role currently is limited to maintaining Crusader’s portfolio within the investment guidelines and providing investment accounting services to the Company.  Through July 31, 2021, the investments were held by Crusader’s previous custodian, Union Bank Global Custody Services (“Union Bank”).  Effective August 2, 2021, the investments were held by Crusader’s current custodian, U.S. Bank, Institutional Trust and Custody (“U.S. Bank”), as a result of the sale of the custodial business by Union Bank to U.S. Bank.  

As of December 31, 2021, six securities were held as collateral with Comerica Bank & Trust, N. A. (“Comerica”), pursuant to the reinsurance trust agreement among Crusader, USIC and Comerica to secure payment of Crusader’s liabilities and performance of its obligations under the reinsurance arrangement with USIC.  The estimated fair value and amortized cost of those securities was $8,243,758 and $8,162,053 on December 31, 2021, respectively. As of December 31, 2020, one corporate security, included in available-for-sale fixed maturities, was held as collateral with Comerica, pursuant to the reinsurance trust agreement among Crusader, USIC and Comerica to secure payment of Crusader’s liabilities and performance of its obligations under the reinsurance arrangement with USIC. The estimated fair value and amortized cost of that security was $824,500 and $787,653 on December 31, 2020, respectively.

On August 10, 2020, the Board authorized a share repurchase program (the “2020 Program”) for up to $5,000,000 of the currently outstanding shares of the Company’s common stock.  The 2020 Program was effective immediately and replaced the Company’s existing share repurchase program that was adopted by the Board on December 19, 2008 (the “2008 Program”) to acquire from time to time up to an aggregate of 500,000 shares of the Company’s common stock.  The purchases under the 2020 Program may be made from time to time in the open market, through block trades, 10b5-1 trading plans, privately negotiated transactions or otherwise and in accordance with applicable laws, rules and regulations. The timing and actual number of the shares repurchased under the 2020 Program will depend on a variety of factors including price, market conditions and corporate and regulatory requirements. The Company intends to fund the share repurchases under the 2020 Program from cash on hand. The 2020 Program does not commit the Company to repurchase shares of its common stock and it may be amended, suspended or discontinued at any time.  The Company repurchased its shares under the 2020 Program and 2008 Program in unsolicited transactions as follows:

The Company has remaining authority under the 2020 Program to repurchase up to $4,995,406 of the currently outstanding shares of the Company’s common stock as of December 31, 2021.  The Company has retired or will retire all stock repurchased under the 2020 Program and 2008 Program.  Effective January 2022, the Company suspended the 2020 Program and ceased any further repurchases of its shares from stockholders of the Company. 

The Company reported $7,510,147 net cash used by operating activities for the year ended December 31, 2021, compared to $2,436,399 net cash used by operating activities for the year ended December 31, 2020.  Fluctuations in cash flows from operating activities relate to changes in loss and loss adjustment expense payments, unearned premium holdings, and the timing of the collection and the payment of insurance-related receivables and payables.  The variability of the Company’s loss 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 of December 31, 2021, was $22,494,454, a decrease of $4,399,061 (-16%) from December 31, 2020 surplus of $26,893,515. The decrease is a result of Crusader being put into runoff and the cessation of writing new policies in August 2021 and renewal policies on December 8, 2021.

On each of September 14, 2020, and May 20, 2020, Crusader paid cash dividends of $2,000,000 to Unico, its parent and sole shareholder.  These two dividends totaling $4,000,000 were used primarily for general corporate purposes.  The Supervision Agreement requires the CA DOI approval of all dividends effective September 7, 2021.  No dividends were paid by Crusader to Unico in 2021 as a result of the Supervision Agreement and other action by the CA DOI. The CA DOI advised Crusader that no dividends may be paid by Crusader through December 31, 2025.

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

Results of Operations

General

All comparisons made in this discussion compare the year ended December 31, 2021 to the year ended December 31, 2020.  Because Crusader has been placed into runoff, some of the financial metrics will not be comparable now or in the future. 

Total revenues for the year ended December 31, 2021, were $36,388,384, an increase of $3,828,273 (11.8%), compared to total revenues of $32,560,111 for the year ended December 31, 2020.  For the year ended December 31, 2021, the Company had a loss before taxes of $5,214,334 compared to loss before taxes of $17,943,515 for the year ended December 31, 2020.  For the year ended December 31, 2021, the Company had a net loss of $5,673,251 compared to net loss of $21,491,113 for the year ended December 31, 2020.  As a result of the runoff of Crusader, revenues and losses in future periods will not be comparable to past periods because Crusader ceased writing new policies in September 2021 and ceased renewing policies in December 2021. 

The increase in total revenues for the year ended December 31, 2021, compared to the year ended December 31, 2020, was due primarily to an increase in policies written in the Transportation Business which resulted in a net earned premium increase of $261,737 (1%).  

The decreases in loss before tax and net loss for the year ended December 31, 2021 as compared to the year ended December 31, 2020 were due primarily to a decrease in loss and loss adjustment expense of $8,670,080 and a decrease in salaries and employee benefits (net amount charged to operating expenses) of $2,513,602 and the realized gain of $3,693,858 on the sale of the Calabasas building, partially offset by increases in other operating expenses of $1,753,665.

During the twelve months ended December 31, 2020 the Company reevaluated certain assumptions used in its process for estimating loss and loss adjustment reserves due to its loss experience in Crusader’s Apartments & Commercial Buildings and Transportation Business as well as changes in market conditions.  This reevaluation resulted in a $9,399,547 increase in Crusader’s IBNR reserves, net of reinsurance, which was a primary contributor to the losses and loss adjustment expenses of $34,642,920 recognized for the twelve months ended December 31, 2020.  The absence of such a revaluation during 2021 was a primary contributor to the decrease in losses and loss adjustment expenses for the twelve months ended December 31, 2021.

The decrease in salaries and employee benefits (net amount charged to operating expenses) during the twelve months ended December 31, 2021, of $2,513,602 from $6,364,170 to $3,850,568 was due primarily to savings in salaries and reductions in compensated absences resulting from workforce reductions.  These workforce reductions were to align staffing with the reduction in premium revenue associated with operations being in runoff.  

The increase in other operating expenses of $1,753,665 during the twelve months ended December 31, 2021, was due primarily to increases in attorney fees, paid rent associated with the lease back of a portion of the previously sold Calabasas building, and increased fees for accounting services.

The decrease in income tax expense of $3,088,681 during the twelve months ended December 31, 2021, was due primarily to an increase in the valuation allowance related to deferred tax assets on federal net operating losses.

The effect of inflation on the Company for the year ended December 31, 2021 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 in inflationary times.

Revenues

Crusader Premium

Crusader’s primary lines of business are CMP policies. These policies represented approximately 99.7% and 99.6% of Crusader’s total written premium for the years ended December 31, 2021, and 2020, respectively.

Gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties) reported on Crusader’s statutory financial statements decreased $376,194 (-1%) to $36,266,636 for the year ended December 31, 2021, compared to $36,642,830 for the year ended December 31, 2020.

As a result of the runoff of Crusader, Crusader will not generate significant levels of written premium in the future.  Crusader was obligated by regulatory requirements to offer renewal policies to those policyholders who could not be issued non-renewal notices immediately after the commencement of the runoff of Crusader in September 2021 for, policies with policy renewal dates of 60 days or less from the date Crusader went into runoff.  Accordingly, Crusader ceased generating any renewal premium in December 2021. 

Written premium

Written premium is a non-GAAP financial measure that is defined, under SAP, as the contractually determined amount charged by the insurance company to the policyholder for the effective period of the contract based on the expectation of risk, policy benefits, and expenses associated with the coverage provided by the terms of the policies.  Written premium is a required statutory reporting 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.

Gross earned premium

Gross earned premium increased $3,858,792 (11%) to $40,123,661 for the year ended December 31, 2021, compared to $36,264,869 for the year ended December 31, 2020.  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 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.  This increase was the result of a successful marketing campaign during early 2021. As a result of the runoff of Crusader, the gross earned premium will 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) increased $3,597,055 (44%) to $11,693,756 for the year ended December 31, 2021, compared to $8,096,701 for the year ended December 31, 2020.  Ceded earned premium as a percentage of gross earned premium was 29% for the year ended December 31, 2021, and 22% for the year ended December 31, 2020.  The increase in the ceded earned premium as a percentage of gross earned premium for the year ended December 31, 2021, compared to the year ended December 31, 2020, was due primarily to the hardening reinsurance market and the Company’s recent underwriting performance.

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.  

Crusader’s primary excess of loss reinsurance agreements, or treaties, during the years ended December 31, 2021 and 2020, are with Renaissance Reinsurance U.S. Inc. & Hannover Ruck SE, both A+ rated. In calendar years 2021 and 2020, Crusader retained a participation in its excess of loss reinsurance treaties of 0% in its 1^st layer (reinsured losses between $500,000 and $1,000,000), 0% in its 2^nd layer (reinsured losses between $1,000,000 and $4,000,000), and 0% in its clash layer (reinsured losses between $4,000,000 and $8,000,000).  Crusader’s retention on losses is $500,000 under these contracts.

Crusader also has catastrophe (“CAT”) reinsurance treaties from various highly rated California authorized and California unauthorized reinsurance companies.  These reinsurance treaties help protect Crusader against losses in excess of certain retentions from catastrophic events that may occur on property risks which Crusader insures.  In calendar years 2021 and 2020, Crusader retained a participation in its catastrophe excess of loss reinsurance treaties of 5% in its 1^st layer (reinsured losses between $1,000,000 and $10,000,000) and 0% in its 2^nd layer (reinsured losses between $10,000,000 and $46,000,000).  Crusader’s retention on losses is $1,000,000 under these contracts.  In 2022 the catastrophe excess of loss reinsurance treaties was reduced to $16,000,000 with 0% participation and 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 rated California 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, (the 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.  From June 2021, 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 of December 31, 2021, all such ceded contracts are accounted for as risk transfer reinsurance.  

A tabular presentation of Crusader’s direct, assumed, ceded and net earned premium is as follows:

Net Investment Income, Net Realized Investment Gains and Losses, and Net Investment Income, Net Realized Investment Gains and Losses, and Net Unrealized Investment Gains on Equity Securities

Net investment income decreased $55,250 (-3%) to $1,932,993 for the year ended December 31, 2021, compared to $1,988,243 for the year ended December 31, 2020.  This decrease in net investment income was due primarily to a decrease in average invested assets, specifically sales of U.S. Treasury Bonds. The Company had net realized investment gains of $259,912 and net unrealized investment gains on equity securities of $400,862, for the year ended December 31, 2021, compared to net realized investment gains of $97,771 and net unrealized investment gains on equity securities of $198,266 for the year ended December 31, 2020. 

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:

As a result of Crusader entering into runoff, 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.

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:

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 investments was approximately 6.7 years as of December 31, 2021 and 8.0 years as of December 31, 2020.

As of December 31, 2021, all of the Company’s investments are in U.S. Treasury securities, FDIC insured certificates of deposit, corporate fixed maturity securities, agency mortgage-backed securities, equity securities and short-term investments.  The investments in the certificates of deposit are classified as held-to-maturity investments, and all other fixed maturity investments are classified as available-for-sale.  All of the Company’s investments, except for the certificates of deposit, are readily marketable.  The following table sets forth the composition of the investment portfolio of the Company at the dates indicated:

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:

While the fair value of Company’s investment portfolio at December 31, 2021 has recovered from the declines recorded in first half of 2020 the effects of increasing inflation and higher market interest rates could result in increased volatility in our fixed income and equity portfolios.   

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 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.  During the year ended December 31, 2021, two fixed maturity corporate securities experienced a decline in market value; the market and book value of those securities at December 31, 2021, was $2,422,354 and $2,522,241, respectively.  The unrealized losses on all securities as of December 31, 2021, and December 31, 2020, were determined to be temporary.

The fixed maturity securities previously held by the Company were sold and called prior to maturity as follows: