UNICO AMERICAN CORP - Quarter Report: 2021 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

	For the quarterly period ended June 30, 2021 or

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

	For the transition period from ____ to ____.

	Commission File No. 00-003978

UNICO AMERICAN CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Nevada		95-2583928
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

26050 Mureau Road, Calabasas, California		91302
(Address of Principal Executive Offices)		(Zip Code)

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

No Change

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

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

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

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

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

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

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

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

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

Class		Outstanding at August 17, 2021
Common Stock, no par value per share		5,304,863

UNICO AMERICAN CORPORATION

INDEX TO FORM 10-Q

		Page No.
Cautionary Note Regarding Forward-Looking Statements		3
Part I ‑ Financial Information		5
	Item 1. Financial Statements	5
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	40
	Item 4. Controls and Procedures	40
Part II ‑ Other Information		41
	Item 1. Legal Proceedings	41
	Item 1A. Risk Factors	41
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	44
	Item 3. Defaults Upon Senior Securities	44
	Item 4. Mine Safety Disclosures	44
	Item 5. Other Information	44
	Item 6. Exhibits	44
Signatures		45

2 of 45

Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q, 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 (or “the Exchange Act”). In this context, forward-looking statements are not historical facts and include statements about the Company’s plans, objectives, beliefs and expectations. Forward-looking statements include statements preceded by, followed by, or that include the words “believes,” “expects,” “anticipates,” “seeks,” “plans,” “estimates,” “intends,” “projects,” “targets,” “should,” “could,” “may,” “will,” “can,” “can have,” “likely,” the negatives thereof or similar words and expressions. These forward-looking statements are contained throughout this Form 10-Q, including, but not limited to, statements found in Part I – Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

·	Unico's ability to continue to operate as a "going concern"
·	substantial historical net losses of Crusader Insurance Company (“Crusader”), the principal subsidiary of the Company, which may continue in the future;
·	failure to meet minimum capital and surplus requirements required of property and casualty insurance companies;
·	Crusader will be limited in the amount of dividends that it can declare and pay to Unico because of decreases in its policyholder surplus;
·	possible restrictions on new business that may be written by Crusader by its principal insurance regulator because of its reduced policyholder surplus;
·	vulnerability to climate change and significant catastrophic property loss;
·	the impact of the recent coronavirus pandemic;
·	ability to adjust claims accurately;
·	insufficiency of loss and loss adjustment expense reserves to cover future losses;
·	ability to realize deferred tax assets;
·	the negative impact of emerging claim and coverage issues;
·	ability to accurately underwrite risks and charge adequate premium;
·	ability to obtain reinsurance or collect from reinsurers and or losses in excess of reinsurance limits;
·	excess underwriting capacity and unfavorable premium rates;
·	extensive regulation and legislative changes;
·	risk management framework could prove inadequate;
·	reliance on subsidiaries to satisfy obligations, including privacy and data protection laws;
·	downgrade in financial strength rating or long-term issuer credit rating by A.M. Best;
·	changes in interest rates;
·	investments subject to credit, prepayment and other risks;
·	geographic concentration;
·	single operating location;
·	reliance on independent insurance agents and brokers;
·	insufficient reserve for doubtful accounts;
·	litigation;
·	enforceability of exclusions and limitations in policies;
·	difficulty in acquiring necessary data;
·	reliance on information technology systems;
·	systems damage, failures, interruptions, cyber-attacks and intrusions, or unauthorized data disclosures;
·	delays and cost overruns in connection with the upgrade of its legacy information technology system;
·	ability to attract, develop and retain employees and maintain appropriate staffing levels;
·	insolvency, financial difficulties, or default in performance of obligations by parties with significant contracts or relationships;

3 of 45

Table of Contents

·	ability to effectively compete;
·	levy assessments by various underwriting pools and programs;
·	maximization of long-term value which may sometimes conflict with short-term earnings expectations;
·	control by a small number of stockholders;
·	difficulty in effecting a change of control or sale of any subsidiaries;
·	limited trading of stock;
·	changes in accounting standards, including those issued by the Financial Accounting Standards Board;
·	changes in federal or state tax laws;
·	ability to prevent or detect acts of fraud with disclosure controls and procedures;
·	change in general economic conditions;
·	dependence on key personnel;
·	no assurance of dividend declaration in the future so returns may be limited to stock value;
·	significant costs and substantial management time devoted to operating as a public company; and
·	failure to maintain effective system of internal controls.

Please see Part I - Item 1A – “Risk Factors” in the Company’s 2020 Annual Report on Form 10-K as filed with the U.S. Securities and Exchange Commission (“SEC”), as well as other documents we file with the SEC from time-to-time, for other important factors that could cause the Company’s actual results to differ materially from the Company’s current expectations and from the forward-looking statements discussed herein. Because of these and other risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. In addition, these statements speak only as of the date of this Form 10-Q and, except as may be required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

4 of 45

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. -FINANCIAL STATEMENTS

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30		December 31
	2021		2020
	(Unaudited)
ASSETS
Investments
Available-for-sale:
Fixed maturities, at fair value (amortized cost: $84,601,638 at June 30, 2021, and $80,071,280 at December 31, 2020)	$	86,746,661	$	83,409,694
Held-to-maturity:
Fixed maturities, at amortized cost (fair value: $548,000 at June 30, 2021, and $798,000 at December 31, 2020)		548,000		798,000
Equity securities, at fair value (cost: $3,205,869 at June 30, 2021, and $2,548,440 at December 31, 2020)		3,570,416		2,746,706
Short‑term investments, at fair value		6,468,314		200,000
Total Investments		97,333,391		87,154,400
Cash and cash equivalents		1,878,556		3,957,980
Accrued investment income		462,458		402,046
Receivables, net		4,029,427		3,321,337
Reinsurance recoverable:
Paid losses and loss adjustment expenses		462,513		621,307
Unpaid losses and loss adjustment expenses		22,081,588		22,253,642
Deferred policy acquisition costs		3,827,217		3,503,248
Real estate held for sale, net		-		8,335,017
Property and equipment, net		2,225,986		2,038,415
Other assets		215,374		313,363
Total Assets	$	132,516,510	$	131,900,755

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Unpaid losses and loss adjustment expenses	$	74,197,167	$	74,893,509
Unearned premium		20,975,844		18,188,298
Advance premium and premium deposits		127,420		208,538
Accrued expenses and other liabilities		2,265,107		3,577,450
Total Liabilities	$	97,565,538	$	96,867,795

Commitments and contingencies

STOCKHOLDERS' EQUITY
Common stock, no par value – authorized 10,000,000 shares; 5,304,863 and 5,304,885 shares issued and outstanding at June 30, 2021, and December 31, 2020, respectively	$	3,771,757	$	3,771,767
Accumulated other comprehensive income		1,694,568		2,637,347
Retained earnings		29,484,647		28,623,846
Total Stockholders’ Equity	$	34,950,972	$	35,032,960

Total Liabilities and Stockholders' Equity	$	132,516,510	$	131,900,755

See notes to condensed consolidated financial statements (unaudited).

5 of 45

Table of Contents

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended						Six Months Ended
	June 30						June 30
	2021			2020			2021		2020
REVENUES
Insurance company operation:
Net earned premium	$	6,967,748		$	6,770,111		$	13,571,508	$	13,681,245
Net investment income		528,879			489,498			1,043,602		1,010,190
Net realized investments gains		106,410			461			161,809		1,575
Net realized gains on real estate sale		-			-			3,693,858		-
Net unrealized investments gains on
equity securities		14,615			67,759			166,281		22,959
Other income		54,465			122,822			27,714		203,759
Total Insurance Company Operation		7,672,117			7,450,651			18,664,772		14,919,728

Other insurance operations:
Gross commissions and fees		415,711			457,886			849,172		926,955
Finance charges and fees earned		44,772			67,686			89,770		134,705
Other income		5			4			546		20
Total Revenues		8,132,605			7,976,227			19,604,260		15,981,408

EXPENSES
Losses and loss adjustment expenses		6,084,707			4,888,906			11,669,920		10,766,291
Policy acquisition costs		1,105,545			1,202,026			2,127,510		2,346,451
Salaries and employee benefits		1,205,630			1,251,922			2,333,721		2,374,421
Commissions to agents/brokers		20,434			24,000			41,002		49,954
Other operating expenses		1,147,124			993,935			2,320,602		1,974,351
Total Expenses		9,563,440			8,360,789			18,492,755		17,511,468

Income (Loss) before taxes		(1,430,835	)		(384,562	)		1,111,505		(1,530,060	)
Income tax expense (benefit)		(24,024	)		50,252			250,612		(51,420	)
Net Income (Loss)	$	(1,406,811	)	$	(434,814	)	$	860,893	$	(1,478,640	)


PER SHARE DATA:
Basic
Income (Loss) per share	$	(0.27	)	$	(0.08	)	$	0.16	$	(0.28	)
Weighted average shares		5,304,885			5,305,742			5,304,885		5,306,231
Diluted
Income (Loss) per share	$	(0.27	)	$	(0.08	)	$	0.16	$	(0.28	)
Weighted average shares		5,304,885			5,305,742			5,304,885		5,306,231

See notes to condensed consolidated financial statements (unaudited).

6 of 45

Table of Contents

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

	Three Months Ended						Six Months Ended
	June 30						June 30
	2021			2020			2021			2020

Net income (loss)	$	(1,406,811	)	$	(434,814	)	$	860,893		$	(1,478,640	)
Other changes in comprehensive income (loss):
Changes in unrealized gains (losses) on securities classified as available-for-sale arising during the period, net of income tax		90,376			1,702,302			(942,779	)		1,402,309
Comprehensive Income (Loss)	$	(1,316,435	)	$	1,267,488		$	(81,886	)	$	(76,331	)

See notes to condensed consolidated financial statements (unaudited).

7 of 45

Table of Contents

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

							Accumulated
	Common Shares						Other
	Issued and						Comprehensive			Retained
	Outstanding			Amount			Income (Loss)			Earnings			Total

Balance – December 31, 2019		5,306,720		$	3,772,669		$	1,182,866		$	50,124,790		$	55,080,325

Shares repurchased		(978	)		(480	)		-			(5,760	)		(6,240	)
Change in comprehensive loss, net of deferred income tax		-			-			(299,993	)		-			(299,993	)
Net loss		-			-			-			(1,043,826	)		(1,043,826	)
Balance – March 31, 2020		5,305,742		$	3,772,189		$	882,873		$	49,075,204		$	53,730,266

Change in comprehensive income, net of deferred income tax		-			-			1,702,302			-			1,702,302
Net loss		-			-			-			(434,814	)		(434,814	)
Balance – June 30, 2020		5,305,742		$	3,772,189		$	2,585,175		$	48,640,390		$	54,997,754

							Accumulated
	Common Shares						Other
	Issued and						Comprehensive			Retained
	Outstanding			Amount			Income (Loss)			Earnings			Total

Balance – December 31, 2020		5,304,885		$	3,771,767		$	2,637,347		$	28,623,846		$	35,032,960

Change in comprehensive loss, net of deferred income tax		-			-			(1,033,155	)		-			(1,033,155	)
Net income		-			-			-			2,267,703			2,267,703
Balance – March 31, 2021		5,304,885		$	3,771,767		$	1,604,192		$	30,891,549		$	36,267,508

Shares repurchased		(22	)		(10	)		-			(91	)		(101	)
Change in comprehensive income, net of deferred income tax		-			-			90,376			-			90,376
Net loss		-			-			-			(1,406,811	)		(1,406,811	)
Balance – June 30, 2021		5,304,863		$	3,771,757		$	1,694,568		$	29,484,647		$	34,950,972

See notes to condensed consolidated financial statements (unaudited).

8 of 45

Table of Contents

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended
	June 30
	2021			2020
Cash flows from operating activities:
Net income (loss)	$	860,893		$	(1,478,640	)
Adjustments to reconcile net income (loss) to net cash from operations:
Depreciation and amortization		268,275			376,723
Bond amortization, net		(354,623	)		(236,401	)
Bad debt expense		5,339			706
Net realized investment gains		(125,353	)		(1,575	)
Net realized gains on real estate sale		(3,693,858	)		-
Net unrealized investment gains on equity securities		(166,281	)		(22,959	)
Changes in assets and liabilities:
Net receivables and accrued investment income		(773,840	)		(139,464	)
Reinsurance recoverable		330,848			(755,862	)
Deferred policy acquisition costs		(323,968	)		(48,542	)
Other assets		97,988			61,701
Unpaid losses and loss adjustment expenses		(696,342	)		(189,161	)
Unearned premiums		2,787,546			317,324
Advance premium and premium deposits		(81,118	)		70,098
Accrued expenses and other liabilities		(1,312,344	)		589,835
Income taxes current/deferred		250,612			(51,420	)
Net Cash Used by Operating Activities		(2,926,226	)		(1,507,637	)

Cash flows from investing activities:
Purchase of fixed maturity investments		(23,149,083	)		(11,764,292	)
Purchase of equity securities		(1,410,323	)		(502,484	)
Proceeds from maturity of fixed maturity investments		15,743,563			9,369,854
Proceeds from sale or call of fixed maturity investments		3,425,261			3,693,797
Proceeds from sale of equity securities		932,771			-
Purchase of short-term investments		(6,268,314	)		(2,389	)
Proceeds from sale of real estate held for sale		12,028,875			-
Purchase of property and equipment		(455,847	)		(387,587	)
Net Cash Provided by Investing Activities		846,903			406,899

Cash flows from financing activities:
Repurchase of common stock		(101	)		(6,240	)
Net Cash Used by Financing Activities		(101	)		(6,240	)

Net decrease in cash and cash equivalents		(2,079,424	)		(1,106,978	)
Cash and cash equivalents at beginning of period		3,957,980			5,781,639
Cash and Cash Equivalents at End of Period	$	1,878,556		$	4,674,661

Supplemental cash flow information
Cash paid during the period for:
Interest	$	-		$	-
Income taxes	$	8,800		$	8,800

See notes to condensed consolidated financial statements (unaudited).

9 of 45

Table of Contents

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2021

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

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

Principles of Consolidation

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

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10‑Q and Rule 8-03 of Regulation S-X for smaller reporting companies. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. Quarterly condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes in the Company’s 2020 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

Going Concern

The Company prepared its condensed consolidated financial statements on a going concern basis, which assumes that the Company 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, is dependent on dividends from Crusader Insurance Company ("Crusader") and its other subsidiaries to fund its operations and expenses. Unico does not expect to receive dividends from Crusader, to fund its operations and expenses for the foreseeable future due to Crusader's decreased policyholder surplus caused by additional underwriting losses during 2021, and the need to preserve policyholder surplus at Crusader, as discussed further in Note 10. These circumstances raise substantial doubt about Unico's ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and reclassification of assets or the amounts and classifications of liabilities that may result from the outcome of the uncertainty of Unico's ability to continue as a going concern.

Based on Unico's current cash and short‑term investments at June 30, 2021, and in light of its expectation that it will not receive dividends from Crusader for the foreseeable future, 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 condensed consolidated financial statements.

Crusader, Unico's principal operating subsidiary, is not itself in a position where there is substantial doubt about its ability to continue as a going concern for the next 12 months and intends to continue to operate in the ordinary course, but any negative consequences that Unico experiences may disrupt or otherwise adversely affect Crusader.

Unico needs to improve its operating results and/or raise substantial additional capital to continue to fund its operations, and to successfully execute its current operating plan. To meet its capital obligations, Unico is considering multiple alternatives, including, but not limited to, strategic financing, reevaluation of its planned operations, delaying, scaling back, or eliminating some or all of its business operations, expense reduction, reorganization, merger with another entity, 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 COVID-19 pandemic has recently 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. If Unico becomes unable to continue as a going concern, Unico may have to dispose of or liquidate its assets, or put its operating units into runoff, and might realize significantly less than the values at which they are carried on its condensed consolidated financial statements. Additionally, Unico may have to write down some or all of its capitalized assets or liquidate some or all of its investments in gross unrealized loss position. These actions may cause Unico’s stockholders to lose all or part of their investment in Unico's common stock. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

10 of 45

Table of Contents

Use of Estimates in the Preparation of the Financial Statements

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

Fair Value of Financial Instruments

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

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

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

Cash Equivalents

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

Concentration of Risks

As of June 30, 2021, the Company’s subsidiary, Crusader Insurance Company (“Crusader”) was licensed as an admitted insurance carrier in the states of Arizona, California, Nevada, Oregon, and Washington. From 2004 until September 2014, all of Crusader’s business was written in the state of California. Crusader’s business remains concentrated in California (100% of gross written premium during the three and six months ended June 30, 2021 and 99.9% of gross written premium during the three and six months ended June 30, 2020). During the three and six months ended June 30, 2021, approximately 99.8% and 99.6%, respectively of Crusader’s business was commercial multiple peril (“CMP”) policies. During the three and six months ended June 30, 2020, approximately 99.5% of Crusader’s business was commercial multiple peril (“CMP”) policies.

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

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

	Three Months Ended June 30				Six Months Ended June 30
	2021		2020		2021		2020

2020 Program
Number of shares repurchased		22		-		22		-
Cost of shares repurchased
Allocated to retained earnings	$	91	$	-	$	91	$	-
Allocated to capital		10		-		10		-
Total cost of shares repurchased	$	101	$	-	$	101	$	-

2008 Program
Number of shares repurchased		-		-		-		978
Cost of shares repurchased
Allocated to retained earnings	$	-	$	-	$	-	$	5,760
Allocated to capital		-		-		-		480
Total cost of shares repurchased	$	-	$	-	$	-	$	6,240

11 of 45

Table of Contents

The Company has remaining authority under the 2020 Program to repurchase up to $4,995,406 of the currently outstanding shares of the Company’s common stock as of June 30, 2021. The Company has retired or will retire all stock repurchased under the 2020 Program and 2008 Program.

NOTE 3 – INCOME (LOSS) PER SHARE

The following table represents the reconciliation of the Company's basic income (loss) per share and diluted income (loss) per share computations reported on the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020:

	Three Months Ended June 30						Six Months Ended June 30
	2021			2020			2021		2020
Basic Income (Loss) Per Share
Net income (loss)	$	(1,406,811	)	$	(434,814	)	$	860,893	$	(1,478,640	)

Weighted average shares outstanding		5,304,885			5,305,742			5,304,885		5,306,231

Basic income (loss) per share	$	(0.27	)	$	(0.08	)	$	0.16	$	(0.28	)

Diluted Income (Loss) Per Share
Net income (loss)	$	(1,406,811	)	$	(434,814	)	$	860,893	$	(1,478,640	)

Weighted average shares outstanding		5,304,885			5,305,742			5,304,885		5,306,231
Effect of dilutive securities		-			-			-		-
Diluted shares outstanding		5,304,885			5,305,742			5,304,885		5,306,231

Diluted income (loss) per share	$	(0.27	)	$	(0.08	)	$	0.16	$	(0.28	)

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

NOTE 4 – RECENTLY ISSUED ACCOUNTING STANDARDS

Recently adopted standards

In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements for assets and liabilities measured at fair value. The amendments in this ASU require certain existing disclosure requirements to be modified or removed, and certain new disclosure requirements to be added. In addition, this ASU allows entities to exercise more discretion when considering fair value measurement disclosures. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. The Company adopted ASU 2018-13 effective January 1, 2020. The adoption of ASU 2018-13 did not have a material impact to the Company’s disclosures.

In December of 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes or ASU 2019-12. ASU 2019-12 is expected to reduce the cost and complexity related to the accounting for income taxes. The ASU removes specific exceptions to the general principles in Topic 740 and improves the financial statement preparer's application of income tax related guidance. The ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company adopted ASU 2019-12 effective January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s consolidated financial statements.

12 of 45

Table of Contents

Standards not yet adopted

In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 replaces the current incurred loss methodology for recognizing credit losses with a current expected credit loss model, which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 also requires enhanced disclosures for better understanding of significant estimates and judgments used in estimating credit losses. The Company is currently evaluating the effect ASU 2016-13 will have on the Company's consolidated financial statements, but expects the primary changes to be (i) the use of the expected credit loss model for its premium receivables and reinsurance recoverables and (ii) the presentation of credit losses within the available-for-sale fixed maturities portfolio through an allowance method rather than as a direct write-down. ASU 2016-13 will primarily impact the Company’s available-for-sale fixed maturities portfolio and reinsurance recoverables. In November 2019, the FASB issued ASU 2019-10 “Financial Instruments – Credit Losses, Derivatives and Hedging, and Leases.” ASU 2019-10 updated the effective date for implementing ASU 2016-13 for smaller reporting entities, and that effective date will be for fiscal years beginning after December 15, 2022. Since the Company’s fixed income portfolio is invested primarily in higher rated bonds and the reinsurance is purchased from financially strong reinsurers, the Company believes the adoption of ASU 2016-13 will not have a material impact to the Condensed Consolidated Statements of Operations and the Condensed Consolidated Balance Sheets.

NOTE 5 – ACCOUNTING FOR TAXES

The Company and its wholly owned subsidiaries file consolidated federal and state income tax returns. Pursuant to a tax allocation agreement, the Company’s subsidiaries, Crusader and American Acceptance Corporation (“AAC”), are allocated taxes or tax credits in the case of losses, at current corporate rates based on their own taxable income or loss. The Company files income tax returns under U.S. federal and various state jurisdictions. The Company is subject to examination by U.S. federal income tax authorities for tax returns filed starting at taxable year 2017 and California state income tax authorities for tax returns filed starting at taxable year 2016. There are no ongoing examinations of income tax returns by federal or state tax authorities.

As of June 30, 2021, and December 31, 2020, the Company had no unrecognized tax benefits or liabilities and, therefore, had not accrued interest and penalties related to unrecognized tax benefits or liabilities. However, if interest and penalties would need to be accrued related to unrecognized tax benefits or liabilities, such amounts would be recognized as a component of federal income tax expense.

As of June 30, 2021, the Company had deferred tax assets of $7,812,224 generated from $37,201,066 of federal net operating loss carryforwards that will begin to expire in 2035 and deferred tax assets of $2,617,828 generated from state net operating loss carryforwards which expire between 2028 and 2040. In connection with preparation of its consolidated financial statements, the Company periodically performs an analysis of future income projections to determine the adequacy of the valuation allowance. In light of the net losses that were generated in recent years, for the six months ended June 30, 2021, the Company has established a valuation allowance for the aggregate amount of the federal and state net operating losses and other deferred tax assets in the amount of $10,698,797 that, in management’s judgment, are not more-likely-than-not to be realized. For the year ended December 31, 2020, the Company has established a valuation allowance for the aggregate amount of the federal and state net operating losses and other deferred tax assets in the amount of $10,557,080.

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

NOTE 6 – REAL ESTATE HELD FOR SALE, NET AND PROPERTY AND EQUIPMENT, NET

Real estate held for sale consists of the following:

	June 30		December 31
	2021		2020

Real estate held for sale, located in Calabasas, California	$	-	$	10,202,676
Accumulated depreciation and amortization		-		(1,867,659	)
Real estate held for sale, net	$	-	$	8,335,017

13 of 45

Table of Contents

Property and equipment consist of the following:

	June 30			December 31
	2021			2020

Furniture, fixtures, equipment		2,188,132			2,191,411
Computer software		2,720,639			467,275
Accumulated depreciation and amortization		(2,682,785	)		(2,423,617	)
Computer software under development		-			1,803,346
Property and equipment, net	$	2,225,986		$	2,038,415

On February 12, 2021, the Company, through Crusader, completed the sale of the Company’s headquarters at 26050 Mureau Road, Calabasas, California 91302 (the “Calabasas Building”), for approximately $12,695,000 (the “Sale”) to Mureau Road, LLC (“Mureau Road”), a subsidiary of Alliant Capital, Ltd. (“Alliant”). Mureau Road and Alliant do not have any material relationship with the Company or its subsidiaries, other than through the Sale and the Lease (as defined below) transactions. The Company recognized a gain of $3,693,858 on the sale of the Calabasas Building.

On February 12, 2021, the Standard-Multi Tenant Office Lease – Net, dated January 28, 2021 (the “Lease”), by and between Crusader and Mureau Road became effective in connection with the completion of the Sale. The Company has agreed to a lease, which expires on January 31, 2022, with Alliant for the second floor of the Calabasas Building with an initial base rent of approximately $52,637 per month, where the Company will continue to operate its corporate headquarters.

Through the date of the real estate listing, depreciation on the Calabasas Building, owned by Crusader, is computed using the straight line method over 39 years. Depreciation on furniture, fixtures, and equipment in the Calabasas Building is computed using the straight line method over 3 to 15 years. Amortization of leasehold improvements in the Calabasas Building is being computed using the shorter of the useful life of the leasehold improvements or the remaining years of the lease. Depreciation and amortization expense on all property and equipment for the three and six months ended June 30, 2021, was $146,548 and $268,275, respectively, and for the three and six months ended June 30, 2020, was $188,638 and $376,723, respectively.

For the three and six months ended June 30, 2021, the Calabasas Building has generated rental revenue from non-affiliated tenants in the amount of $0 and $13,806, respectively, and for the three and six months ended June 30, 2020, rental revenue from non-affiliated tenants in the amount of $36,070 and $89,360, respectively, which is included in “Other income” from insurance company operation in the Company’s Condensed Consolidated Statements of Operations.

For the three and six months ended June 30, 2021, the Calabasas Building incurred operating expenses (including depreciation) in the amount of $2,741 and $98,705, respectively, and, for the three and six months ended June 30, 2020, it incurred operating expenses (including depreciation) of $182,937 and $373,034, respectively, which are included in “Other operating expenses” in the Company’s Condensed Consolidated Statements of Operations.

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

In 2018, the Company determined that the cost to replace its legacy IT system would be between $4,000,000 and $8,000,000, and the installation of such a system would take between two to four years. After weighing the time and expense involved against the anticipated benefit from such an investment, the Company opted for what it then perceived to be a less expensive upgrade to its legacy system to an IBM platform. While initially expected to be completed by the end of 2019, at a cost of approximately $300,000, excluding costs of Unico’s employees involved in the upgrade, the system upgrade was completed at the end of the 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. As the system upgrade was completed at the end of the first quarter, 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.

14 of 45

Table of Contents

NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

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

The following table presents information about the Company’s financial instruments and their estimated fair values, which are measured on a recurring basis, and are allocated among the three levels within the fair value hierarchy as of June 30, 2021, and December 31, 2020:

	Level 1		Level 2		Level 3		Total
June 30, 2021
Financial instruments:
Available-for-sale fixed maturities:
U.S. Treasury securities	$	7,371,434	$	-	$	-	$	7,371,434
Corporate securities		-		52,073,814		-		52,073,814
Agency mortgage-backed securities		-		27,301,413		-		27,301,413
Equity securities		3,570,416		-		-		3,570,416
Short-term investments		6,468,314		-		-		6,468,314
Total financial instruments at fair value	$	17,410,164	$	79,375,227	$	-	$	96,785,391

December 31, 2020
Financial instruments:
Available-for-sale fixed maturities:
U.S. Treasury securities	$	10,832,181	$	-	$	-	$	10,832,181
Corporate securities		-		46,451,905		-		46,451,905
Agency mortgage-backed securities		-		26,125,608		-		26,125,608
Equity securities		2,746,706		-		-		2,746,706
Short-term investments		200,000		-		-		200,000
Total financial instruments at fair value	$	13,778,887	$	72,577,513	$	-	$	86,356,400

15 of 45

Table of Contents

Fair value measurements are not adjusted for transaction costs. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer. The Company did not have any transfers between Levels 1, 2, and 3 of the fair value hierarchy during the three and six months ended June 30, 2021 and 2020.

As a result of the spread of the ongoing coronavirus (“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 fair value of its investment portfolio may be adversely affected by the general economic conditions as a result of the governmental responses to the pandemic.

NOTE 8 – INVESTMENTS

A summary of investment income, net of investment expenses, net realized investment gains, realized gains on real estate sale, and net unrealized investment gains on equity securities is as follows:

	Three Months Ended June 30						Six Months Ended June 30
	2021			2020			2021			2020

Fixed maturities	$	543,971		$	509,324		$	1,072,138		$	1,051,731
Equity securities		22,020			4,890			42,774			6,332
Short-term investments and cash equivalents		341			8,193			722			19,914
Gross investment income		566,332			522,407			1,115,634			1,077,977
Less investment expenses		(37,453	)		(32,909	)		(72,032	)		(67,787	)
Net investment income		528,879			489,498			1,043,602			1,010,190
Net realized investment gains		106,410			461			161,809			1,575
Net realized gains on real estate sale		-			-			3,693,858			-
Net unrealized investment gains on equity securities		14,615			67,759			166,281			22,959
Net investment income, realized investment gains, realized gains on real estate sale and unrealized investment gains	$	649,904		$	557,718		$	5,065,550		$	1,034,724

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
June 30, 2021
Available-for-sale fixed maturities:
U.S. Treasury securities	$	7,262,854	$	140,241	$	(31,661	)	$	7,371,434
Corporate securities		50,551,597		1,646,629		(124,412	)		52,073,814
Agency mortgage-backed securities		26,787,187		566,299		(52,073	)		27,301,413
Total Available-for sale fixed maturities		84,601,638		2,353,169		(208,146	)		86,746,661
Held-to-maturity fixed securities:
Certificates of deposits		548,000		-		-			548,000
Total fixed maturities	$	85,149,638	$	2,353,169	$	(208,146	)	$	87,294,661

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
December 31, 2020
Available-for-sale fixed maturities:
U.S. Treasury securities	$	10,596,808	$	235,373	$	-		$	10,832,181
Corporate securities		44,159,926		2,347,826		(55,847	)		46,451,905
Agency mortgage-backed securities		25,314,546		833,336		(22,274	)		26,125,608
Total Available-for sale fixed maturities		80,071,280		3,416,535		(78,121	)		(83,409,694	)
Held-to-maturity fixed securities:
Certificates of deposits		798,000		-		-			798,000
Total fixed maturities	$	80,869,280	$	3,416,535	$	(78,121	)	$	84,207,694

16 of 45

Table of Contents

As of June 30, 2021, one corporate security, included in available-for-sale fixed maturities, was held as collateral with Comerica Bank & Trust, N. A. (“Comerica”), pursuant to the reinsurance trust agreement among Crusader, United Specialty Insurance Company (“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 $2,045,000 and $1,974,534, on June 30, 2021, respectively.

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

	June 30			December 31
	2021			2020

Gross unrealized gains on fixed maturities	$	2,353,169		$	3,416,535
Gross unrealized losses on fixed maturities		(208,146	)		(78,121	)
Net unrealized gains on fixed maturities		2,145,023			3,338,414
Deferred federal tax expense		(450,455	)		(701,067	)
Net unrealized gains, net of deferred income taxes	$	1,694,568		$	2,637,347

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

Maturities by Year at June 30, 2021	Par Value		Amortized Cost		Fair Value		Weighted Average Yield

Due in one year	$	16,170,000	$	16,185,243	$	16,386,079		2.31	%
Due after one year through five years		26,521,012		26,682,135		27,372,028		1.87	%
Due after five years through ten years		19,424,414		19,506,193		20,317,069		2.41	%
Due after ten years and beyond		22,237,762		22,776,067		23,219,485		2.37	%
Total	$	84,353,188	$	85,149,638	$	87,294,661		2.21	%

Maturities by Year at December 31, 2020	Par Value		Amortized Cost		Fair Value		Weighted Average Yield

Due in one year	$	11,070,641	$	11,064,202	$	11,169,232		2.57	%
Due after one year through five years		30,065,671		30,090,910		31,260,694		2.59	%
Due after five years through ten years		18,363,570		18,476,051		19,806,444		2.51	%
Due after ten years and beyond		20,927,571		21,238,117		21,971,324		2.63	%
Total	$	80,427,453	$	80,869,280	$	84,207,694		2.58	%

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

The weighted average maturity of the Company’s fixed maturity investments was 7.8 years as of June 30, 2021, and 8.3 years as of June 30, 2020.

A summary of estimated fair value, gross unrealized losses, and number of securities in a gross unrealized loss position by the length of time in which the securities have continually been in that position is shown below:

	Less than 12 Months							12 Months or Longer
	Estimated Fair Value		Gross Unrealized Losses			Number of Securities		Estimated Fair Value		Gross Unrealized Losses			Number of Securities
June 30, 2021
U.S. Treasury securities	$	4,762,045	$	(31,661	)		3	$	-	$	-			-
Corporate securities		14,419,743		(124,412	)		18		-		-			-
Agency mortgage-backed securities		6,465,163		(52,073	)		8		-		-			-
Total debt securities		25,646,951		(208,146	)		29		-		-			-
Equity securities		787,071		(40,703	)		38		54		(3	)		1
Total	$	26,434,022	$	(248,849	)		67	$	54	$	(3	)		1

17 of 45

Table of Contents

	Less than 12 Months							12 Months or Longer
	Estimated Fair Value		Gross Unrealized Losses			Number of Securities		Estimated Fair Value		Gross Unrealized Losses		Number of Securities
December 31, 2020
Corporate securities		2,101,986		(55,847	)		2		-		-		-
Agency mortgage-backed securities		3,223,329		(22,274	)		12		-		-		-
Total debt securities		5,325,315		(78,121	)		14		-		-		-
Equity securities		723,346		(37,357	)		25		-		-		-
Total	$	6,048,661	$	(115,478	)		39	$	-	$	-		-

The Company closely monitors its investments. If an unrealized loss is determined to be other-than-temporary, it is written off as a realized loss through the Condensed Consolidated Statements of Operations. The Company’s methodology of assessing other-than-temporary impairments is based on security-specific analysis as of the balance sheet date and considers various factors including the length of time to maturity and the extent to which the fair value has been less than the cost, the financial condition and the near-term prospects of the issuer, and whether the debtor is current on its contractually obligated interest and principal payments. The unrealized losses on all securities as of June 30, 2021, and December 31, 2020, were determined to be temporary.

Although the Company does not intend to sell its fixed maturity investments prior to maturity, the Company may sell investment securities from time to time in response to cash flow requirements, economic, regulatory, and/or market conditions or investment securities may be called by their issuers prior to the securities’ maturity. The fixed maturity securities previously held by the Company were sold and called prior to maturity as follows:

	Three Months Ended June 30					Six Months Ended June 30
	2021			2020		2021			2020

Fixed maturities securities sold
Number of securities sold		2			-		3			1
Amortized cost of sold securities	$	1,943,398		$	-	$	2,193,393		$	601,316
Realized gains on sales	$	707		$	-	$	710		$	1,114

Fixed maturities securities called
Number of securities called		1			2		3			2
Amortized cost of called securities	$	1,018,877		$	1,699,539	$	2,393,778		$	1,699,539
Realized (losses) gains on calls	$	(18,877	)	$	461	$	(18,778	)	$	461

The unrealized gains or losses from fixed maturities are reported as “Accumulated other comprehensive income or loss,” which is a separate component of stockholders’ equity, net of any deferred tax effect.

The Company started investing in common stock equity securities during the year ended December 31, 2020. The Company’s equity securities allocation is intended to enhance the return of and provide diversification for the total investment portfolio. A summary of equity securities is shown below:

	June 30		December 31
	2021		2020

Cost	$	3,205,869	$	2,548,440
Unrealized gains		364,547		198,266
Fair market value of equity securities	$	3,570,416	$	2,746,706

The Company’s investment in certificates of deposit included $598,000 of brokered certificates of deposit as of June 30, 2021 and December 31, 2020.

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

18 of 45

Table of Contents

	June 30		December 31
	2021		2020

Certificates of deposit	$	200,000	$	200,000
Short-term investments		200,000		200,000
Total state held deposits	$	400,000	$	400,000

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

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

	June 30		December 31
	2021		2020
U.S. Treasury bills	$	5,299,331	$	-
Short-term bonds		968,983		-
Certificates of deposit		200,000		200,000
Total short-term investments	$	6,468,314	$	200,000

NOTE 9 – UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

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

	Six Months Ended June 30
	2021			2020

Reserve for unpaid losses and loss adjustment expenses at January 1 – gross of reinsurance	$	74,893,509		$	55,066,480

Less reinsurance recoverable on unpaid losses and loss adjustment expenses		22,253,642			14,725,855
Reserve for unpaid losses and loss adjustment expenses at January 1 – net of reinsurance		52,639,867			40,340,625

Incurred losses and loss adjustment expenses:
Provision for insured events of current year		12,512,046			10,539,635
Development of insured events of prior years		(842,126	)		226,656
Total incurred losses and loss adjustment expenses		11,669,920			10,766,291

Loss and loss adjustment expense payments:
Attributable to insured events of the current year		4,374,086			3,266,570
Attributable to insured events of prior years		7,820,122			8,769,575
Total payments		12,194,208			12,036,145

Reserve for unpaid losses and loss adjustment expenses at June 30 – net of reinsurance		52,115,579			39,070,771

Reinsurance recoverable on unpaid losses and loss adjustment expenses		22,081,588			15,806,548
Reserve for unpaid losses and loss adjustment expenses at June 30 – gross of reinsurance	$	74,197,167		$	54,877,319

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

19 of 45

Table of Contents

NOTE 10 – CONTINGENCIES

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

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

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

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

Crusader has received a number of coronavirus-related business interruption claims. With an exception of one claim for which the 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. The Company intends to contest the allegations and to contest certification of any class. The Company has filed responsive pleadings and the litigation is proceeding.

20 of 45

Table of Contents

Crusader has received seven claims related to civil unrest through June 30, 2021 of which two are open. Crusader has sufficient excess of loss and catastrophe reinsurance treaties to protect against exposure of such claims. The Company believes the losses and loss adjustment expenses associated with those claims will not exceed Crusader’s $500,000 excess of loss reinsurance treaty retention.

As a property and casualty insurance company, Crusader is subject to Risk Based Capital (“RBC”) requirements. RBC is a method developed by the National Association of Insurance Commissioners (“NAIC”) and adopted in the 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 California Insurance Commissioner, as its domiciliary insurance regulator (“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.

Crusader’s RBC total adjusted capital was less than 300% of its Authorized Control Level RBC as of December 31, 2020, and its statutory accounting basis combined ratio was in excess of 120% for the year ended December 31, 2020. The RBC level when coupled with the statutory accounting basis combined ratio triggered a Company Action Level Event under the RBC. 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 will take to correct the conditions that resulted in the Company Action Level Event and on July 2, 2021, submitted a revised RBC Plan which addressed questions raised by the CA DOI. The CA DOI has not accepted the revised RBC. 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, the Company and Crusader may not be able to take certain of such corrective actions, including the potential infusion of capital to Crusader.

It is possible that continued underwriting losses being experienced by Crusader during 2021 will cause further deterioration in the policyholder surplus of Crusader. If this causes Crusader's adjusted capital to be less than 300% as of December 31, 2021, an additional Company Action Level Event would be triggered if the statutory accounting basis combined ratio as of December 31, 2021 is greater than 120%. At June 30, 2021, Crusader’s statutory accounting basis combined ratio was 117%.

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 is policyholder surplus. Crusader has sustained net losses for several years which have decreased its policyholder surplus, which has fallen from $46,498,960 at December 31 2019 to $26,893,515 at December 31, 2020. The Company does not have current resources to infuse additional capital into Crusader to increase its policyholder surplus.

Unico generally receives dividends annually from Crusader to fund its operations and expenses. However, due to Crusader's decreased policyholder surplus caused by additional underwriting losses during 2021, and the need to preserve policyholder surplus at Crusader, Unico does not expect that Crusader will declare any such dividends for the foreseeable future because of its capital position. It is also possible that the CA DOI may request or direct that Crusader not make any dividend payments (or impose limits on the amount of dividends that Crusader can make) to Unico for a period of time. If the CA DOI imposes such restrictions on Crusader, or if Unico otherwise does not receive such dividends, Unico's financial condition and its ability to fund its operations and expenses will be adversely affected.

NOTE 11 – INCENTIVE STOCK PLANS AND STOCK BASED COMPENSATION

The Company’s 2021 Equity Incentive Plan (the “Plan”) Incentive Stock Option Plan covers 500,000 shares of the Company’s common stock (subject to adjustment in the case of merger, consolidation, reorganization, recapitalization, stock split, reverse stock split, split up, spin-off, combination of shares, exchange of shares, stock dividend, dividend in kind, etc.) and was approved by shareholders on May 27, 2021. The Plan provides for the grant of the following equity-based incentive awards to participants: (i) non-qualified stock options, (ii) stock appreciation rights, (iii) restricted stock, (iv) restricted stock units and (v) other stock-based awards. As of June 30, 2021 there have been no stock awards granted under the Plan. Through the date of this filing, there have been 44,250 non-qualified stock options granted and 48,000 restricted stock grants under the plan, of which none were vested and exercisable.

NOTE 12 – SUBSEQUENT EVENTS

The Company evaluated subsequent events and transactions for potential recognition or disclosure through the date the condensed consolidated financial statements were issued. Except as disclosed below and elsewhere, no events have occurred subsequent to June 30, 2021 requiring disclosure or recording in the condensed consolidated financial statements.

Effective August 6, 2021, the Company decided to discontinue loan issuance through AAC. The Company will continue servicing existing loans and will continue issuing loans in the short-term until necessary operational changes are completed.

21 of 45

Table of Contents

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

OVERVIEW

General

Unico American Corporation, referred to herein as the "Company” or “Unico," is an insurance holding company. Currently, the Company’s subsidiary Crusader Insurance Company (“Crusader”) underwrites commercial property and casualty insurance, the Company’s subsidiaries Unifax Insurance Systems, Inc. (“Unifax”) and American Insurance Brokers, Inc. (“AIB”) provide marketing and various underwriting support services related to property, casualty, health and life insurance, the Company’s subsidiary American Acceptance Company (“AAC”) provides insurance premium financing, and the Company’s subsidiary Insurance Club, Inc., dba AAQHC (“AAQHC”), an Administrator provides membership association services.

Total revenues for the three months ended June 30, 2021, were $8,132,605 compared to $7,976,227 for the three months ended June 30, 2020, an increase of $156,378 (2%). Total revenues for the six months ended June 30, 2021, were $19,604,260 compared to $15,981,408 for the six months ended June 30, 2020, an increase of $3,622,852 (23%). The Company had net loss of $1,406,811 for the three months ended June 30, 2021, compared to net loss of $434,814 for the three months ended June 30, 2020, an increase in net loss of $971,997. The Company had net income of $860,893 for the six months ended June 30, 2021, compared to net loss of $1,478,640 for the six months ended June 30, 2020, an increase in net income of $2,339,533 (158%). On February 12, 2021, the Company, through Crusader, completed the sale of the Company’s headquarters at 26050 Mureau Road, Calabasas, California 91302, for approximately $12,695,000 (the “Sale”). The Company recognized a gain of $3,693,858 on the sale of the building. The increase in net income was primarily due to the realized gain on this sale.

This overview discusses some of the relevant factors that management considers in evaluating the Company's performance, prospects, and risks. It is not all-inclusive and is meant to be read in conjunction with the entirety of the management discussion and analysis, the Company's consolidated financial statements and notes thereto, and all other items contained within the Company’s 2020 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

As a result of the spread of the ongoing coronavirus (“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 governmental responses to the pandemic.

22 of 45

Table of Contents

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 governmental response to the pandemic contributed to the recent decline in investment yields, compared to the 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 an 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.

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 will follow governmental safety guidelines in determining on when to remove the coronavirus-related business restrictions and on when to request the employees working from their homes to return to their workplaces for several days per week; the Company estimates this will occur in the fourth quarter of 2021. 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.

The Company’s financial performance suffered in recent years, reporting net losses for each fiscal year beginning with the year ended December 31, 2015. While losses in recent years have been driven primarily by losses from Crusader’s policies and their high loss ratios, management believes that other contributing factors include (1) the growth of some of the Company’s non-routine expenses relative to flat or declining revenues, (2) the failure to have replaced or upgraded the Company’s legacy IT system in order to process Crusader’s smaller premium accounts more efficiently, and (3) the failure to have shifted focus to larger premium accounts and fee-for-service operations.

In light of the challenges faced and operational results, the Company has taken several steps to improve its results. To improve revenues the Company is working to improve its sales in the markets that it has historically served, to gain access to markets that it has not previously served.

23 of 45

Table of Contents

On November 24, 2020, United Specialty Insurance Company (“USIC”) and certain Company’s subsidiaries entered into the following agreements pursuant to which USIC will underwrite property and casualty insurance policies on a surplus lines basis by and through Unifax and such policies will be reinsured by Crusader:

	·	USIC and Crusader entered into a Quota Share Reinsurance Agreement, effective April 1, 2020, (the “Reinsurance Agreement”), pursuant to which Crusader will reinsure all of USIC’s liability for policies issued by USIC and produced by Unifax for property, general liability, CMP property, CMP liability and other miscellaneous coverages, subject to certain maximum policy limits. Policies placed with USIC by Unifax and reinsured with Crusader from April 1, 2020, to November 24, 2020, remain in place without interruption or change and are subject to the Reinsurance Agreement.

	·	USIC and Unifax entered into a Surplus Line Broker Agreement, effective April 1, 2020 (the “Broker Agreement”), pursuant to which USIC authorized Unifax to act as its broker and agent for the purpose of producing and administering certain specified classes of insurance policies, which are the subject of the Reinsurance Agreement. Under the Broker Agreement, Unifax is entitled to retain a commission for policies produced based on a percentage of the premiums on business placed with USIC. Unifax has agreed to indemnify and hold USIC harmless from any losses relating to the Broker Agreement.

	·	USIC and U.S. Risk Managers, Inc. (“U.S. Risk”) entered into a Claims Administration Agreement, effective as of April 1, 2020 (the “Claims Administration Agreement”). Pursuant to the Claims Administration Agreement, USIC appointed U.S. Risk, which is a licensed claims adjuster in the state of California, to adjust and settle claims on its behalf in connection with the surplus lines policies issued by USIC in connection with the Reinsurance Agreement. U.S. Risk will be paid a fee by Unifax on behalf of USIC based on a percentage of earned premium. U.S. Risk has agreed to indemnify and hold USIC harmless from any losses relating to the Claims Administration Agreement.

Revenue and Income Generation

The Company receives its revenues primarily from earned premium derived from the insurance company operations, commission and fee income generated from the insurance agency operations, finance charges and fee income from the premium finance operations, and investment income from cash generated primarily from the insurance company operation. The insurance company operation, excluding the realized gain on real estate sale, generated approximately 94% of consolidated revenues for the three and six months ended June 30, 2021, compared to 93% of consolidated revenues for the three and six months ended June 30, 2020, respectively. None of the Company’s other operations is individually material to consolidated revenues.

Insurance Company Operation

As of June 30, 2021, Crusader was licensed as an admitted insurance carrier in the states of Arizona, California, Nevada, Oregon, and Washington. From 2004 until September 2014, all of Crusader’s business was written in the state of California. Crusader’s business remains concentrated in California (100% of gross written premium during the three and six months ended June 30, 2021 and 99.9% of gross written premium during the three and six months ended June 30, 2020). During the three and six months ended June 30, 2021, approximately 99.8% and 99.6%, respectively of Crusader’s business was commercial multiple peril (“CMP”) policies. During the three and six months ended June 30, 2020, approximately 99.5% of Crusader’s business was commercial multiple peril (“CMP”) policies.

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:

24 of 45

Table of Contents

	Three Months Ended June 30							Six Months Ended June 30
	2021		2020		Change			2021		2020		Change

California	$	11,567,118	$	8,770,767	$	2,796,351		$	22,049,663	$	17,966,631	$	4,083,032
Arizona		-		10,360		(10,360	)		-		21,382		(21,382	)
Total gross written premium	$	11,567,118	$	8,781,127	$	2,785,991		$	22,049,663	$	17,988,013	$	4,061,650

Crusader believes that it can grow its sales and profitability through improved specialization and sales incentives. Crusader currently focuses in three underwriting verticals: (1) Transportation, (2) Mainstreet, and (3) Buildings. The Company reorganized its underwriting verticals for proper staffing and business focus during the first quarter of 2021. The former Food, Beverage and Entertainment and Garage and Mercantile verticals became Mainstreet, and the former Apartments & Commerical Buildings vertical was renamed Buildings. Crusader also is evaluating the possibility of expanding its operations geographically, on an admitted or non-admitted basis, so as to offer similar products in other states, but the timing of any such expansion is not yet determined.

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

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

	Three Months Ended June 30						Six Months Ended June 30
	2021			2020			2021			2020

Direct written premium	$	10,781,536		$	8,596,429		$	20,958,399		$	17,803,315
Assumed written premium		785,582			184,698			1,091,264			184,698
Less: written premium ceded to reinsurers		(2,857,064	)		(2,003,311	)		(5,637,056	)		(3,982,438	)
Net written premium		8,710,054			6,777,816			16,412,607			14,005,575
Change in direct unearned premium		(1,109,381	)		147,389			(1,993,075	)		(149,672	)
Change in assumed unearned premium		(583,254	)		(167,652	)		(794,470	)		(167,652	)
Change in ceded unearned premiums		(49,671	)		12,558			(53,554	)		(7,006	)
Net earned premium	$	6,967,748		$	6,770,111		$	13,571,508		$	13,681,245

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

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

	Three Months Ended June 30									Six Months Ended June 30
	2021			2020			Change			2021			2020			Change

Net written premium	$	8,710,054		$	6,777,816		$	1,932,238		$	16,412,607		$	14,005,575		$	2,407,032
Change in net unearned premium		(1,742,306	)		(7,705	)		(1,734,601	)		(2,841,099	)		(324,330	)		(2,516,769	)
Net earned premium		6,967,748			6,770,111			197,637			13,571,508			13,681,245			(109,737	)
Less:
Losses and loss adjustment expenses		6,084,707			4,888,906			1,195,801			11,669,920			10,766,291			903,629
Policy acquisition costs		1,105,545			1,202,026			(96,481	)		2,127,510			2,346,451			(218,941	)
Total underwriting expenses		7,190,252			6,090,932			1,099,320			13,797,430			13,112,742			684,688
Underwriting gain (loss) before income taxes	$	(222,504	)	$	679,179		$	(901,683	)	$	(225,922	)	$	568,503		$	(794,425	)

25 of 45

Table of Contents

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

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

	Three Months Ended June 30						Six Months Ended June 30
	2021			2020			2021			2020

Underwriting gain (loss) before income taxes	$	(222,504	)	$	679,179		$	(225,922	)	$	568,503
Insurance company operation revenues:
Net investment income		528,879			489,498			1,043,602			1,010,190
Net realized investment gains		106,410			461			161,809			1,575
Net realized gains on real estate sale		-			-			3,693,858			-
Net unrealized investment gains on
equity securities		14,615			67,759			166,281			22,959
Other income		54,465			122,822			27,714			203,759
Other insurance operations revenues:
Gross commissions and fees		415,711			457,886			849,172			926,955
Finance charges and fees earned		44,772			67,686			89,770			134,705
Other income		5			4			546			20
Less expenses:
Salaries and employee benefits		1,205,630			1,251,922			2,333,721			2,374,421
Commissions to agents/brokers		20,434			24,000			41,002			49,954
Other operating expenses		1,147,124			993,935			2,320,602			1,974,351
(Loss) income before taxes	$	(1,430,835	)	$	(384,562	)	$	1,111,505		$	(1,530,060	)

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 a premium deficiency of $50,000 as of June 30, 2021. The Company did not carry a premium deficiency reserve as of June 30, 2020. The premium deficiency was recorded as a reduction in deferred policy acquisition costs.

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

	Three Months Ended June 30						Six Months Ended June 30
	2021			2020			2021			2020

Loss ratio (1)		87	%		72	%		86	%		79	%
Expense ratio (2)		33	%		27	%		32	%		32	%
Combined ratio (3)		120	%		99	%		118	%		111	%

(1) Loss ratio is defined as losses and loss adjustment expenses divided by net earned premium.

26 of 45

Table of Contents

(2) Expense ratio is defined as a sum of policy acquisition costs and portions of indirect salaries and employee benefits and other operating expenses allocation to the insurance company operations, reduced by allocation of gross commissions and fees and other income, divided by net earned premium. The calculation of this expense ratio is different from the one used for computing the statutory accounting basis combined ratio.

(3) Combined ratio is defined as a sum of loss ratio and expense ratio. This combined ratio is different from the statutory accounting basis combined ratio.

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

	Three Months Ended June 30							Six Months Ended June 30
	2021		2020			Change		2021			2020		Change

Losses and loss adjustment expenses:
Provision for insured events of current year	$	5,754,482	$	5,378,459		$	376,023	$	12,512,046		$	10,539,635	$	1,972,411
Development of insured events of prior years		330,225		(489,553	)		819,778		(842,126	)		226,656		(1,068,782	)
Total losses and loss adjustment expenses	$	6,084,707	$	4,888,906		$	1,195,801	$	11,669,920		$	10,766,291	$	903,629

For further analysis of losses and loss adjustment expenses, refer to “Results of Operations”.

On February 5, 2021, A.M. Best Company revised the outlooks to negative from stable and affirmed Crusader’s Financial Strength Rating (“FSR”) of B++ (Good) and Long-Term Issuer Credit Rating (“Long-Term ICR”) of “bbb”. Additionally, A.M. Best has revised the outlook to negative from stable and affirmed the Long-Term ICR of “bb” of the Company. Crusader is a wholly owned subsidiary of the Company.

The negative outlooks capture A.M. Best’s concerns with Crusader’s declining underwriting performance, the Company’s overall capitalization and the execution risk associated with implementing strategic operating changes to address these conditions.

The Long-Term ICRs reflect Crusader’s balance sheet strength, which A.M. Best categorizes as very strong, as well as its marginal operating performance, limited business profile and marginal enterprise risk management.

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 may have a negative impact on the Company’s revenue and results of operations. The Company cannot quantify the impact that the rating changes have had or will have on its revenue and results of operations, and the Company cannot determine if or when Crusader might regain the “A-” FSR from A.M. Best. In light of the liquidity concerns being experienced by the Company and further deterioration of Crusader policyholder surplus during the first six months of 2021, it is possible that A.M. Best may further downgrade the FSR and Long-Term ICR of the Company and/or Crusader, or negatively revise its outlooks for such ratings.

The reinsurance arrangement with USIC allows Unifax to offer its customers policies written on USIC paper, which has A.M. Best FSR of “A,” when such rating is required.

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

Crusader’s ability to successfully operate its insurance operation is dependent upon its ability to charge premium rates to its policyholders that are adequate and thereby permit it to cover its anticipated losses and expenses and achieve a fair and reasonable return on its capital. To the extent that Crusader’s existing premium rates do not meet this threshold, Crusader may seek to increase or otherwise modify such rates. Crusader’s ability to successfully operate its insurance operation is also dependent upon its ability to utilize appropriate policy forms. However, as an insurance company, Crusader is subject extensive statutes, regulations, administrative directives and common law that limit modifications of its premium rates or policy forms. Accordingly, Crusader’s ability to implement rate increases or modifications to its policy forms are dependent upon regulatory approval, which Crusader may not receive. Furthermore, the ability of insurers to obtain regulatory approval of premium rate increases and modifications to policy forms is subject to additional uncertainty during the COVID-19 pandemic.

27 of 45

Table of Contents

Revenues from Other Insurance Operations

The Company’s revenues from other insurance operations consist of commissions, fees and other income. These operations accounted for approximately 6% of total revenues, excluding the realized gain on real estate sale, in the three and six months ended June 30, 2021, compared to approximately 7% of total revenues in the three and six months ended June 30, 2020, respectively.

Investments

The Company generated revenues from its total invested assets of $94,823,821 (fixed maturities at amortized cost, equity securities at cost and short-term investments at fair value) and $84,440,715 (fixed maturities at amortized cost, equity securities at cost and short-term investments at fair value) as of June 30, 2021 and 2020, respectively.

Investment income (net of investment expenses) increased $39,381 (8%) and $33,412 (3%) to $528,879 and $1,043,602 for the three and six months ended June 30, 2021, respectively, compared to $489,498 and $1,010,190 for the three and six months ended June 30, 2020, respectively. This increase in investment income was due primarily to the increase in average invested assets.

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 June 30, 2021, all of the Company’s investments are in U.S. Treasury securities, corporate fixed maturity securities, agency mortgage-backed securities, common stock, Federal Deposit Insurance Corporation (“FDIC”) insured certificates of deposit, money market funds, and a savings account. The Company’s investments in U.S. treasury securities, corporate fixed maturity securities, agency mortgage-backed securities, common stock and money market funds are readily marketable. As of June 30, 2021, the weighted average maturity of the Company’s investments was approximately 7.8 years, and the effective duration for available-for-sale investments (investments managed under the investment guidelines) was 2.6 years.

LIQUIDITY AND CAPITAL RESOURCES

The Company prepared the accompanying condensed consolidated financial statements on a going concern basis, which assumes that it will realize its assets and satisfy its liabilities in the normal course of business. Unico has a history of recurring losses from operations, negative cash flows from its operating activities which may continue in the future, and, as a holding company, is dependent on dividends from Crusader and its other subsidiaries to fund its operations and expenses. Unico does not expect that it will receive dividends from Crusader to fund its operations and expenses for the foreseeable future due to Crusader's decreased policyholder surplus caused by additional underwriting losses during 2021, and the need to preserve policyholder surplus at Crusader. These circumstances raise substantial doubt about Unico's ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and 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.

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 issues for Crusader. However, as an insurance holding company, the Company does not independently generate significant revenue and is dependent on dividends from Crusader and its other subsidiaries to fund its operations and expenses. As discussed below, the Company does not expect to receive such dividends for the foreseeable future, and accordingly, its financial position and ability to pay operating expenses will be adversely impacted.

Crusader has a significant amount of 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 Crusader. Those payments are monitored and projected to ensure that Crusader has liquidity to cover those payments without the need to liquidate investments. Cash, cash equivalents, and investments (at amortized cost) of Crusader at June 30, 2021, were $96,702,377 compared to $87,575,700 at December 31, 2020. Crusader's cash, cash equivalents, and investments were 99% and 98% of the total cash and investments (at amortized cost) held by the Company as of June 30, 2021, and December 31, 2020, respectively.

As disclosed in the Company’s 2020 Annual Report on Form 10-K, a Company Action Level Event of Crusader was deemed to have occurred as of December 31, 2020. On March 24, 2021, Crusader submitted a Risk Based Capital Plan (the “RBC Plan”) to the CA DOI to address the actions that Crusader will take to correct the conditions that resulted in the Company Action Level Event. On July 2, 2021, Crusader submitted a revised RBC Plan which addressed questions raised by the CA DOI. The CA DOI has not accepted the revised RBC Plan. 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, the Company and Crusader may not be able to take certain of such corrective actions, including the potential infusion of capital to Crusader.

28 of 45

Table of Contents

Unico generally receives dividends annually from Crusader to fund its operations and expenses. However, due to Crusader's decreased policyholder surplus caused by additional underwriting losses during 2021, and the need to preserve policyholder surplus at Crusader, Unico does not expect that Crusader will declare any such dividends for the foreseeable future because of its capital position. It is also possible that the CA DOI may request or direct that Crusader not make any dividend payments (or impose limits on the amount of dividends that Crusader can make) to Unico for a period of time. Such action could occur because of the current amount of policyholder surplus of Crusader and the continued losses being sustained by Crusader, which have the effect of further reducing its policyholder surplus. In 2021, the policyholder surplus of Crusader decreased because Crusader experienced net losses for the quarters ended March 31, 2021 and June 30, 2021. The possible action by the CA DOI regarding the payment of dividends may occur in connection with the review of the revised RBC Plan submitted by Crusader.

As of June 30, 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, common stock and short-term investments. All of the Company’s investments, except for the certificates of deposit, are readily marketable.

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

	June 30, 2021				December 31, 2020
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

Fixed maturities:
U.S. Treasury securities	$	7,262,854	$	7,371,434	$	10,596,808	$	10,832,181
Corporate securities		50,551,597		52,073,814		44,159,926		46,451,905
Agency mortgage-backed securities		26,787,187		27,301,413		25,314,546		26,125,608
Certificates of deposit		548,000		548,000		798,000		798,000
Total fixed maturity investments		85,149,638		87,294,661		80,869,280		84,207,694
Equity securities		3,205,869		3,570,416		2,548,440		2,746,706
Short-term investments		6,468,314		6,468,314		200,000		200,000
Total investments	$	94,823,821	$	97,333,391	$	83,617,720	$	87,154,400

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

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

The Company’s Board of Directors approved investment guidelines 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.

29 of 45

Table of Contents

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

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

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

As of June 30, 2021, one corporate security, included in available-for-sale fixed maturities, was 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 that security was $2,045,000 and $1,974,534 on June 30, 2021, respectively.

	Three Months Ended June 30				Six Months Ended June 30
	2021		2020		2021		2020

2020 Program
Number of shares repurchased		22		-		22		-
Cost of shares repurchased
Allocated to retained earnings	$	91	$	-	$	91	$	-
Allocated to capital		10		-		10		-
Total cost of shares repurchased	$	101	$	-	$	101	$	-

2008 Program
Number of shares repurchased		-		-		-		978
Cost of shares repurchased
Allocated to retained earnings	$	-	$	-	$	-	$	5,760
Allocated to capital		-		-		-		480
Total cost of shares repurchased	$	-	$	-	$	-	$	6,240

The Company reported $2,926,226 net cash used by operating activities for the six months ended June 30, 2021, compared to $1,507,637 net cash used by operating activities for the six months ended June 30, 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 losses and loss adjustment expenses is due primarily to its small population of claims which may result in greater fluctuations in claim frequency and/or severity. Although the Condensed Consolidated Statements of Cash Flows reflect net cash used by operating activities, the Company does not anticipate future liquidity problems, and the Company believes it continues to be well capitalized and adequately reserved.

30 of 45

Table of Contents

RESULTS OF OPERATIONS

All comparisons made in this discussion are comparing the three and six months ended June 30, 2021, to the three and six months ended June 30, 2020, unless otherwise indicated.

For the three and six months ended June 30, 2021, total revenues were $8,132,605, an increase of $156,378 (2%) and $19,604,260, an increase of $3,622,852 (23%) compared to total revenues of $7,976,227 and $15,981,408 for the three and six months ended June 30, 2020, respectively. For the three and six months ended June 30, 2021, the Company had loss before taxes of $1,430,835 and income before tax of $1,111,505, respectively, compared to loss before taxes of $384,562 and $1,530,060 for the three and six months ended June 30, 2020, respectively. For the three and six months ended June 30, 2021, the Company had net loss of $1,406,811 and net income of $860,893, respectively, compared to net loss of $434,814 and $1,478,640, for the three and six months ended June 30, 2020, respectively

The increase in revenues of $156,378 for the three months ended June 30, 2021, when compared to the three months ended June 30, 2020, was primarily due to an increase in net earned premium of $197,637 (3%). The increase in revenues of $3,622,852 for the six months ended June 30, 2021, when compared to the six months ended June 30, 2020, was primarily due to the realized gain of $3,693,858 on the sale of the Calabasas Building.

The loss before tax of $1,430,835 for the three months ended June 30, 2021, compared to loss before taxes of $384,582 for the three months ended June 30, 2020, was due primarily to an increase in losses and loss adjustment expenses of $1,195,801 (24%) and an increase in other operating expenses of $153,188 (15%). The income before tax of $1,111,505 for the six months ended June 30, 2021, compared to loss before taxes of $1,530,060 for the six months ended June 30, 2020, was due primarily to the realized gain of $3,693,858 on the sale of the Calabasas Building, a decrease in policy acquisition costs of $218,941 (9%), offset by an increase in losses and loss adjustment expenses of $903,629 (8%) and an increase in other operating expenses of $346,251 (18%).

Crusader premium

Crusader’s primary lines of business are written on Commercial Multi Peril policies. These policies represented approximately 99.6% and 99.5% of Crusader’s total written premium for the years ended June 30, 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 increased $2,785,991 (32%) and $4,061,650 (23%) to $11,567,118 and $22,049,663 for the three and six months ended June 30, 2021, respectively, compared to $8,781,127 and $17,988,013 for the three and six months ended June 30, 2020, respectively.

The increase in gross written premium for the three and six months ended June 30, 2021, was due primarily to growth in the Company’s Transportation vertical. The Transportation vertical transacts insurance primarily for long-haul trucking operations that are domiciled in California. The growth in the Company’s Transportation vertical was partially offset by the decrease in the Buildings vertical.

As part of its periodic performance reviews, Crusader analyzed the adequacy of its existing premium rates and policy forms. This analysis revealed that certain of Crusader’s products have approved rates and policy forms that are expected to yield premium revenue that is insufficient to cover Crusader’s anticipated losses and expenses and provide Crusader with a fair and reasonable rate of return. Accordingly, Crusader filed applications seeking rate increases and policy form revisions, which the CA DOI declined to approve. Due to the inability to obtain approval of rate increases or changes to its policy forms designed to exclude habitability related perils needed in the Company’s view to profitably underwrite its Building program policies, the Company stopped renewing its existing policies on Crusader’s paper and is now offering this product on USIC paper.

31 of 45

Table of Contents

Written premium

Written premium is a required statutory measure. 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 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 $1,113,619 (13%) to $9,874,483 and $1,591,429 (9%) to $19,262,118 for the three and six months ended June 30, 2021, respectively, compared to $8,760,864 and $17,670,689 for the three and six months ended June 30, 2020, respectively. All policies are written on annual basis. Earned premium represents a portion of written premium that is recognized as income in the consolidated financial statements for the period presented and earned daily on a pro-rata basis over the terms of the policies, and, therefore, premiums earned in the current year are related to policies written during both the current year and immediately preceding year. The increase in gross earned premium was due primarily to an increase in gross written premium in 2020 and 2021.

Ceded earned premium

Ceded earned premium (premium ceded to reinsurers under reinsurance treaties) increased $915,982 (46%) to $2,906,735 and $1,701,165 (43%) to $5,690,609 for the three and six months ended June 30, 2021, compared to $1,990,753 and $3,989,444 for the three and six months ended June 30, 2020, respectively. Ceded earned premium as a percentage of gross earned premium was 29% and 30% for the three and six months ended June 30, 2021, respectively, and 23% for the three and six months ended June 30, 2020. The increase in the ceded earned premium as a percentage of gross earned premium for the three and six months ended June 30, 2021, compared to the three and six months ended June 30, 2020, was due primarily to higher rates on the excess of loss reinsurance treaty.

Reinsurance treaties are generally structured in layers, with different negotiated economic terms and retention of participation, or liability, in each layer. In calendar years 2021 and 2020, Crusader retained 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 property and casualty clash treaty.

Crusader also has catastrophe reinsurance treaties from various highly rated California authorized and California unauthorized reinsurance companies. These reinsurance treaties help protect Crusader against losses in excess of certain retentions from catastrophic events that may occur on property risks which Crusader insures. In calendar years 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 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 June 30, 2021, all such ceded contracts are accounted for as risk transfer reinsurance.

32 of 45

Table of Contents

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

	Three Months Ended June 30						Six Months Ended June 30
	2021			2020			2021			2020

Direct earned premium	$	9,672,155		$	8,743,818		$	18,965,324		$	17,653,643
Assumed earned premium		202,328			17,046			296,794			17,046
Ceded earned premium		(2,906,735	)		(1,990,753	)		(5,690,609	)		(3,989,444	)
Net earned premium	$	6,967,748		$	6,770,111		$	13,571,508		$	13,681,245

Ratio of ceded earned premium to gross earned premium (direct and assumed earned premium)		29%			23%			30%			23%

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

Investment income increased $39,381 (8%) to $528,879 and $33,412 (3%) to $1,043,602 for the three and six months ended June 30, 2021, respectively, compared to $489,498 and $1,010,190 for the three and six months ended June 30, 2020, respectively. This increase in investment income was due primarily to an increase in average invested assets. The Company had net realized investment gains of $106,410 and $161,809 for the three and six months ended June 30, 2021, respectively, compared to net realized investment gains of $461 and $1,575 for the three and six months ended June 30, 2020, respectively. The Company had net unrealized investment gains on equity securities of $14,615 and $166,281 for the three and six months ended June 30, 2021 compared to $67,759 and $22,959 for the three and six months ended June 30, 2020.

Average annualized yields on the Company’s average invested assets and investment income, excluding net realized investment gain and losses and net unrealized investment losses on equity securities, are as follows:

	Three Months Ended June 30				Six Months Ended June 30
	2021		2020		2021		2020

Average invested assets (1) - at amortized cost	$	93,962,767	$	84,876,803	$	89,220,771	$	84,718,971
Net investment income from:
Invested Assets (2)	$	528,791	$	489,387	$	1,043,183	$	1,006,567
Cash Equivalents		88		111		419		3,623
Total investment income	$	528,879	$	489,498	$	1,043,602	$	1,010,190
Annualized yield on average invested assets (3)		2.3%		2.3%		2.3%		2.4%

(1)	The average is based on the beginning and ending balance of the amortized cost of the invested assets for each respective period.

(2)	Investment income from insurance company operation included $37,453 and $72,032 of investment expense for the three and six months ended June 30, 2021, compared to $32,909 and $67,787 of investment expense for the three and six months ended June 30, 2020.

(3)	Annualized yield on average invested assets did not include the investment income from cash equivalents.

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

Maturities by Year at June 30, 2021	Par Value		Amortized Cost		Fair Value		Weighted Average Yield

Due in one year	$	16,170,000	$	16,185,243	$	16,386,079		2.31	%
Due after one year through five years		26,521,012		26,682,135		27,372,028		1.87	%
Due after five years through ten years		19,424,414		19,506,193		20,317,069		2.41	%
Due after ten years and beyond		22,237,762		22,776,067		23,219,485		2.37	%
Total	$	84,353,188	$	85,149,638	$	87,294,661		2.21	%

33 of 45

Table of Contents

Maturities by Year at December 31, 2020	Par Value		Amortized Cost		Fair Value		Weighted Average Yield

Due in one year	$	11,070,641	$	11,064,202	$	11,169,232		2.57	%
Due after one year through five years		30,065,671		30,090,910		31,260,694		2.59	%
Due after five years through ten years		18,363,570		18,476,051		19,806,444		2.51	%
Due after ten years and beyond		20,927,571		21,238,117		21,971,324		2.63	%
Total	$	80,427,453	$	80,869,280	$	84,207,694		2.58	%

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

The weighted average maturity of the Company’s fixed maturity investments was 7.8 years as of June 30, 2021, and 8.3 years as of June 30, 2020.

	Less than 12 Months							12 Months or Longer
	Estimated Fair Value		Gross Unrealized Losses			Number of Securities		Estimated Fair Value		Gross Unrealized Losses			Number of Securities
June 30, 2021
U.S. Treasury securities	$	4,762,045	$	(31,661	)		3	$	-	$	-			-
Corporate securities		14,419,743		(124,412	)		18		-		-			-
Agency mortgage-backed securities		6,465,163		(52,073	)		8		-		-			-
Total debt securities		25,646,951		(208,146	)		29		-		-			-
Equity securities		787,071		(40,703	)		38		54		(3	)		1
Total	$	26,434,022	$	(248,850	)		67	$	54	$	(3	)		1

	Less than 12 Months							12 Months or Longer
	Estimated Fair Value		Gross Unrealized Losses			Number of Securities		Estimated Fair Value		Gross Unrealized Losses			Number of Securities
December 31, 2020
Corporate securities		2,101,986		(55,847	)		2		-		-			-
Agency mortgage-backed securities		3,223,329		(22,274	)		12		-		-			-
Total debt securities		5,325,315		(78,121	)		14		-		-			-
Equity securities		723,346		(37,357	)		25		-		-			-
Total	$	6,048,661	$	(115,478	)		39	$	-	$	-			-

While the fair value of Company’s investment portfolio at June 30, 2021, has recovered from the declines recorded in the first half of 2020, the effects of the coronavirus pandemic were a major contributor to the variability in fair value of the Company’s fixed income and equity investments during the six months ended June 30, 2021, and the economic uncertainty caused by the pandemic may lead to further investment valuation volatility. In addition, the recent decline in investment yields resulted in lower reinvestment rates, compared to the 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.

34 of 45

Table of Contents

	Three Months Ended June 30					Six Months Ended June 30
	2021			2020		2021			2020

Fixed maturities securities sold
Number of securities sold		2			-		3			1
Amortized cost of sold securities	$	1,943,398		$	-	$	2,193,393		$	601,316
Realized gains on sales	$	707		$	-	$	710		$	1,114

Fixed maturities securities called
Number of securities called		1			2		3			2
Amortized cost of called securities	$	1,018,877		$	1,699,539	$	2,393,778		$	1,699,539
Realized (losses) gains on calls	$	(18,877	)	$	461	$	(18,778	)	$	461

Other income

Other income included in Insurance Company Revenues and Other Insurance Operations was $54,470 and $28,260 for the three and six months ended June 30, 2021, respectively, compared to $122,826 and $203,779 for the three and six months ended June 30, 2020, respectively. The decreases in other income during the three and six months ended June 30, 2021, are due primarily to a decrease in rental income as a result of the sale of the building owned by Crusader and timing of certain receipts.

Gross commissions and fees

Gross commissions and fees decreased $42,175 (9%) to $415,711 and $77,783 (8%) to $849,172 for the three and six months ended June 30, 2021, respectively, compared to gross commissions and fees of $457,886 and $926,955 for the three and six months ended June 30, 2020, respectively.

The comparison in gross commission and fee income for the three and six months ended June 30, 2021, as compared to the three and six months ended June 30, 2020, are as follows:

	Three Months Ended June 30							Six Months Ended June 30
	2021		2020		Change			2021		2020		Change

Brokerage fee income	$	205,725	$	265,763	$	(60,038	)	$	441,621	$	526,709	$	(85,088	)
Health insurance program		198,487		168,098		30,389			377,461		353,282		24,179
Membership and fee income		11,499		24,025		(12,526	)		30,090		46,964		(16,874	)
Gross commissions and fees	$	415,711	$	457,886	$	(42,175	)	$	849,172	$	926,955	$	(77,783	)

Unifax sells and services insurance policies for Crusader and USIC. For these brokerage services, Unifax receives commissions from insurance companies and fees from policyholders. The commissions paid by Crusader to Unifax are eliminated as intercompany transactions and are not reflected as income in the condensed consolidated financial statements. Policy fee income received by Unifax is related to the Crusader policies and service fee income received by Unifax is related to the USIC policies. For financial statement reporting purposes, brokerage fees are earned ratably over the life of the related insurance policy. The unearned portion of the brokerage fees is recorded as a liability on the Condensed Consolidated Balance Sheets under “Accrued expenses and other liabilities.” The earned portion of the brokerage fees charged to the policyholder by Unifax is recognized as income in the condensed consolidated financial statements. Brokerage fee income decreased $60,038 (23%) and $85,088 (16%) in the three and six months ended June 30, 2021, respectively, compared to the three and six months ended June 30, 2020, due primarily to reduction in policy counts.

AIB markets health insurance in California through non-affiliated insurance companies for individuals and groups. For these services, AIB receives commission based on the premiums that it writes. Commission income increased $30,389 (18%) and $24,179 (7%) in the three and six months ended June 30, 2021, respectively, compared to the three and six months ended June 30, 2020. The increases in the commission during the three and six months ended June 30, 2021, are due primarily to the increase in overall group size for existing accounts as more companies are increasing their employee counts compared to the decrease in employee counts as a result of COVID in the prior period where there was a decrease in employee counts due to COVID.

35 of 45

Table of Contents

AAQHC is a third party administrator for contracted insurance companies and is a membership association that provides various consumer benefits to its members, including participation in group health care insurance policies that AAQHC negotiates for the association. For these services, AAQHC receives membership and fee income from its members. Membership and fee income decreased $12,526 (52%) and $16,874 (36%) for the three and six months ended June 30, 2021, respectively, compared to the three and six months ended June 30, 2020. The decreases in the membership and fee income during the three and six months ended June 30, 2021, are due primarily to a decrease in administration fees.

Finance charges and fees earned

Finance charges and fees earned consist of finance charges, late fees, returned check fees and payment processing fees. These charges and fees earned by AAC decreased $22,914 (34%) to $44,772 and $44,935 (33%) to $89,770 for the three and six months ended June 30, 2021, respectively, compared to $67,686 and $134,705 in fees earned during the three and six months ended June 30, 2020, respectively, due primarily to the decrease in the number of policies financed. During the three and six months ended June 30, 2021, AAC issued 201 and 432 loans, respectively, and had 670 loans outstanding as of June 30, 2021. During the three and six months ended June 30, 2020, AAC issued 296 and 641 loans, respectively, and had 1,078 loans outstanding as of June 30, 2020. AAC provides premium financing for Crusader and USIC policies produced by Unifax in California. Effective August 6, 2021, the Company decided to discontinue loan issuance through AAC. The Company will continue servicing existing loans and will continue issuing loans in the short-term until necessary operational changes are completed.

Losses and loss adjustment expenses

Loss and loss adjustment expenses are the Company’s largest expense item. Loss ratio, which is calculated by dividing losses and loss adjustment expenses by net earned premium, were 87% and 86% for the three and six months ended June 30, 2021, compared to 72% and 79% for the three and six months ended June 30, 2020.

Losses and loss adjustment expenses and loss ratios are as follows:

	Three Months Ended June 30
	2021		2021 Loss Ratio			2020			2020 Loss Ratio			Change

Net earned premium	$	6,967,748				$	6,770,111					$	197,637

Losses and loss adjustment expenses:
Provision for insured events of current year		5,754,482		82	%		5,378,459			79	%		376,023
Development of insured events of prior years		330,225		5	%		(489,553	)		(7	)%		819,778
Total losses and loss adjustment expenses	$	6,084,707		87	%	$	4,888,906			72	%	$	1,195,801

	Six Months Ended June 30
	2021			2021 Loss Ratio			2020		2020 Loss Ratio			Change

Net earned premium	$	13,571,508					$	13,681,245				$	(109,737	)

Losses and loss adjustment expenses:
Provision for insured events of current year		12,512,046			92	%		10,539,635		77	%		1,972,411
Development of insured events of prior years		(842,126	)		(6	)%		226,656		2	%		(1,068,782	)
Total losses and loss adjustment expenses	$	11,669,920			86	%	$	10,766,291		79	%	$	903,629

36 of 45

Table of Contents

The $5,754,482 provision for insured events of current year for the three months ended June 30, 2021, was $376,023 higher than the $5,378,459 provision for insured events of current year for the three months ended June 30, 2020, due primarily to higher severity and frequency of liability claims related to the Transportation vertical. The higher severity of the Transportation liability claims was caused by several fatal accidents which involved drivers insured by Crusader.

The $330,225 adverse development of insured events of prior years for the three months ended June 30, 2021, was $819,778 higher compared to the $489,553 favorable development for the three months ended June 30, 2020, due primarily to the increase in the incurred but not reported (“IBNR”) reserves associated with the Buildings vertical and higher severity of liability claims related to the Transportation vertical during the three months ended June 30, 2021.

The $12,512,046 provision for insured events of current year for the six months ended June 30, 2021, was $1,972,411 higher than the $10,539,635 provision for insured events of current year for the six months ended June 30, 2020, due primarily to the increase in the 2021 accident year IBNR reserves associated with the Transportation vertical as a result of premium growth in the vertical. Also, contributing to the increase was a higher frequency and severity of liability claims related to the Transportation vertical. The higher severity of the Transportation liability claims was caused by several fatal accidents which involved drivers insured by Crusader.

The $842,126 favorable development of insured events of prior years for the six months ended June 30, 2021, was $1,068,782 lower compared to the $226,656 adverse development for the six months ended June 30, 2020, due primarily to reductions in the 2020 and prior accident years IBNR reserves associated with Transportation vertical as a result of positive claims emergence.

Crusader has received 152 coronavirus-related business interruption claims through June 30, 2021 of which one is open. While the Company does not believe it is exposed to substantial risk from those claims under the insurance policies written by Crusader, the individual circumstances of each such claim are reviewed to fulfill Crusader’s obligation to its policyholders if coverage applies. Further, there may be impacts to the timing of loss emergence and ultimate loss ratios for certain Crusader’s products due to postponements of civil court cases, extensions of various statutes of limitations, changes in settlement trends and other new legislative, regulatory or judicial developments which could result in loss reserve deficiencies and negative impact on results of operations.

The following table breaks out adverse (favorable) development from total losses and loss adjustment expenses quarterly since June 30, 2019:

	Provision for Insured Events of Current Year		Adverse (Favorable) Development of Insured Events of Prior Years			Total Losses and Loss Adjustment Expenses

Three Months Ended:
June 30, 2021	$	5,754,482	$	330,225		$	6,084,707
March 31, 2021		6,757,564		(1,172,351	)		5,585,213
December 31, 2020		6,758,848		(202,270	)		6,556,578
September 30, 2020		9,385,389		7,934,662			17,320,051
June 30, 2020		5,378,459		(489,553	)		4,888,906
March 31, 2020		5,161,176		716,209			5,877,385
December 31, 2019		5,400,410		1,824,349			7,224,759
September 30, 2019		4,299,018		838,956			5,137,974
June 30, 2019		5,134,626		(75,675	)		5,058,951

At the end of each fiscal quarter, Crusader’s loss and loss adjustment expense reserves for each accident year (i.e., for all claims incurred within each year) are re-evaluated independently by the Company’s president, the Company’s chief financial officer, and by an independent consulting actuary. Generally accepted actuarial methods, including the widely used Bornhuetter-Ferguson and loss development methods, are employed to estimate ultimate claims costs. An actuarial central estimate of the ultimate claims costs and IBNR reserves is ultimately determined by management and tested for reasonableness by the independent consulting actuary.

37 of 45

Table of Contents

Repeated and sustained underwriting losses in Crusader’s Buildings vertical and growth in Crusader’s Transportation vertical, a product which is generally known for its difficulty to be underwritten profitably, coupled with changes in the market conditions and increases in social inflation (discussed below), caused Crusader management to reevaluate the assumptions used in its process for estimating loss and loss adjustment expense reserves during the three months ended September 30, 2020. This reevaluation and the use of updated assumptions led to significantly more conservative estimates for expected claims frequency, claims severity and ultimate incurred losses and loss adjustment expenses during the quarterly re-evaluation of the loss and loss adjustment expense reserves as of September 30, 2020. The increase in the ultimate incurred losses and loss adjustment expenses manifested primarily through higher IBNR reserves as of December 31, 2020, for 2018, 2019, and 2020 accident year claims pertaining to Buildings and Transportation liability coverages during the three months ended September 30, 2020. During the three months ended June 30, 2021, primarily higher ultimate estimates for Building liability coverage for the 2015 accident year resulted in adverse development of insured events of prior years.

Crusader attributes much of its adverse loss development experienced in the three most recent years ending June 30, 2021, to social inflation. Used here, social inflation is a term that encompasses a relatively new adverse trend related to society’s application of the law when it comes to insurance. In this context, social inflation is generally described by the rising costs of insurance claims due to societal trends which result in increased litigation, broader definitions of liability and contractual interpretations, plaintiff friendly legal decisions, larger compensatory jury awards, and larger awards for non-economic damages. Crusader has experienced increased costs due to social inflation in all three of its largest programs, Long-haul Transportation, Residential Apartment Buildings, and Bars/Taverns, resulting in higher-than-expected frequency and severity of third-party liability claims.

The variability of Crusader’s losses and loss adjustment expenses for the periods presented is primarily due to the small and diverse population of Crusader’s policyholders and claims, which may result in greater fluctuations in claim frequency and/or severity. In addition, Crusader’s reinsurance retention, which is relatively high in relationship to its net earned premium, can result in increased loss ratio volatility when large losses are incurred in a relatively short period of time. Nevertheless, management believes that its reinsurance retention is reasonable given the amount of Crusader’s surplus and its goal to minimize ceded premium.

The preparation of the Company’s condensed consolidated financial statements requires estimation of certain liabilities, most significantly the liability for unpaid losses and loss adjustment expenses. Management makes its best estimate of the liability for these unpaid claims costs as of the end of each fiscal quarter. Due to the inherent uncertainties in estimating the Crusader’s unpaid claims costs, actual loss and loss adjustment expense payments are expected to vary, perhaps significantly, from any estimate made prior to the settling of all claims. Variability is inherent in establishing loss and loss adjustment expense reserves, especially for a small insurer such as Crusader. For any given line of insurance, accident year, or other group of claims, there is a continuum of possible loss and loss adjustment expense reserve estimates, each having its own unique degree of propriety or reasonableness. Due to the complexity and nature of the insurance claims process, there are potentially an infinite number of reasonably likely scenarios. Management draws on its collective experience to judgmentally determine its best estimate. In addition to applying a variety of standard actuarial methods to the data, an extensive series of diagnostic tests are applied to the resultant loss and loss adjustment expense reserve estimates to determine management’s best estimate of the unpaid claims liability. Among the statistics reviewed for each accident year are: loss and loss adjustment expense development patterns; frequencies; severities; and ratios of loss to premium, loss adjustment expense to premium, and loss adjustment expense to loss.

When there is clear evidence that the actual claims costs emerged are different than expected for any prior accident year, the claims cost estimates for that year are revised accordingly. If the claims costs that emerge are less favorable than initially anticipated, generally, Crusader increases its loss and loss adjustment expense reserves immediately. However, if the claims costs that emerge are more favorable than initially anticipated, generally, Crusader reduces its loss and loss adjustment expense reserves over time while it continues to assess the validity of the observed trends based on the subsequent emerged claim costs.

The establishment of loss and loss adjustment expense reserves is a detailed process as there are many factors that can ultimately affect the final settlement of a claim. Estimates are based on a variety of industry data and on Crusader’s current and historical accident year claims data, including but not limited to reported claim counts, open claim counts, closed claim counts, closed claim counts with payments, paid losses, paid loss adjustment expenses, case loss reserves, case loss adjustment expense reserves, earned premiums and policy exposures, salvage and subrogation, and unallocated loss adjustment expenses paid. Many other factors, including changes in reinsurance, changes in pricing, changes in policy forms and coverage, changes in underwriting and risk selection, legislative changes, results of litigation and inflation are also taken into account.

38 of 45

Table of Contents

Policy acquisition costs

Policy acquisition costs consist of commissions, premium taxes, inspection fees, and certain other underwriting costs that are directly related to and vary with the successful production of Crusader insurance policies. These costs include both Crusader expenses and the allocated expenses of other Unico subsidiaries. Crusader's reinsurers pay Crusader a ceding commission, which is primarily a reimbursement of the acquisition cost related to the ceded premium. No ceding commission is received on facultative or catastrophe ceded premium. Policy acquisition costs, net of ceding commission, are deferred and amortized as the related premiums are earned. The Company annually reevaluates its acquisition costs to determine that costs related to successful policy acquisition are capitalized and deferred.

Policy acquisition costs and the ratio to net earned premium are as follows:

	Three Months Ended June 30									Six Months Ended June 30
	2021			2020			Change			2021			2020			Change

Policy acquisition costs	$	1,105,545		$	1,202,026		$	(96,481	)	$	2,127,510		$	2,346,451		$	(218,941	)
Ratio to net earned premium (GAAP ratio)		16	%		18	%					16	%		17	%

Policy acquisition costs decreased during the three and six months ended June 30, 2021, as compared to the three and six months ended June 30, 2020, due primarily to increase of ceding commission that Crusader received as a result of increase in premium ceded to its reinsurers.

Salaries and employee benefits

Salaries and employee benefits decreased $46,291 (4%) to $1,205,630 and $40,700 (2%) to $2,333,721 for the three and six months ended June 30, 2021, respectively, compared to $1,251,922 and $2,374,421 for the three and six months ended June 30, 2020.

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

	Three Months Ended June 30
	2021			2020			Change

Total salaries and employee benefits incurred	$	2,150,841		$	2,066,520		$	84,322
Less: charged to losses and loss adjustment expenses		(594,655	)		(392,682	)		(201,973	)
Less: capitalized to policy acquisition costs		(350,556	)		(362,029	)		11,473
Less: charged to IT system upgrade		-			(59,887	)		59,887
Net amount charged to operating expenses	$	1,205,630		$	1,251,922		$	(46,291	)

	Six Months Ended June 30
	2021			2020			Change

Total salaries and employee benefits incurred	$	4,324,282		$	4,073,278		$	251,004
Less: charged to losses and loss adjustment expenses		(1,161,993	)		(909,065	)		(252,928	)
Less: capitalized to policy acquisition costs		(660,251	)		(682,078	)		21,827
Less: charged to IT system upgrade		(168,317	)		(107,714	)		(60,603	)
Net amount charged to operating expenses	$	2,333,721		$	2,374,421		$	(40,700	)

The decrease in the total salaries and employee benefits incurred for the three and six months ended June 30, 2021, compared to the three and six months ended June 30, 2020, was due primarily to a reduction in headcount, partially offset by increases in employee benefits costs as a result of higher medical insurance rates.

Commissions to agents/brokers

Commissions to agents/brokers decreased $3,566 (15%) to $20,434 and $8,952 (18%) to $41,002 for the three and six months ended June 30, 2021, respectively, compared to $24,000 and $49,954 for the three and six months ended June 30, 2020. These decreases in commissions to agents/brokers were due primarily to lower commissions associated with loss of a large group account.

Other operating expenses

Other operating expenses increased $153,189 (15%) to $1,147,124 and $346,251 (18%) to $2,320,602 for the three and six months ended June 30, 2021, respectively, compared to $993,935 and $1,974,351 for the three and six months ended June 30, 2020. The increases in other operating expenses for the three and six months ended June 30, 2021, compared to the six months ended June 30, 2020, were primarily due to increases in rent expense for the corporate headquarters office space leased in February 2021, fees paid under reinsurance arrangement with USIC, business insurance costs, and CA DOI financial examination of Crusader expenses, partially offset by elimination of building maintenance costs after the sale of the building owned by Crusader.

39 of 45

Table of Contents

Income tax benefit

Income tax benefit was $24,024 (2% of pre-tax loss) for the three months ended June 30, 2021 and income tax expense was $50,252 (-13% of pre-tax loss) for the three months ended June 30, 2020. Income tax expense was $250,612 (23% of pre-tax income) for the six months ended June 30, 2021 and income tax benefit was $51,420 (3% of pre-tax loss) for the six months ended June 30, 2020.

OFF-BALANCE SHEET ARRANGEMENTS

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was carried out by the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of June 30, 2021, as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of June 30, 2021.

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

The Company has not experienced any material impact to its internal controls over financial reporting while the majority of its employees were working remotely due to the COVID-19 pandemic. The Company will continually monitor and assess the COVID-19 situation with respect to its internal controls to minimize the impact of the pandemic on their design and operating effectiveness.

40 of 45

Table of Contents

PART II ‑ OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company and its subsidiaries are named from time to time as defendants in various legal actions that are incidental to its business, including those which arise out of or are related to the handling of claims made in connection with Crusader’s insurance policies. Crusader is also subject to regulatory and governmental examinations, requests for information, inquiries, investigations and threatened legal actions and proceedings by state regulators and others. Crusader receives numerous requests, orders for documents, and information in connection with various aspects of its regulated business.

In accordance with applicable accounting guidance, Crusader establishes reserves for certain claims-related lawsuits, regulatory actions and other contingencies when it believes a loss is probable and is able to estimate its potential exposure.

Due to the inherent difficulty of predicting the outcome of litigation, regulatory and government matters, the Company generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or the amount, if any, of eventual loss, fines or penalties related to these matters. While actual losses may differ from the amounts recorded and such matters are subject to many uncertainties and outcomes that are not predictable with assurance, on the basis of currently available information, the Company is not aware of any currently pending or threatened legal or regulatory proceedings that, either individually or in the aggregate, it anticipates will have a material adverse effect on its consolidated financial condition, results of operations or cash flows.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A, "Risk Factors" of the Company's 2020 Form 10-K, which could materially affect our business, financial condition, and/or future results. The risks described in our 2020 Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may adversely affect the Company's business, financial condition, and/or operating results.

With the exception of the risk factors set forth below, which update and supplement the risk factors disclosed in the Company's 2020 Form 10-K, there have been no material changes to the risk factors disclosed in the Company’s 2020 Form 10-K.

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

41 of 45

Table of Contents

Crusader is subject to minimum capital and surplus requirements, and any failure to meet these requirements could subject Crusader to regulatory action.

Crusader’s RBC total adjusted capital was less than 300% of its Authorized Control Level RBC as of December 31, 2020, and its statutory accounting basis combined ratio was in excess of 120% for the year ended December 31, 2020. The RBC level when coupled with the statutory accounting basis combined ratio triggered a Company Action Level Event under the RBC. 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 will take to correct the conditions that resulted in the Company Action Level Event and on July 2, 2021, submitted a revised RBC Plan which addressed questions raised by the CA DOI. The CA DOI has not accepted the revised RBC Plan. 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, the Company and Crusader may not be able to take certain of such corrective actions, including the potential infusion of capital to Crusader.

It is possible that continued underwriting losses being experienced by Crusader during 2021 will cause further deterioration in the policyholder surplus of Crusader. If this causes Crusader's adjusted capital to be less than 300% as of December 31, 2021, an additional Company Action Level Event would be triggered if the statutory accounting basis combined ratio as of December 31, 2021 is greater than 120%. At December 31, 2020, Crusader’s statutory accounting basis combined ratio was 153%.

Unico is dependent on dividends from Crusader to fund its operations, and Crusader will be limited in the amount of dividends that it can declare and pay to Unico as a result of decreases in its policyholder surplus.

As an insurance holding company, Unico does not independently generate significant revenue, and is dependent on dividends from Crusader and its other subsidiaries to fund its operations and expenses. Unico generally receives such dividends annually from Crusader, but does not expect to receive any such dividends for the foreseeable future due to Crusader's decreased policyholder surplus caused by additional underwriting losses during 2021, and the need to preserve policyholder surplus at Crusader. It is also possible that the CA DOI may request or direct that Crusader not make any dividend payments (or impose limits on the amount of dividends that Crusader can make) to Unico for a period of time. If the CA DOI imposes such restrictions on Crusader, or if Unico otherwise does not receive such dividends, the Company's financial condition and its ability to fund its operations and expenses will be adversely affected.

Crusader may be restricted in its ability to write new business as a result of decreases in its policyholder surplus.

Due to Crusader's decreased policyholder surplus and its failure to maintain an adjusted capital level of 400% or more of the Authorized Control Level, the CA DOI could restrict the amount of new business that Crusader is permitted to write. If such restrictions were to be imposed, the operating results of Crusader could be adversely affected, which would in turn adversely affect the operating results and financial condition of the Company could be adversely affected.

42 of 45

Table of Contents

Crusader may be limited in the amount of premium rate increases due to required regulatory approval.

Crusader’s ability to successfully operate its insurance operation is dependent upon its ability to charge premium rates to its policyholders that are adequate and thereby permit it to cover its anticipated losses and expenses and achieve a fair and reasonable return on its capital. To the extent that Crusader’s existing premium rates do not meet this threshold, Crusader may seek to increase or otherwise modify such rates. However, as an insurance company, Crusader is subject extensive statutes, regulations, administrative directives and common law that limit its ability to modify its premium rates. Accordingly, Crusader’s ability to implement rate increases or modifications is dependent upon regulatory approval, which Crusader may not receive. Furthermore, the ability of insurers to obtain regulatory approval of premium rate increases and modifications is subject to additional uncertainty during the COVID-19 pandemic.

Crusader may be limited in policy form modifications due to required regulatory approval.

Crusader’s ability to successfully operate its insurance operation is also dependent upon its ability to utilize appropriate policy forms. To the extent that Crusader’s existing policy forms do not align with the premium rates that Crusader is permitted to charge to its policyholders and Crusader’s business objectives, Crusader may seek to modify its policy forms so as to, among other things, change the coverage terms. In many of the jurisdictions in which Crusader operates, Crusader’s ability to modify its policy forms is subject to limitations established by statutes, regulations, administrative directives and common law. Accordingly, Crusader’s ability to implement policy form modifications is dependent upon regulatory approval, which Crusader may not receive. Furthermore, the ability of insurers to obtain regulatory approval of policy form modifications is subject to additional uncertainty during the COVID-19 pandemic.

43 of 45

Table of Contents

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

3.1	Restated Articles of Incorporation of Registrant.

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

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

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

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

101	The following information from the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2021, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive Loss; (iv) the Condensed Consolidated Statements of Cash Flows; and (v) the Condensed Notes to Unaudited Condensed Consolidated Financial Statements.*

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

44 of 45

Table of Contents

SIGNATURES

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

UNICO AMERICAN CORPORATION

Date: August 17, 2021	By:	/s/ Michael Budnitsky
		Michael Budnitsky
		Chief Executive Officer, President,
		Secretary, (Principal Executive Officer)

Date: August 17, 2021	By:	/s/ Renai Effarah
		Renai Effarah
		Treasurer, Chief Financial Officer,
		(Principal Accounting Officer
		and Principal Financial Officer)

45 of 45