UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period endedSeptemberJune 30, 20172019or

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

For the transition period from _________ to _________.

 

Commission File No.000-03978

 

UNICO AMERICAN CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

             Nevada                                                                     95-2583928

                                        Nevada95-2583928
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)
26050 Mureau Road, Calabasas, California91302
(Address of Principal Executive Offices)(Zip Code)

(State or Other Jurisdiction of                                            (I.R.S. Employee

Incorporation or Organization)                                               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

(Registrant's Telephone Number, Including Area Code)

 

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 classTrading SymbolName of each exchange on which registered
Common Stock, No Par ValueUNAMNasdaq 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.

YesX No __ 

 

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

(Do not check if a smaller reporting company)

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes NoX 

 

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

 

ClassOutstanding at November 13, 2017August 14, 2019
Common Stock, no par value per share5,307,1335,306,747

 

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UNICO AMERICAN CORPORATION

INDEX TO FORM 10-Q

 

 Page No.
Cautionary Note Regarding Forward-Looking Statements3
 3 
Part I-Financial Information4
 
Item 1. Financial Statements4
 4 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations18
 16 
Item 3. Quantitative and Qualitative Disclosures About Market Risk30
 29 
Item 4. Controls and Procedures30
 29 
Part II-Other Information31
 29 
Item 1. Legal Proceedings31
 29 
Item 1A. Risk Factors31
 29 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds31
 30 
Item 3. Defaults Upon Senior Securities31
 30 
Item 4. Mine Safety Disclosures31
 30 
Item 5. Other Information31
 30 
Item 6. Exhibits31
 30 
SignaturesSignatures3231

 

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

CertainThis Form 10-Q, and the documents incorporated by reference in this document, our press releases and oral statements made from time to time by us or on our behalf, may contain “forward-looking statements” within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended (or “the Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (or “the Exchange Act”). In this context, forward-looking statements are not historical facts and include statements about our plans, objectives, beliefs and expectations. Forward-looking statements include statements preceded by, followed by, or that include the words “believes,” “expects,” “anticipates,” “seeks,” “plans,” “estimates,” “intends,” “projects,” “targets,” “should,” “could,” “may,” “will,” “can,” “can have,” “likely,” the negatives thereof or similar words and expressions. These forward-looking statements are contained herein,throughout this Form 10-Q, including, but not limited to, statements found in the sections entitled “Legal Proceedings” andPart I – Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995 and Unico American Corporation (the “Company”) intends that such forward-lookingOperations.”

Forward-looking statements are subject to the safe harbors created thereby.only predictions and are not guarantees of future performance. These statements which may be identified by words or phrases such as “anticipate,” “appear,” “believe,” “estimate,” “expect,” “intend,” “plan,” “predict,” “will,” “may,” “likely,” “future,” “should,” “could,” and “would” and similar words, are intended to identify forward-looking statements. In addition, any statements that refer to projections of the Company’s future financial performance, trends in its businesses, or other characterizations of future events or circumstances are forward-looking statements.

The forward-looking statements included herein 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 the Company’s management based on available informationwhich are difficult or impossible to predict accurately and involve certain risks and uncertainties, many of which are beyond our control. These predictions are also affected by known and unknown risks, uncertainties and other factors that may cause our actual results to be materially different from those expressed or implied by any forward-looking statement. Many of these factors are beyond our ability to control or predict. Our actual results could differ materially from the controlresults contemplated by these forward-looking statements due to a number of factors. Such factors include, but are not limited to, the Company. Suchfollowing:

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

Please see Part I - Item 1A – “Risk Factors” in the Company’s 2018 Annual Report on Form 10-K as filed with the U.S. Securities and uncertaintiesExchange Commission (“SEC”), as well as other documents we file with the SEC from time-to-time, for other important factors that could cause our actual results to differ materially from those anticipated byour 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. Factors that could cause actual results to differ materially include, among others: failure to meet minimum capitalIn addition, these statements speak only as of the date of this Form 10-Q and, surplus requirements; vulnerability to significant catastrophic property loss; a change in accounting standards issued by the Financial Accounting Standards Board; required adoption of International Financial Reporting Standards; ability to adjust claims accurately; insufficiency of loss and loss adjustment expense reserves to cover future losses; ability to realize deferred tax assets; ability to accurately underwrite risks and charge adequate premium; ability to obtain reinsurance or collect from reinsurers; extensive regulation and legislative changes; reliance on subsidiaries to satisfy obligations; downgrade in financial strength rating by AM Best; intense competition; changes in interest rates; investments subject to credit, prepayment and other risks; geographic concentration; reliance on independent insurance agents and brokers; insufficient reserve for doubtful accounts; litigation; enforceability of exclusions and limitations in policies; reliance on information technology systems; ability to prevent or detect acts of fraud with disclosure controls and procedures; change in general economic conditions; dependence on key personnel; ability to attract, develop and retain employees and maintain appropriate staffing levels; insolvency, financial difficulties, or default in performance of obligations by parties with significant contracts or relationships; implementation of new computer software; ability to effectively compete; maximization of long-term value and no focus on short-term earnings expectations; control by a small number of shareholders; failure to maintain effective system of internal controls; difficulty in effecting a change of control or sale of any subsidiaries; and losses in excess of reinsurance limits. Exceptexcept as may be required by law, the Company undertakeswe undertake no obligation to revise or update publicly any forward-looking statements to reflect new information or events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

for any reason.

 

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PART 1I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

  September 30 December 31
  2017 2016
   (Unaudited)     
ASSETS        
Investments        
Available-for-sale:        
Fixed maturities, at fair value (amortized cost: $84,279,349 at September 30, 2017, and $80,371,842 at December 31, 2016) $84,268,895  $80,383,925 
Short-term investments, at fair value  13,080,515   10,204,603 
Total Investments  97,349,410   90,588,528 
Cash and restricted cash  230,376   13,496,379 
Accrued investment income  435,706   185,916 
Receivables, net  6,046,875   6,008,083 
Reinsurance recoverable:        
Paid losses and loss adjustment expenses  1,692,142   260,744 
Unpaid losses and loss adjustment expenses  11,890,854   9,520,970 
Deferred policy acquisition costs  4,230,832   4,432,299 
Property and equipment, net  10,117,563   10,282,532 
Deferred income taxes  1,231,499   1,177,346 
Other assets  4,853,239   2,269,408 
Total Assets $138,078,496  $138,222,205 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
         
LIABILITIES        
Unpaid losses and loss adjustment expenses $53,066,515  $47,055,787 
Unearned premiums  19,472,136   19,374,740 
Advance premium and premium deposits  429,560   224,055 
Accrued expenses and other liabilities  2,155,975   2,660,983 
Total Liabilities $75,124,186  $69,315,565 
         
Commitments and contingencies        
         
STOCKHOLDERS'  EQUITY        
Common stock, no par value – authorized 10,000,000 shares; 5,307,133 shares issued and outstanding at September 30, 2017, and December 31, 2016 $3,772,872  $3,761,320 
Accumulated other comprehensive income (loss)  (6,900)  7,975 
Retained earnings  59,188,338   65,137,345 
Total Stockholders’ Equity $62,954,310  $68,906,640 
         
Total Liabilities and Stockholders' Equity $138,078,496  $138,222,205 

  June 30 December 31
  2019 2018
   (Unaudited)     
ASSETS        
Investments        
Available-for-sale:        
Fixed maturities, at fair value (amortized cost: $80,207,437 at June 30, 2019, and $78,302,588 at December 31, 2018) $81,270,712  $76,910,137 
Held-to-maturity:        
Fixed maturities, at amortized cost (fair value: $4,782,000 at June 30, 2019, and $7,126,000 at December 31, 2018)  4,782,000   7,126,000 
Short-term investments, at fair value  200,000   4,690,954 
Total Investments  86,252,712   88,727,091 
Cash and cash equivalents  5,591,085   4,917,762 
Accrued investment income  409,544   393,782 
Receivables, net  4,738,587   3,933,068 
Reinsurance recoverable:        
Paid losses and loss adjustment expenses  455,413   (1,319)
Unpaid losses and loss adjustment expenses  11,139,312   9,531,602 
Deferred policy acquisition costs  3,628,624   3,489,728 
Property and equipment, net  9,909,957   9,692,325 
Deferred income taxes  4,089,041   4,375,484 
Other assets  257,394   557,443 
Total Assets $126,471,669  $125,616,966 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
         
LIABILITIES        
Unpaid losses and loss adjustment expenses $49,829,790  $51,657,155 
Unearned premiums  17,726,398   15,964,589 
Advance premium and premium deposits  359,705   234,442 
Accrued expenses and other liabilities  1,650,203   1,845,358 
Total Liabilities  69,566,096   69,701,544 
         
Commitments and contingencies        
         
STOCKHOLDERS'  EQUITY        
Common stock, no par value – authorized 10,000,000 shares; 5,306,747 and 5,307,103 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively  3,772,682   3,772,857 
Accumulated other comprehensive income (loss)  839,987   (1,100,036)
Retained earnings  52,292,904   53,242,601 
Total Stockholders’ Equity  56,905,573   55,915,422 
         
Total Liabilities and Stockholders' Equity $126,471,669  $125,616,966 

 

  

See notes to condensed consolidated financial statements (unaudited).

 

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

  Three Months Ended Nine Months Ended
  September 30 September 30
  2017 2016 2017 2016
REVENUES        
Insurance company operation:                
Net earned premium $8,168,252  $7,980,930  $24,309,101  $23,271,296 
Net investment income  309,405   234,495   785,579   658,839 
Net realized investment gains (losses)  373   —     528   (1,278)
Other income  108,169   66,147   243,642   201,425 
Total Insurance Company Operation  8,586,199   8,281,572   25,338,850   24,130,282 
                 
Other insurance operations:                
Gross commissions and fees  685,288   697,245   2,097,916   2,063,429 
Investment income  87   75   206   272 
Finance fees earned  21,814   18,450   58,155   50,667 
Other income  1   1,000   65   6,002 
Total Revenues  9,293,389   8,998,342   27,495,192   26,250,652 
                 
EXPENSES                
Losses and loss adjustment expenses  9,917,896   8,038,100   24,351,751   17,982,351 
Policy acquisition costs  1,854,212   1,741,499   4,943,350   5,142,250 
Salaries and employee benefits  1,221,182   1,318,622   4,534,550   3,980,055 
Commissions to agents/brokers  39,737   40,324   126,620   121,379 
Other operating expenses  695,587   826,519   2,592,318   2,052,771 
Total Expenses  13,728,614   11,965,064   36,548,589   29,278,806 
                 
Loss before taxes  (4,435,225)  (2,966,722)  (9,053,397)  (3,028,154)
Income tax benefit  1,507,976   1,013,225   3,104,390   1,026,700 
Net Loss $(2,927,249) $(1,953,497) $(5,949,007) $(2,001,454)
                 
                 
                 
PER SHARE DATA:                
Basic                
Loss per share $(0.55) $(0.37) $(1.12) $(0.38)
Weighted average shares  5,307,133   5,307,133   5,307,133   5,307,881 
Diluted                
Loss per share $(0.55) $(0.37) $(1.12) $(0.38)
Weighted average shares  5,307,133   5,307,133   5,307,133   5,307,881 

  Three Months Ended Six Months Ended
  June 30 June 30
  2019 2018 2019 2018
REVENUES        
Insurance company operation:                
Net earned premium $6,518,112  $7,362,945  $12,782,262  $15,044,572 
Investment income  530,745   452,508   1,063,375   897,209 
Net realized investments gains (losses)  (4,512)  137   (12,661)  137 
Other income (loss)  168,828   112,199   (91,872)  167,889 
Total Insurance Company Operation  7,213,173   7,927,789   13,741,104   16,109,807 
                 
Other insurance operations:                
Gross commissions and fees  527,825   671,449   1,075,270   1,278,106 
Investment income  2   98   9   195 
Finance charges and fees earned  53,998   34,380   103,371   52,476 
Other income  100   9,736   10,818   9,757 
Total Revenues  7,795,098   8,643,452   14,930,572   17,450,341 
                 
EXPENSES                
Losses and loss adjustment expenses  5,058,951   4,929,203   10,213,394   12,730,960 
Policy acquisition costs  1,289,481   1,515,476   2,376,194   3,136,981 
Salaries and employee benefits  1,012,805   1,126,503   2,040,654   2,414,580 
Commissions to agents/brokers  41,077   40,541   91,198   81,880 
Other operating expenses  735,454   744,697   1,363,534   1,610,840 
Total Expenses  8,137,768   8,356,420   16,084,974   19,975,241 
                 
Income (Loss) before taxes  (342,670)  287,032   (1,154,402)  (2,524,900)
Income tax expense (benefit)  (65,993)  118,735   (206,651)  (485,945)
Net Income (Loss) $(276,677) $168,297  $(947,751) $(2,038,955)
                 
                 
                 
PER SHARE DATA:                
Basic                
Earnings (loss) per share $(0.05) $0.03  $(0.18) $(0.38)
Weighted average shares  5,306,938   5,307,133   5,307,021   5,307,133 
Diluted                
Earnings (loss) per share $(0.05) $0.03  $(0.18) $(0.38)
Weighted average shares  5,306,938   5,307,133   5,307,021   5,307,133 

 

  

See notes to condensed consolidated financial statements (unaudited).

 

5 of 3231 

 

 

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSINCOME (LOSS)

(UNAUDITED)

 

  Three Months Ended Nine Months Ended
  September 30 September 30
  2017 2016 2017 2016
         
Net loss $(2,927,249) $(1,953,497) $(5,949,007) $(2,001,454)
Other changes in comprehensive loss:                
Changes in net unrealized gains (losses) on securities  classified as available-for-sale arising  during the period  (6,581)  (21,186)  (22,537)  82,614 
Income tax benefit (expense) related to changes in unrealized gains on securities classified as available-for-sale arising during the period  2,238   7,203   7,662   (28,089)
Comprehensive Loss $(2,931,592) $(1,967,480) $(5,963,882) $(1,946,929)

  Three Months Ended Six Months Ended
  June 30 June 30
  2019 2018 2019 2018
         
         
Net income (loss) $(276,677) $168,297  $(947,751) $(2,038,955)
Changes in unrealized gains (losses) on securities classified as available-for-sale arising during the period, net of income tax  964,138   (244,273)  1,940,023   (1,139,399)
Comprehensive Income (Loss) $687,461  $(75,976) $992,272  $(3,178,354)

 

  

See notes to condensed consolidated financial statements (unaudited).

 

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

         
    Accumulated    
  Common Shares Other    
  Issued and   Comprehensive Retained  
  Outstanding Amount Loss Earnings Total
           
Balance – December 31, 2017  5,307,133  $3,772,872  $(239,896) $56,412,361  $59,945,337 
                     
Change in comprehensive loss, net of deferred income tax  —     —     (895,126)  —     (895,126)
Net loss  —     —     —     (2,207,251)  (2,207,251)
Balance – March 31, 2018  5,307,133  $3,772,872  $(1,135,022) $54,205,110  $56,842,960 
                     
Change in comprehensive loss, net of deferred income tax  —     —     (244,273)  —     (244,273)
Net income  —     —     —     168,296   168,296 
Balance – June 30, 2018  5,307,133  $3,772,872  $(1,379,295) $54,373,406  $56,766,983 

         
    Accumulated    
  Common Shares Other    
  Issued and   Comprehensive Retained  
  Outstanding Amount Income (Loss) Earnings Total
           
Balance – December 31, 2018  5,307,103  $3,772,857  $(1,100,036) $53,242,601  $55,915,422 
                     
Change in comprehensive income, net of deferred income tax  —     —     975,885   —     975,885 
Net loss  —     —     —     (671,074)  (671,074)
Balance – March 31, 2019  5,307,103  $3,772,857  $(124,151) $52,571,527  $56,220,233 
                     
Shares repurchased  (356)  (175)  —     (1,946)  (2,121)
Change in comprehensive income, net of deferred income tax  —     —     964,138   —     964,138 
Net loss  —     —     —     (276,677)  (276,677)
Balance – June 30, 2019  5,306,747  $3,772,682  $839,987  $52,292,904  $56,905,573 

See notes to condensed consolidated financial statements (unaudited).

7 of 31 

 

 

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

  Nine Months Ended
  September 30
  2017 2016
Cash flows from operating activities:        
Net loss $(5,949,007) $(2,001,454)
Adjustments to reconcile net loss to net cash from operations:        
Depreciation and amortization  386,250   361,490 
Bond amortization, net  (533,123)  (12,897)
Bad debt expense  15,534   385 
Non-cash stock based compensation  11,552   17,328 
Realized investment (gains) losses  (528)  1,278 
Changes in assets and liabilities:        
Net receivables and accrued investment income  (304,116)  (726,376)
Reinsurance recoverable  (3,801,282)  237,404 
Deferred policy acquisition costs  201,467   (313,431)
Other assets  478,373   698,737 
Unpaid losses and loss adjustment expenses  6,010,728   727,884 
Unearned premium  97,396   1,322,906 
Advance premium and premium deposits  205,505   277,193 
Accrued expenses and other liabilities  (505,008)  330,730 
Income taxes current/deferred  (3,108,695)  (1,037,537)
Net Cash Used by Operating Activities  (6,794,954)  (116,360)
         
Cash flows from investing activities:        
Purchase of fixed maturity investments  (44,321,953)  (12,032,000)
Proceeds from maturity of fixed maturity investments  39,354,000   10,894,000 
Proceeds from sale of fixed maturity investments  1,594,097   744,722 
Net (increase) decrease in short-term investments  (2,875,912)  7,466,195 
Additions to property and equipment  (221,281)  (536,584)
Net Cash (Used by) Provided by Investing Activities  (6,471,049)  6,536,333 
         
Cash flows from financing activities:        
Repurchase of common stock  —     (89,582)
Net Cash Used by Financing Activities  —     (89,582)
         
Net (decrease) increase in cash and restricted cash  (13,266,003)  6,330,391 
Cash and restricted cash at beginning of period  13,496,379   8,258,673 
Cash and Restricted Cash at End of Period $230,376  $14,589,064 
         
Supplemental cash flow information        
Cash paid during the period for:        
Interest  —     —   
Income taxes $8,800  $8,774 

 

  Six Months Ended
  June 30
  2019 2018
Cash flows from operating activities:        
Net loss $(947,751) $(2,038,955)
Adjustments to reconcile net loss to net cash from operations:        
Depreciation and amortization  270,105   281,717 
Bond amortization, net  (5,228)  128,839 
Bad debt expense  (20,867)  279 
Net realized investment losses (gains)  12,661   (137)
Changes in assets and liabilities:        
Net receivables and accrued investment income  (800,414)  1,626,298 
Reinsurance recoverable  (2,064,442)  (378,171)
Deferred policy acquisition costs  (138,896)  445,267 
Other assets  300,049   (50,203)
Unpaid losses and loss adjustment expenses  (1,827,365)  989,062 
Unearned premiums  1,761,809   (1,944,306)
Advance premium and premium deposits  125,263   31,980 
Accrued expenses and other liabilities  (195,155)  (697,649)
Deferred income taxes  (229,260)  (494,745)
Net Cash Used by Operating Activities  (3,759,491)  (2,100,724)
         
Cash flows from investing activities:        
Purchase of fixed maturity investments  (6,743,752)  (10,735,449)
Proceeds from maturity of fixed maturity investments  3,702,676   8,741,441 
Proceeds from sale or call of fixed maturity investments  3,472,794   1,000,000 
Net decrease in short-term investments  4,490,954   1,647,778 
Additions to property and equipment  (487,737)  (84,790)
Net Cash Provided by Investing Activities  4,434,935   568,980 
         
Cash flows from financing activities:        
Repurchase of common stock  (2,121)  —   
Net Cash Used by Financing Activities  (2,121)  —   
         
Net increase (decrease) in cash and cash equivalents  673,323   (1,531,744)
Cash and cash equivalents at beginning of period  4,917,762   9,366,944 
Cash and Cash Equivalents at End of Period $5,591,085  $7,835,200 
         
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).

  

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBERJUNE 30, 20172019

 

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 ninesix months ended SeptemberJune 30, 2017,2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2019. Quarterly condensed financial statements should be read in conjunction with the consolidated financial statements and related notes in the Company’s 2018 Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission. Certain reclassifications have been made to prior period amounts to conform to the current quarter’squarter presentation.

 

Use of Estimates in the Preparation of the Financial Statements

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

 

Fair Value of Financial Instruments

The Company employs a fair value hierarchy that prioritizes the inputs for valuation techniques used to measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Financial assets and financial liabilities recorded on the Condensed Consolidated Balance Sheets at fair value are categorized based on the reliability of inputs for the valuation techniques. (Seetechniques (see Note 8.)7).

 

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

 

1.Investment securities, excluding long-term certificates of deposit – Fair values are obtained from a national quotation service.

2.Long-term certificates of deposit – The carrying amounts reported in the Condensed Consolidated Balance Sheets for these instruments approximate their fair values.

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

 

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Cash Equivalents

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

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

On December 19, 2008, the Board of Directors authorized a stock repurchase program to acquire from time to time up to an aggregate of 500,000 shares of the Company’s common stock. This program has no expiration date and may be terminated by the Board of Directors at any time. As of SeptemberJune 30, 2017,2019, and December 31, 2016,2018, the Company had remaining authority under the 2008 program to repurchase up to an aggregate of 188,655188,269 and 188,625 shares of its common stock.stock, respectively. The 2008 program is the only program under which there is authority to repurchase shares of the Company’s common stock. The Company did not repurchase any stock during the three or nine months ended September 30, 2017. The Company repurchased 8,812356 shares of stock during the ninethree and six months ended SeptemberJune 30, 2016,2019, in unsolicited transactions at a cost of $89,582$2,121 of which $4,331$175 was allocated to capital and $85,251$1,946 was allocated to retained earnings; theearnings. The Company did not repurchase any stock during the three and six months ended SeptemberJune 30, 2016.2018. The Company has retired and intends toor will retire all repurchased stock as applicable.repurchased.

 

NOTE 3 – LOSSEARNINGS (LOSS) PER SHARE

The following table represents the reconciliation of the Company's basic lossearnings (loss) per share and diluted lossearnings (loss) per share computations reported on the Condensed Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016:2018:

  Three Months Ended Nine Months Ended
  September 30 September 30
  2017 2016 2017 2016
Basic Loss Per Share        
Net loss $(2,927,249) $(1,953,497) $(5,949,007) $(2,001,454)
                 
Weighted average shares outstanding  5,307,133   5,307,133   5,307,133   5,307,881 
                 
Basic loss per share $(0.55) $(0.37) $(1.12) $(0.38)
                 
Diluted Loss Per Share                
Net loss $(2,927,249) $(1,953,497) $(5,949,007) $(2,001,454)
                 
Weighted average shares outstanding  5,307,133   5,307,133   5,307,133   5,307,881 
Effect of dilutive securities  —     —     —     —   
Diluted shares outstanding  5,307,133   5,307,133   5,307,133   5,307,881 
                 
Diluted loss per share $(0.55) $(0.37) $(1.12) $(0.38)
  Three Months Ended June 30    Six Months Ended June 30
  2019 2018 2019 2018
Basic Earnings (Loss) Per Share        
Net income (loss) $(276,677) $168,297  $(947,751) $(2,038,955)
                 
Weighted average shares outstanding  5,306,938   5,307,133   5,307,021   5,307,133 
                 
     Basic earnings (loss) per share $(0.05) $0.03  $(0.18) $(0.38)
                 
Diluted Earnings (Loss) Per Share                
Net income (loss) $(276,677) $168,297  $(947,751) $(2,038,955)
                 
Weighted average shares outstanding  5,306,938   5,307,133   5,307,021   5,307,133 
Diluted shares outstanding  5,306,938   5,307,133   5,307,021   5,307,133 
                 
     Diluted earnings (loss) per share $(0.05) $0.03  $(0.18) $(0.38)

 

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. As of September 30, 2017 and 2016, the Company had 0 and 222 common share equivalents that were excluded in the three months diluted loss per share calculation, respectively, and 0 and 530 common share equivalents that were excluded in the nine months diluted loss per share calculation, respectively.

 

NOTE 4 – RECENTLY ISSUED ACCOUNTING STANDARDS

Recently adopted standards

In May 2017,February 2016, the Financial Accounting Standards Board ("FASB")FASB issued Accounting Standards Update ("ASU") 2017-09, "Compensation - Stock Compensation (Topic 718), Scope of Modification Accounting." ASU 2017-09 provides guidance about which changes2016-02 “Leases.” ASU 2016-02 requires lessees to recognize on the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 will be effectivebalance sheet the assets and liabilities for the rights and obligations created by all leases, including those historically accounted for as operating leases. The Company beginningadopted ASU 2016-02 effective January 1, 2018, with early2019. The adoption permitted. The Company doesof ASU 2016-02 did not anticipate that ASU 2017-09 will have a material impact on its consolidated financial statementsto the Condensed Consolidated Statements of Operations and related disclosures.the Condensed Consolidated Balance Sheets.

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Standards not yet adopted

 

In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 replaces the current incurred loss methodology for recognizing credit losses with a current expected credit loss model, which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 also requires enhanced disclosures for better understanding of significant estimates and judgments used in estimating credit losses. The Company is currently evaluating the effect ASU 2016-13 will have on the Company's consolidated financial statements, but expects the primary changes to be (i) the use of the expected credit loss model for its premium receivables and reinsurance recoverables and (ii) the presentation of credit losses within the available-for-sale fixed maturities portfolio through an allowance method rather than as a direct write-down. ASU 2016-13 will become effective for fiscal years beginning after December 31, 2019, but provides for an early adoption for fiscal years beginning after December 31, 2018. The Company has not determined when it will adopt ASU 2016-13.

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In February 2016, the FASB issued ASU 2016-02 “Leases.” This ASU requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by all leases, including those historically accounted for as operating leases. The Company is currently evaluating the effect ASU 2016-02 will have on the Company's consolidated financial statements. The guidance is effective for interim and annual periods beginning after December 31, 2018, and will be applied under a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18 “Statement of Cash Flows: Restricted Cash.” This ASU requires that a statement of cash flows explains the change during the period of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. The Company early adopted this ASU as of December 31, 2016, and this ASU was applied using a retrospective approach for each period presented. Upon adoption of this ASU, the Company's consolidated statements of cash flows included restricted cash in the beginning-of-period and end-of-period total amounts for cash and restricted cash. This ASU did not have a material impact on the Company’s consolidated financial statements, but this ASU required additional disclosures in “Note 10 – Cash and Restricted Cash” to these condensed consolidated financial statements.

In May 2015, the FASB issued ASU 2015-09 “Disclosures About Short-Duration Contracts.” The objective of this ASU is to increase transparency about significant estimates in unpaid losses and loss adjustment expenses and provide additional information about the amount, timing and uncertainty of cash flows related to unpaid losses and loss adjustment expenses. ASU 2015-09 also requires entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for loss and loss expense reserves, including reasons for the change and the effects on the financial statements. ASU 2015-09 also requires entities to disclose a roll forward of the liability of loss and loss expense reserves for annual and interim reporting periods. The effective date of ASU 2015-09 was for annual reporting periods beginning after December 15, 2015, and interim reporting periods beginning after December 15, 2016. The Company adopted this ASU as of December 31, 2016. This ASU did not have a material impact on the Company’s consolidated financial statements, but this ASU required additional disclosures in “Note 11 – Unpaid Losses and Loss Adjustment Expenses” to these condensed consolidated financial statements.2019.

 

NOTE 5 – ACCOUNTING FOR INCOME TAXES

The Company and its wholly owned subsidiaries file consolidated federal and state income tax returns. Pursuant to a tax allocation agreement, the Company’s subsidiaries, Crusader Insurance Company (“Crusader”) and American Acceptance Corporation (“AAC”), are allocated taxes or tax credits in the case of losses, at current corporate rates based on their own taxable income or loss. The Company files income tax returns under U.S. federal and various state jurisdictions. The Company is subject to examination by U.S. federal income tax authorities for tax returns filed starting at taxable year 20132015 and California state income tax authorities for tax returns filed starting at taxable year 2012.2014. There are no ongoing examinations of income tax returns by federal or state tax authorities.

 

As of SeptemberJune 30, 2017,2019, and December 31, 2016,2018, the Company had no unrecognized tax benefits or liabilities. In addition, the Companyliabilities and, therefore, had not accrued interest and penalties related to unrecognized tax benefits or liabilities. However, if interest and penalties would need to be accrued related to unrecognized tax benefits or liabilities, such amounts would be recognized as a component of federal income tax expense.

 

As a California based insurance company, Crusader is obligated to pay a premium tax on gross premiums written in all states in whichthat 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.

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NOTE 6 – PROPERTY AND EQUIPMENT, NET

Property and equipment consist of the following:

 September 30 December 31 June 30 December 31
 2017 2016 2019 2018
        
Building and leasehold improvements located in Calabasas, California $8,352,180  $8,339,807  $8,398,275  $8,398,275 
Furniture, fixtures and equipment  2,707,211   2,673,670 
Furniture, fixtures, and equipment  2,081,157   2,063,549 
Computer software  344,544   169,177   363,016   363,016 
Accumulated depreciation and amortization  (3,073,857)  (2,687,607)  (3,321,610)  (3,051,505)
Computer software under development  601,634   131,505 
Land located in Calabasas, California  1,787,485   1,787,485   1,787,485   1,787,485 
Property and equipment, net $10,117,563  $10,282,532  $9,909,957  $9,692,325 

 

Depreciation on the Calabasas building, owned by Crusader, is computed using the straight line method over 39 years. Depreciation on furniture, fixtures, and equipment in the Calabasas building is computed using the straight line method over 3 to 15 years. Amortization of leasehold improvements in the Calabasas building is being computed using the shorter of the useful life of the leasehold improvements or the remaining years of the lease. Depreciation and amortization expense on all property and equipment for the three and ninesix months ended SeptemberJune 30, 2017,2019, was $121,540$135,078 and $386,250,$270,105, respectively, and for the three and ninesix months ended SeptemberJune 30, 2016,2018, was $121,577$141,516 and $361,490,$281,717, respectively.

 

For the three and ninesix months ended SeptemberJune 30, 2017,2019, the Calabasas building has generated rental revenue from non-affiliated tenants in the amount of $83,257$40,158 and $198,902,$82,388, respectively, and for the three and ninesix months ended SeptemberJune 30, 2016,2018, rental revenue from non-affiliated tenants in the amount of $55,099$89,211 and $171,133, respectively. This rental revenue$175,117, respectively, which is included in “Other income” from insurance company operation in the Company’s Condensed Consolidated Statements of Operations.

 

The

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For the three and six months ended June 30, 2019, the Calabasas building has incurred operating expenses (including depreciation) in the amount of $201,701$198,507 and $549,295$355,296, respectively, and $186,205 and $374,109 for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively, and $207,401 and $543,638 for the three and nine months ended September 30, 2016, respectively. These operating expenseswhich are included in “Other operating expenses” in the Company’s Condensed Consolidated Statements of Operations.

 

The total square footage of the Calabasas building is 46,884, including common areas. As of SeptemberJune 30, 2017, 14,4812019, 5,092 square feet of the Calabasas building was leased to non-affiliated entities. As of September 30, 2017, the Calabasas buildingentities and 9,389 square feet was fully occupied.vacant and available to be leased to non-affiliated entities.

 

The Company capitalizes certain computer software costs purchased from outside vendors for internal use.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. On January 1, 2017, the Company placed its new general ledger system into production. Accordingly, the capitalized costs associated with this system were moved from “Computer software under development” to “Computer software,” and the Company began depreciating these costs.

NOTE 7 – SEGMENT REPORTING

Accounting Standards Codification (“ASC”) Topic 280, “Segment Reporting,” establishes standards for the way information about operating segments is reported in financial statements. The Company has identified its insurance company operation as its primary reporting segment. Revenues from this segment comprised 92% of total revenues for each of the three and nine months ended September 30, 2017, and the three and nine months ended September 30, 2016. The Company’s remaining operations constitute a variety of specialty insurance services, each with unique characteristics and individually insignificant to total revenues.

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Revenues, loss before income taxes, and assets by segment are as follows:

  Three Months Ended Nine Months Ended
  September 30 September 30
  2017 2016 2017 2016
Revenues        
Insurance company operation $8,586,199  $8,281,572  $25,338,850  $24,130,282 
                 
Other insurance operations  3,346,184   3,367,469   10,311,036   10,108,721 
Intersegment eliminations (1)  (2,638,994)  (2,650,699)  (8,154,694)  (7,988,351)
Total other insurance operations  707,190   716,770   2,156,342   2,120,370 
                 
Total revenues $9,293,389  $8,998,342  $27,495,192  $26,250,652 
                 
Loss Before Income Taxes                
Insurance company operation $(3,917,854) $(2,414,571) $(7,328,672) $(1,856,083)
Other insurance operations  (517,371)  (552,151)  (1,724,725)  (1,172,071)
Total loss before income taxes $(4,435,225) $(2,966,722) $(9,053,397) $(3,028,154)

  September 30 December 31
  2017 2016
Assets        
Insurance company operation $127,140,004  $124,325,620 
Intersegment eliminations (2)  (4,514,427)  (1,579,820)
Total insurance company operation  122,625,577   122,745,800 
Other insurance operations  15,452,919   15,476,405 
Total assets $138,078,496  $138,222,205 

(1)Intersegment revenue eliminations reflect rents paid by Unico to Crusader for space leased in the Calabasas building and commissions paid by Crusader to Unifax Insurance Systems, Inc. (“Unifax”), a wholly owned subsidiary of Unico.
(2)Intersegment asset eliminations reflect the elimination of Crusader receivables from Unifax and Unifax payables to Crusader.

 

NOTE 87 – 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 level within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) or unobservable (Level 3). The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

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The following table presents information about the Company’s consolidated financial instruments and their estimated fair values, which are measured on a recurring basis, and are allocated among the three levels within the fair value hierarchy as of SeptemberJune 30, 2017,2019, and December 31, 2016:2018:

 

 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
September 30, 2017        
June 30, 2019        
Financial instruments:                                
Fixed maturity securities:                
Available-for-sale fixed maturities:                
U.S. treasury securities $9,519,063  $—    $—    $9,519,063  $15,198,840  $—    $—    $15,198,840 
Corporate securities  —     22,995,709   —     22,995,709   —     42,276,974   —     42,276,974 
Agency mortgage-backed securities  —     15,928,123   —     15,928,123 
Certificates of deposit  —     35,826,000   —     35,826,000 
Total fixed maturity securities  9,519,063   74,749,832   —     84,268,895 
Agency mortgage backed securities  —     23,794,898   —     23,794,898 
Short-term investments  12,080,638   999,877   —     13,080,515   200,000   —     —     200,000 
Total financial instruments at fair value $21,599,701  $75,749,709  $—    $97,349,410  $15,398,840  $66,071,872  $—    $81,470,712 
                

 

 

  Level 1 Level 2 Level 3 Total
December 31, 2016        
Financial instruments:                
Fixed maturity securities:                
U.S. treasury securities $19,103,925  $—    $—    $19,103,925 
Certificates of deposit  —     61,280,000   —     61,280,000 
Total fixed maturity securities  19,103,925   61,280,000   —     80,383,925 
Short-term investments  10,204,603   —     —     10,204,603 
Total financial instruments at fair value $29,308,528  $61,280,000  $—    $90,588,528 

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  Level 1 Level 2 Level 3 Total
December 31, 2018        
Financial instruments:                
Available-for-sale fixed maturities:                
U.S. treasury securities $16,619,619  $—    $—    $16,619,619 
Corporate securities  —     40,003,723   —     40,003,723 
Agency mortgage backed securities  —     20,286,795   —     20,286,795 
Short-term investments  4,690,954   —     —     4,690,954 
Total financial instruments at fair value $21,310,573  $60,290,518  $—    $81,601,091 

 

Fair value measurements are not adjusted for transaction costs. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer. The Company did not have any transfers between Levels 1, 2, and 3 of the fair value hierarchy during the three and ninesix months ended SeptemberJune 30, 20172019 and 2016.2018.

 

NOTE 98 – INVESTMENTS

A summary of investment income, net of investment expenses, and net realized gains and losses is as follows:

  Three Months Ended
September 30		 Nine Months Ended
September 30
  2017 2016 2017 2016
         
Fixed maturities $323,023  $196,327  $746,787  $554,992 
Short-term investments  (13,335)  38,243   64,444   104,119 
Gross investment income  309,688   234,570   811,231   659,111 
Less investment expenses  (196)  —     (25,446)  —   
Net investment income  309,492   234,570   785,785   659,111 
Net realized gains (losses)  373   —     528   (1,278)
Net investment income, realized gains and losses $309,865  $234,570  $786,313  $657,833 

  Three Months Ended June 30 Six Months Ended June 30
  2019 2018 2019 2018
         
Fixed maturities $550,841  $469,500  $1,094,536  $931,667 
Short-term investments and cash equivalents  9,906   11,642   36,467   19,588 
Gross investment income  560,747   481,142   1,131,003   951,255 
Less: investment expenses  (30,000)  (28,536)  (67,619)  (53,851)
Net investment income $530,747  $452,606  $1,063,384  $897,404 

 

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

 

 

Amortized

Cost

 

Gross

Unrealized

Gains

 

Gross

UnrealizedLosses

 

Estimated

Fair

Value

 

 

Amortized Cost

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

Estimated Fair Value

September 30, 2017        
Available for sale:                
Fixed maturities:                
Certificates of deposit $35,826,000  $—    $—    $35,826,000 
June 30, 2019        
Available-for-sale fixed maturities:                
U.S. treasury securities  9,528,210   248   (9,395)  9,519,063  $15,076,613  $132,352  $(10,125) $15,198,840 
Corporate securities  22,983,627   49,063   (36,981)  22,995,709   41,465,815   817,350   (6,191)  42,276,974 
Agency mortgage-backed securities  15,941,512   3,754   (17,143)  15,928,123   23,665,009   184,821   (54,932)  23,794,898 
Held-to-maturity fixed securities:                
Certificates of deposits  4,782,000   —   —     4,782,000 
Total fixed maturities $84,279,349  $53,065  $(63,519) $84,268,895  $84,989,437  $1,134,523  $(71,248) $86,052,712 

  

 

Amortized Cost

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

Estimated Fair Value

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

 

13 of 3231 

 

  

 

Amortized

Cost

 

Gross

Unrealized

Gains

 

Gross

UnrealizedLosses

 

Estimated

Fair

Value

December 31, 2016        
Available for sale:                
Fixed maturities:                
Certificates of deposit $61,280,000  $—    $—    $61,280,000 
U.S. treasury securities  19,091,842   14,205   (2,122)  19,103,925 
Total fixed maturities $80,371,842  $14,205  $(2,122) $80,383,925 

  

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

  September 30 December 31
  2017 2016
     
Gross unrealized gains of fixed maturities $53,065  $14,205 
Gross unrealized (losses) of fixed maturities  (63,519)  (2,122)
Net unrealized gains (losses) on investments  (10,454)  12,083 
Deferred federal tax (expense) benefit  3,554   (4,108)
Net unrealized gains (losses), net of deferred income taxes $(6,900) $7,975 
  June 30 December 31
  2019 2018
     
Gross unrealized gains on fixed maturities $1,134,523  $74,248 
Gross unrealized losses on fixed maturities  (71,248)  (1,466,699)
Net unrealized gains (losses) on fixed maturities  1,063,275   (1,392,451)
Deferred federal tax benefit (expense)  (223,288)  292,415 
Net unrealized gains (losses), net of deferred income taxes $839,987  $(1,100,036)

 

A summary of estimated fair value, and 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, 2019            
U.S. treasury securities $—    $—     —    $3,486,173  $(10,125)  3 
Corporate securities  —     —     —     3,513,044   (6,191)  5 
Agency mortgage-backed securities  —     —     —     13,031,946   (54,932)  11 
Total $—    $—     —    $20,031,163  $(71,248)  19 

 

  Less than 12 Months 12 Months or Longer
  

Estimated

Fair Value

 

Gross

Unrealized Losses

 

Estimated

Fair Value

 

Gross

Unrealized Losses

September 30, 2017:        
U.S. treasury securities $9,519,063  $(9,395) $—    $—   
Corporate securities  9,731,038   (36,981)  —     —   
Agency mortgage-backed securities  12,973,738   (17,143)  —     —   
Total $32,223,839  $(63,519) $—    $—   

 Less than 12 Months 12 Months or Longer Less than 12 Months 12 Months or Longer
 Estimated
Fair Value		 

Gross

Unrealized Losses

 Estimated
Fair Value		 

Gross

Unrealized Losses

 

Estimated Fair Value

 

Gross Unrealized Losses

 

Number of Securities

 

 

Estimated Fair Value

 

Gross Unrealized Losses

 

Number of Securities

December 31, 2016:        
December 31, 2018            
U.S. treasury securities $—    $—    $9,097,285  $(2,122) $1,760,491  $(20,181)  2  $8,496,069  $(123,101)  6 
Corporate securities  10,878,381   (272,515)  17   21,189,487   (578,609)  27 
Agency mortgage-backed securities  —     —     —     17,034,086   (472,293)  15 
Total $—    $—    $9,097,285  $(2,122) $12,638,872  $(292,696)  19  $46,719,642  $(1,174,003)  48 

 

The Company closely monitors its investments. If an unrealized loss is determined to be other-than-temporary, it is written off as a realized loss through the Condensed Consolidated Statements of Operations. The Company’s methodology of assessing other-than-temporary impairments is based on security-specific analysis, performed by the Company’s independent investment advisor, as of the balance sheet date and considers various factors including the length of time to maturity and the extent to which the fair value has been less than the cost, the financial condition and the near-term prospects of the issuer, and whether the debtor is current on its contractually obligated interest and principal payments. The unrealized losses as of SeptemberJune 30, 2017,2019, and December 31, 2016,2018, were determined to be temporary.

 

Although the Company does not intend to sell its fixed maturity investments prior to maturity, the Company may sell investment securities from time to time in response to cash flow requirements, economic, regulatory, and/or market conditions. Duringconditions or investment securities may be called by their issuers prior to the three months ended September 30, 2017, thesecurities’ maturity. The Company sold two fixedsecurities, with amortized cost of $2,498,104, prior to maturity investments and realized a net investment gain of $373 on the sales. During the nine months ended September 30, 2017, the Company sold four fixed maturity investments and realized a net investment gain of $528 on the sales. The Company sold three certificates of deposit during the nine months ended September 30, 2016, and realized an investment loss of $1,278 on the sales; the Company did not sell any securities during the three months ended SeptemberJune 30, 2016. Unrealized2019 and three securities, with amortized cost of $2,997,098, during the six months ended June 30, 2019. The Company had one call of an investment security during the three and six months ended June 30, 2019. The Company realized net investment losses of $4,512 and $12,661 on these sales and call for the three and six months ended June 30, 2019, respectively. The Company had two calls of investment securities during the three and six months ended June 30, 2018 and realized net investment gains of $137 for the three and six months ended June 30, 2018 on these calls. The unrealized gains or losses from fixed maturities are reported as “Accumulated other comprehensive income or loss,” which is a separate component of stockholders’ equity, net of any deferred tax effect.

 

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The Company’s investment in certificates of deposit included $35,426,000$4,382,000 and $60,780,000$6,726,000 of brokered certificates of deposit as of SeptemberJune 30, 2017,2019, and December 31, 2016,2018, respectively. Brokered certificates of deposit provide the safety and security of a certificate of deposit combined with the convenience gained by one-stop shopping for rates at various institutions. This allows the Company to spread its investments across multiple institutions so that all of its certificate of deposit investments are insured by the Federal Deposit Insurance Corporation (“FDIC”). Brokered certificates

14 of deposit are purchased through UnionBanc Investment Services, LLC, a registered broker-dealer, investment advisor, member of FINRA/SIPC, and a subsidiary of Union Bank, N.A. Brokered certificates of deposit are a direct obligation of the issuing depository institution, are bank products of the issuing depository institution, are held in the name of Union Bank as Custodian for the benefit of the Company, and are FDIC insured within permissible limits. All the Company’s brokered certificates of deposit are within the FDIC insured permissible limits.31 

 

The following securities from fourthree 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 businessinsurance in California and for admission to transact insurance business in the state of Nevada:Nevada.

 

 September 30 December 31 June 30 December 31
 2017 2016 2019 2018
        
Certificates of deposit $400,000  $500,000  $200,000  $200,000 
Short-term investments  200,000   100,000   200,000   200,000 
Total state held deposits $600,000  $600,000  $400,000  $400,000 

 

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

 

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

  September 30 December 31
  2017 2016
     
U.S. treasury money market fund $6,673,261  $8,542,292 
U.S. treasury bills  1,174,217   —   
Short-term bonds  999,877   —   
Certificates of deposit  200,000   1,098,000 
Commercial paper
  998,570   —   
Bank money market accounts  3,032,827   562,548 
Bank savings accounts  1,763   1,763 
Total short-term investments $13,080,515  $10,204,603 

NOTE 10 – CASH AND RESTRICTED CASH

The following table provides a reconciliation of cash and restricted cash reported within the Condensed Consolidated Balance Sheets to the amounts shown in the Condensed Consolidated Statements of Cash Flows:

  September 30 December 31
  2017 2016
     
Cash $230,376  $122,586 
Restricted cash  —     13,373,793 
Cash and restricted cash $230,376  $13,496,379 

The restricted cash was represented by two cash deposits placed by Crusaderwith the Los Angeles Superior Court in lieu of appeal bonds. In December 2015, a judgment was finalized on a Crusader policy liability claim. Crusader appealed the judgment. As a part of the appeal, Crusader deposited $7,924,178 in cash with the Los Angeles Superior Court on December 28, 2015, in lieu of an appeal bond. This cash deposit was required to appeal the judgment. In March 2016, an additional judgment for plaintiff’s attorney fees and costs on this Crusader policy liability claim was finalized. Crusader appealed this additional judgment. That additional appeal required an additional $5,449,615 cash deposit, which was made on March 21, 2016, in lieu of an appeal bond. In September 2017, the two judgments were settled between the parties thereto for a total of $7,000,000 which was paid from the two deposits, and the remaining funds on deposit with the Los Angeles Superior Court for the two appeals in the amount of $6,373,793 were returned to Crusader and were invested in fixed maturities and short-term investments.

15 of 32 

  June 30 December 31
  2019 2018
U.S. treasury bills $—    $4,490,954 
Certificate of deposit  200,000   200,000 
Total short-term investments $200,000  $4,690,954 

 

NOTE 119 – 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:

 

  Nine Months Ended
September 30
  2017 2016
     
Reserve for unpaid losses and loss adjustment expenses at January 1 – gross of reinsurance $47,055,787  $49,093,571 
Less reinsurance recoverable on unpaid losses and loss adjustment expenses  9,520,970   9,636,961 
Reserve for unpaid losses and loss adjustment expenses at January 1 – net of reinsurance  37,534,817   39,456,610 
         
Incurred losses and loss adjustment expenses:        
Provision for insured events of current year  18,046,953   17,119,210 
Development of insured events of prior years  6,304,798   863,141 
Total incurred losses and loss adjustment expenses  24,351,751   17,982,351 
         
Loss and loss adjustment expense payments:        
Attributable to insured events of the current year  4,375,729   4,783,251 
Attributable to insured events of prior years  16,335,178   12,487,969 
Total payments  20,710,907   17,271,220 
         
Reserve for unpaid losses and loss adjustment expenses at September 30 – net of reinsurance  41,175,661   40,167,741 
Reinsurance recoverable on unpaid losses and loss adjustment expenses  11,890,854   9,653,714 
Reserve for unpaid losses and loss adjustment expenses at September 30 – gross of reinsurance $53,066,515  $49,821,455 

  Six Months Ended June 30
  2019 2018
     
Reserve for unpaid losses and loss adjustment expenses at January 1 – gross of reinsurance $51,657,155  $49,076,991 
Less reinsurance recoverable on unpaid losses and loss adjustment expenses  9,531,602   8,393,550 
Reserve for unpaid losses and loss adjustment expenses at January 1 – net of reinsurance  42,125,553   40,683,441 
         
Incurred losses and loss adjustment expenses:        
Provision for insured events of current year  9,685,514   10,661,378 
Development of insured events of prior years  527,880   2,069,582 
Total incurred losses and loss adjustment expenses  10,213,394   12,730,960 
         
Loss and loss adjustment expense payments:        
Attributable to insured events of the current year  2,670,068   2,819,187 
Attributable to insured events of prior years  10,978,401   9,333,811 
Total payments  13,648,469   12,152,998 
         
Reserve for unpaid losses and loss adjustment expenses at June 30 – net of reinsurance  38,690,478   41,261,403 
Reinsurance recoverable on unpaid losses and loss adjustment expenses  11,139,312   8,804,650 
Reserve for unpaid losses and loss adjustment expenses at June 30 – gross of reinsurance $49,829,790  $50,066,053 

 

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

 

The $927,743 increase in the provision for insured events

15 of current year for the nine months ended September 30, 2017, compared to the provision for insured events of current year for the nine months ended September 30, 2016, was due primarily to an aberrational increase in the frequency and severity of accident year 2017 short-tail property claims during the three months ended March 31 2017.

The $5,441,657 increase in the development of insured events of prior years for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, was primarily due to higher than expected severity of long-tail assault and battery liability claims in accident years 2011, 2014, and 2016 associated with Crusader’s Food, Beverage and Entertainment program. The Company believes the increase in the severity for these claims as compared to prior periods is due to relatively recent social, legal, and economic changes. The development on the accident year 2011 was due primarily to $1,497,499 in additional losses and loss adjustment expenses incurred due to the September 2017 $7,000,000 settlement (see Note 12). The developments on the accident years 2014 and 2016 were due primarily to the unexpected increase in the severity of existing assault and battery claims. As a result of the foregoing losses and loss adjustment expenses and the observed trend of increasing severity of assault and battery claims, the Company decided to significantly curtail or entirely exclude coverage for risks of assault and battery covered through the Food, Beverage and Entertainment program.

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NOTE 1210 – 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 toresort to legal proceedings against vendors providing services to the Company or againstcustomers or their agentsto enforce collection of premiums, commissions, or fees. These routine items of litigation do not materially affect the Company and are handled on a routine basis by the Company through its counsel.

 

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

 

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

In December 2015, a judgment was finalized on a Crusader policy liability claim. Crusader appealed the judgment. As a part of the appeal, Crusader deposited $7,924,178 in cash in lieu of an appeal bond with the Los Angeles Superior Court on December 28, 2015. This cash deposit was required to appeal the judgment. In March 2016, an additional judgment for plaintiff’s attorney fees and costs on this Crusader policy liability claim was finalized. Crusader appealed this additional judgment. That additional appeal required an additional cash deposit in lieu of an appeal bond of $5,449,615. The additional cash deposit was made on March 21, 2016. In September 2017, the two judgments were settled between the parties thereto for a total of $7,000,000 which was paid from the two deposits, and the remaining funds on deposit with the Los Angeles Superior Court for the two appeals were returned to Crusader.

One of the Company’s agents, which the Company appointed in 2008 to assist in expanding its Transportation program, failed to pay the net premium and policy fees due to Unifax, the exclusive general agent for Crusader. The agent was initially late in paying its February 2009 production that was due to Unifax on April 15, 2009. In May 2009, as a result of the agent’s failure to timely pay its balance due to Unifax, the Company terminated its agency agreement and assumed ownership and control of that agent’s policy expirations written with the Company. The Company subsequently commenced legal proceedings against the agent corporation, its three principals (who personally guaranteed the agent’s obligations) and another individual for the recovery of the balance due and any related recovery costs incurred. All related recovery costs have been expensed as incurred. The agent corporation and two of its principals filed bankruptcy. The corporation was adjudicated bankrupt. The Company obtained judgments, non-dischargeable in bankruptcy, for the full amount due from the two principals who filed bankruptcy. The other principal stipulated to a judgment of $1,200,000. The claim against the fourth individual was resolved. The Company collected $0 during the three and nine months ended September 30, 2017 and 2016. As of September 30, 2017, and December 31, 2016, the agent’s balance due to Unifax was $1,181,272. As of September 30, 2017, and December 31, 2016, the Company’s bad debt reserve associated with this matter was $1,181,272 which represents 100% of the balance due to Unifax. Although the receivable is fully reserved for financial reporting purposes at September 30, 2017, the Company continues to pursue collection of the judgments from the three principals. 

NOTE 13 – SUBSEQUENT EVENTS

In October 2017, a number of wildfires burned through several Northern California counties. The Company has received three claims related to these fires and began adjusting them. As of the date of this report, the Company believes these three claims will not materially and adversely impact theCompany's consolidated financial statements. Due to the recent nature and scale of these events, however, it is difficult to estimate ultimate losses related to the wildfires and their potential impact on the Company’sconsolidated financial statements and related disclosures.

On October 24, 2017, Crusader issued a cash dividend of $3,000,000 to Unico, its parent and sole shareholder. This dividend was used primarily for general corporate purposes. Based on Crusader’s statutory surplus for the year ended December 31, 2016, the maximum dividend that could be made by Crusader to Unico without prior regulatory approval in 2017 is $5,912,044.

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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 thatcompany. Currently, the Company’s subsidiary Crusader Insurance Company (“Crusader”) underwrites commercial property and casualty insurance, through its insurance company subsidiary; providesthe 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, through its agency subsidiaries;the Company’s subsidiary American Acceptance Company (“AAC”) provides insurance premium financing;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 SeptemberJune 30, 2017,2019, were $9,293,389$7,795,098 compared to $8,998,342$8,643,452 for the three months ended SeptemberJune 30, 2016, an increase2018, a decrease of $295,047 (3%$848,354 (10%). Total revenues for the ninesix months ended SeptemberJune 30, 2017,2019, were $27,495,192$14,930,572 compared to $26,250,652$17,450,341 for the ninesix months ended SeptemberJune 30, 2016, an increase2018, a decrease of $1,244,540 (5%$2,519,769 (14%). The Company had a net loss of $2,927,249$276,677 for the three months ended SeptemberJune 30, 2017,2019, compared to a net lossincome of $1,953,497$168,297 for the three months ended SeptemberJune 30, 2016, an increase of $973,752 (50%).2018. The Company had a net loss of $5,949,007$947,751 for the ninesix months ended SeptemberJune 30, 2017,2019, compared to a net loss of $2,001,454$2,038,955 for the ninesix months ended SeptemberJune 30, 2016, an increase of $3,947,553 (197%).

In December 2015, a judgment was finalized on a Crusader Insurance Company (“Crusader”, a wholly owned subsidiary of the Company) policy liability claim. In March 2016, an additional judgment for plaintiff’s attorney fees and costs on this Crusader policy liability claim was finalized. In September 2017, the two judgments were settled between the parties thereto for a total of $7,000,000.As a result of this settlement, the Company incurred $1,422,499 and $1,497,499 in additional losses and loss adjustment expenses during the three and nine months ended September 30, 2017, respectively.2018.

 

This overview discusses some of the relevant material factors that management considers in evaluating the Company's performance, prospects, and risks. This discussion shouldIt is not all inclusive and is meant to be read in conjunction with the Company’s Annual Report on Form 10-K forentirety of the year ended December 31, 2016, including management’smanagement discussion and analysis, of financial condition and results of operations and the Company's consolidated financial statements and notes thereto, and all other items contained within the Company’s 2018 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

The Company’s financial performance has suffered in recent years, and the Company has reported net losses for each fiscal year beginning with the year ended December 31, 2015. While losses in recent years have been driven primarily by losses from Crusader’s policies and its high loss ratios, management believes that other contributing factors include (1) flat or declining revenues due to intense competition, (2) the somewhat-fixed nature of many of the Company’s expenses relative to flat or declining revenues, (3) the failure to have replaced or upgraded the Company’s legacy IT system in order to process Crusader’s smaller premium accounts more efficiently, and (4) the failure to have shifted focus to larger premium accounts and fee-for-service operations.

16 of 31 

In 2018, the Company determined that the cost to replace its legacy IT system would be between $4 million and $8 million, and the installation of such a system would take between two to four years. 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, an upgrade that then seemed to offer more incremental benefits in a shorter timeframe. While initially expected to be completed by the end of 2019, the system upgrade is now expected to be completed by the end of the first half of 2020, due to unexpected technical challenges. While working to bring Crusader’s loss ratios back into line with historical expectations, and to improve its sales in the markets that it historically serves, the Company’s other subsidiaries are working to generate new sources of revenue on a fee-for-service basis. For example, the Unifax operations are preparing to transact admitted and non-admitted business with non-affiliated insurers; and the Company re-activated its US Risk Managers, Inc. subsidiary so it can provide claims adjustment services to non-affiliated insurers and self-insurers. The Company cannot predict the outcome of such endeavors but believes them to have a reasonable likelihood of long-term success.

 

Revenue and Income Generation

The Company receives its revenues primarily from earned premium derived from the insurance company operation,operations, commission and fee income generated from the insurance agency operation,operations, finance charges and fee income from the premium finance operation,operations, and investment income from cashfunds generated primarily from the insurance company operation. The insurance company operation generated approximately 92% and 93% of totalconsolidated revenues for each of the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, compared to 93% and 92% of consolidated revenues for the three and ninesix months ended SeptemberJune 30, 2016. The2018, respectively. None of the Company’s remainingother operations constitute a variety of specialty insurance services, each with unique characteristics andis individually not material to totalconsolidated revenues.

 

Insurance Company Operation

As of SeptemberJune 30, 2017,2019, Crusader was licensed as an admitted insurance carrier in the states of Arizona, California, Nevada, Oregon, and Washington. From 2004 until September 2014, all of Crusader’s business was written in the state of California. Crusader began writingCrusader’s business remains concentrated in California (99.8% of direct written premium (before reinsurance ceded) during the statesthree and six months ended June 30, 2019 and 99.6% of Arizonadirect written premium (before reinsurance ceded) during the three and Washington in September 2014 and May 2017, respectively.

In October 2016, A.M. Best Company reaffirmed Crusader’s financial strength rating of A- (Excellent) and a rating outlook of “stable.” In addition, in October 2016, A.M. Best Company assigned Crusader an Issuer Credit Rating of a- (Excellent)six months ended June 30, 2018).

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 intensely competitive but relatively stable.

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

  Three Months Ended June 30 Six Months Ended June 30
  2019 2018 Change 2019 2018 Change
             
California $9,437,584  $7,753,668  $1,683,916  $17,953,139  $16,380,339  $1,572,800 
Arizona  16,818   26,087   (9,269)  31,593   55,559   (23,966)
Washington  —     6,444   (6,444)  (1,149)  6,444   (7,593)
Total direct written premium $9,454,402  $7,786,199  $1,668,203  $17,983,583  $16,442,342  $1,541,241 

 

  

Three Months Ended

September 30

 Nine Months Ended
September 30
  2017 2016 (Decrease) 2017 2016 

Increase

(Decrease)

             
California $9,428,307  $9,639,380  $(211,073) $29,273,828  $28,972,217  $301,611 
Arizona  17,898   27,666   (9,768)  107,716   148,195   (40,479)
Washington  —     —     —     6,444   —     6,444 
Total direct written premium $9,446,205  $9,667,046  $(220,841) $29,387,988  $29,120,412  $267,576 

Crusader believes that it can grow its sales and profitability through improved specialization and sales incentives. Crusader currently focuses in four underwriting verticals: (1) Transportation, (2) Food, Beverage & Entertainment, (3) Garage & Mercantile, and (4) Apartments & Commercial Buildings. Crusader also is evaluating the possibility of expanding its operations geographically, on an admitted or non-admitted basis, so as to offer similar products in other states, but the timing of any such expansion is not yet determined.

 

Written premium is a non-GAAP financial measure that is defined, under the statutory accounting practices prescribed or permitted by the California Department of Insurance, as the contractually determined amount charged by the insurance company to the policyholder for the effective period of the contract based on the expectation of risk, policy benefits, and expenses associated with the coverage provided by the terms of the policies. Written premium is a required statutory measure. Written premium is defined under GAAP in Accounting Standards Codification Topic 405, “Liabilities,” as “premiums on all policies an entity has issued in a period.” Earned premium, 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 conjunction with the GAAP financial results.

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

 

Three Months Ended

September 30

 

Nine Months Ended

September 30

 Three Months Ended June 30 Six Months Ended June 30
 2017 2016 2017 2016 2019 2018 2019 2018
                
Direct written premium $9,454,402  $7,786,199  $17,983,583  $16,442,342 
Less: written premium ceded to reinsurers  (1,732,839)  (1,690,611)  (3,416,529)  (3,442,442)
Net written premium $7,754,793  $8,120,565  $24,380,186  $24,580,923   7,721,563   6,095,588   14,567,054   12,999,900 
Change in direct unearned premium  404,454   (137,144)  (97,396)  (1,322,897)  (1,200,032)  1,230,382   (1,761,809)  1,944,306 
Change in ceded unearned premium  9,005   (2,491)  26,311   13,270   (3,419)  36,975   (22,983)  100,366 
Net earned premium $8,168,252  $7,980,930  $24,309,101  $23,271,296  $6,518,112  $7,362,945  $12,782,262  $15,044,572 

 

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

 

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

 Three Months Ended
September 30		 Nine Months Ended
September 30		 Three Months Ended June 30 Six Months Ended June 30
 2017 2016 Increase
(Decrease)		 2017 2016 Increase
(Decrease)		 2019 2018 Change 2019 2018 Change
                        
Net written premium $7,754,793  $8,120,565  $(365,772) $24,380,186  $24,580,923  $(200,737) $7,721,563  $6,095,588  $1,625,975  $14,567,054  $12,999,900  $1,567,154 
Change in net unearned premium  413,459   (139,635)  553,094   (71,085)  (1,309,627)  1,238,542   (1,203,451)  1,267,357   (2,470,808)  (1,784,792)  2,044,672   (3,829,464)
Net earned premium  8,168,252   7,980,930   187,322   24,309,101   23,271,296   1,037,805   6,518,112   7,362,945   (844,833)  12,782,262   15,044,572   (2,262,310)
Less:                                                
Losses and loss adjustment expenses  9,917,896   8,038,100   1,879,796   24,351,751   17,982,351   6,369,400   5,058,951   4,929,203   129,748   10,213,394   12,730,960   (2,517,566)
Policy acquisition costs  1,854,212   1,741,499   112,713   4,943,350   5,142,250   (198,900)  1,289,481   1,515,476   (225,995)  2,376,194   3,136,981   (760,787)
Total underwriting expenses  11,772,108   9,779,599   1,992,509   29,295,101   23,124,601   6,170,500   6,348,432   6,444,679   (96,247)  12,589,588   15,867,941   (3,278,353)
Underwriting profit (loss) (before income taxes) $(3,603,856) $(1,798,669) $(1,805,187) $(4,986,000) $146,695  $(5,132,695)
Underwriting gain (loss) before income taxes $169,680  $918,266  $(748,586) $192,674  $(823,369) $1,016,043 

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 gain or loss before income taxes is useful supplemental information that helps align the reader’s understanding with management’s view of insurance company operations profitability. Each of these captions is presented in the Condensed Consolidated Statements of Operations but is not subtotaled.

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

  Three Months Ended June 30 Six Months Ended June 30
  2019 2018 2019 2018
         
Underwriting gain (loss) before income taxes $169,680  $918,266  $192,674  $(823,369)
Insurance company operation revenues:                
Investment income  530,745   452,508   1,063,375   897,209 
Net realized investment gains (losses)  (4,512)  137   (12,661)  137 
Other income (loss)  168,828   112,199   (91,872)  167,889 
Other insurance operations revenues:                
Gross commissions and fees  527,825   671,449   1,075,270   1,278,106 
Investment income  2   98   9   195 
Finance charges and fees earned  53,998   34,380   103,371   52,476 
Other income  100   9,736   10,818   9,757 
Less expenses:                
Salaries and employee benefits  1,012,805   1,126,503   2,040,654   2,414,580 
Commissions to agents/brokers  41,077   40,541   91,198   81,880 
Other operating expenses  735,454   744,697   1,363,534   1,610,840 
Income (loss) before taxes $(342,670) $287,032  $(1,154,402) $(2,524,900)

 

Crusader18 of 31 

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 Crusader’sthe Company’s programs become unprofitable, a premium deficiency reserve may be required. During the three months ended September 30, 2017, Crusader established a $150,000 premium deficiency reserve; CrusaderThe Company did not carry sucha premium deficiency reserve prior to the three months ended Septemberas of June 30, 2017.2019 and 2018.

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

  Three Months Ended
September 30		 Nine Months Ended
September 30
  2017 2016 Increase
(Decrease)		 2017 2016 Increase
Losses and loss adjustment expenses:                        
Provision for insured events of current year $5,982,245  $6,792,115  $(809,870) $18,046,953  $17,119,210  $927,743 
Development of insured events of prior years  3,935,651   1,245,985   2,689,666   6,304,798   863,141   5,441,657 
Total losses and loss adjustment expenses $9,917,896  $8,038,100  $1,879,796  $24,351,751  $17,982,351  $6,369,400 

  Three Months Ended June 30 Six Months Ended June 30
  2019 2018 Change 2019 2018 Change
Losses and loss adjustment expenses:                        
Provision for insured events of current year $5,134,626  $4,652,240  $482,386  $9,685,514  $10,661,378  $(975,864)
Development of insured events of prior years  (75,675)  276,963   (352,638)  527,880   2,069,582   (1,541,702)
Total losses and loss adjustment expenses $5,058,951  $4,929,203  $129,748  $10,213,394  $12,730,960  $(2,517,566)

 

Losses and loss adjustment expenses were 121%78% and 100%80% of net earned premium for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, compared to 101%67% and 77%85% of net earned premium for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively. For further analysis, refer to “Results of Operations.”

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

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

 

Revenues from Other Insurance Operations

The Company’s revenues from other insurance operations consist of commissions, fees, investment and other income. Excluding investment and other income, these operations accounted for approximately 7% and 8% of total revenues in each of the three and ninesix months ended SeptemberJune 30, 2017, and2019, respectively, compared to approximately 8% of total revenues in the three and ninesix months ended SeptemberJune 30, 2016.2018.

 

Investments and Liquidity

The Company generated revenues from its total invested assets of $97,359,864$85,189,437 (at amortized cost) and $90,782,232$87,316,426 (at amortized cost) as of SeptemberJune 30, 20172019 and 2016, respectively, and from two cash deposits placed with the Los Angeles Superior Court by Crusader in lieu of appeal bonds. These two deposits, totaling $13,373,793, were made on December 28, 2015, for $7,924,178, and on March 21, 2016, for $5,449,615, and their respective balances were included in “Cash and restricted cash” on the Condensed Consolidated Balance Sheets and were not a part of the total invested assets as of December 31, 2016. In September 2017, two judgments associated with the two deposits in lieu of appeal bonds were settled for a total of $7,000,000 which was paid from the two deposits, and the remaining funds on deposit with the Los Angeles Superior Court were returned to Crusader.2018, respectively.

 

Net investment income (net of investment expenses) included in insurance company operation and other insurance operations revenue increased $74,922 (32%$78,141 (17%) and $126,674 (19%$165,980 (18%) to $309,492$530,747 and $785,785$1,063,384 for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, compared to $234,570$452,606 and $659,111$897,404 for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively. TheThis increase in net investment income was due primarily a result of anto increase in the Company’s annualized yield on average invested assets to 1.2% and 1.1% for the three and nine months ended September 30, 2017, respectively, from 1.0% and 0.9% for the three and nine months ended September 30, 2016, respectively (as defined in “Results of Operations”).assets.

 

The increase in the annualized yield on average invested assets is primarily a result

19 of a decrease in lower yielding short-term investments and an increase in higher yielding fixed maturity investments as a result of investment into new classes of fixed maturity securities. 31 

Due to the current interest rate environment, athe current target effective duration for the Company’s investment portfolio is between 3.25 and 4.75 years. As of SeptemberJune 30, 2017,2019, all of the Company’s investments are in U.S. treasury securities, corporate fixed maturity securities, agency mortgage-backed securities, Federal Deposit Insurance Corporation (“FDIC”) insured certificates of deposit, money market funds, and a savings account. The Company’s investments in U.SU.S. treasury securities, corporate fixed maturity securities, agency mortgage-backed securities, and money market funds are readily marketable. As of SeptemberJune 30, 2017,2019, the weighted average maturity of the Company’s investments was approximately 2.77.3 years, and the effective duration for available-for-sale investments (investments managed under the investment guidelines) was 3.14 years.

 

Liquidity and Capital ResourcesLIQUIDITY AND CAPITAL RESOURCES

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, restricted cash, and its capital and surplus. Crusader's loss and loss adjustment expense payments are the most significant cash flow requirement of the Company. These payments are continually monitored and projected to ensure that the Company has the liquidity to cover these payments without the need to liquidate its investments. Cash, restricted cash equivalents, and investments (at amortized cost) of the Company at SeptemberJune 30, 2017,2019, were $97,590,240$90,780,522 compared to $104,072,824$95,037,304 at December 31, 2016.2018. Crusader's cash, restricted cash equivalents, and investments were 94%99% and 98% of the total cash and investments (at amortized cost) held by the Company as of SeptemberJune 30, 2017,2019, and December 31, 2016.2018, respectively.

 

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June 30, 2019, all of the Company’s investments are in U.S. treasury securities, FDIC insured certificates of deposit, other fixed maturity securities, and short-term investments. All of the Company’s investments, except for the certificates of deposit, are readily marketable. The Company’s investments, at amortized cost, were as follows:

 

 June 30 December 31
 September 30 December 31 2019 2018
 2017 2016    
Fixed maturities:                
Certificates of deposit $35,826,000  $61,280,000  $4,782,000  $7,126,000 
U.S. treasury securities  9,528,210   19,091,842   15,076,613   16,746,832 
Corporate securities  22,983,627   —     41,465,815   40,804,425 
Agency mortgage-backed securities  15,941,512   —     23,665,009   20,751,331 
Total fixed maturities  84,279,349   80,371,842   84,989,437   85,428,588 
Short-term investments  13,080,515   10,204,603   200,000   4,690,954 
Total investments $97,359,864  $90,576,445  $85,189,437  $90,119,542 

 

The increase in total investments from December 31, 2016, to September 30, 2017, is due to receipt of funds previously held on deposit with the Los Angeles Superior Court.

 

The short-term investments include U.S. treasury bills a U.S. treasury money market fund, short-term bonds,and certificates of deposit bank money market accounts, and a bank savings account that are all highly rated and redeemable within one year.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 investmentsecurities into one of three categories: held-to-maturity, available-for-sale, or trading securities.Although allpart of the Company's investmentinvestments in fixed maturity securities areis classified as available-for-sale and, whilethe 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.

 

For a period beginning prior to fiscal 2015 and ending on March 24, 2017, the Company’s investment guidelines on equity securities limited investments in equity securities to an aggregate maximum of $2,000,000. The Company’s investment guidelines on fixed maturities limited those investments to high-grade obligations with a maximum term of eight years. The maximum investment authorized in any one issuer was $2,000,000. This dollar limitation excluded bond premiums paid in excess of par value and U.S. government or U.S. government guaranteed issues. When the Company invested in fixed maturity municipal securities, preference was given to issues that are pre-refunded and secured by U.S. treasury securities. The short-term investments were either U.S. government obligations, FDIC insured, or are in an institution with a Moody's rating of at least P2 and/or a Standard & Poor's rating of A1. All of the Company's fixed maturity investment securities were rated, readily marketable, and could be liquidated without any materially adverse financial impact.

On March 24, 2017, the Company’s Board of Directors approved new investment guidelines. Those guidelines which are similar to what the Company believes are general investment guidelines used by Crusader’s peers.

 

Under the newCompany’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 new investment guidelines provide for certain investment limitations in each investment category.

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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.

 

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Historically, the Company managed Crusader’s investments in-house. Effective April 1, 2017, an outsideAn independent investment advisor began managingmanages Crusader’s investments.  The advisor’s role currently is limited to maintaining Crusader’s portfolio within the new investment guidelines and providing investment accounting services to the Company.  The investments will continue to be held by Crusader’s current custodian, Union Bank Global Custody Services.

 

On December 19, 2008, the Board of Directors authorized a stock repurchase program to acquire from time to time up to an aggregate of 500,000 shares of the Company’s common stock. This program has no expiration date and may be terminated by the Board of Directors at any time. As of SeptemberJune 30, 2017,2019, and December 31, 2016,2018, the Company had remaining authority under the 2008 program to repurchase up to an aggregate of 188,655188,269 and 188,625 shares of its common stock.stock, respectively. The 2008 program is the only program under which there is authority to repurchase shares of the Company’s common stock. The Company did not repurchase any stock during the three or nine months ended September 30, 2017. The Company repurchased 8,812356 shares of stock during the ninethree and six months ended SeptemberJune 30, 2016,2019, in unsolicited transactions at a cost of $89,582$2,121 of which $4,331$175 was allocated to capital and $85,251$1,946 was allocated to retained earnings; theearnings. The Company did not repurchase any stock during the three and six months ended SeptemberJune 30, 2016.2018. The Company has retired and intends toor will retire all repurchased stock as applicable.repurchased.

 

The Company reported $6,794,954$3,759,491 net cash used by operating activities for the ninesix months ended SeptemberJune 30, 2017,2019, compared to $117,638$2,100,724 net cash used by operating activities for the ninesix months ended SeptemberJune 30, 2016. The change in cash flows from operating activities is primarily attributable to the increase in loss and loss adjustment expense payments.  Other fluctuations2018. Fluctuations in cash flows from operating activities relate to changes in loss and loss adjustment expense payments, unearned premium holdings, and the timing of the collection and the payment of insurance-related receivables and payables. The variability of the Company’s losses and loss adjustment expenses is primarily due to its small population of claims which may result in greater fluctuations in claim frequency and/or severity. Although the Condensed Consolidated Statements of Cash Flows reflect net cash used by operating activities, the Company does not anticipate future liquidity problems, and the Company believes that it continues to be well capitalized and adequately reserved. 

 

While material capital expenditures may be funded through borrowings, the Company believes that its cash, cash equivalents, and short-term investments at SeptemberJune 30, 2017,2019,net ofstatutory deposits of $600,000,$710,000, and California insurance company statutory dividend restrictions applicable to Crusader, plus the cash to be generated from operations, should be sufficient to meet its operating requirements during the next 12 months without the necessity of borrowing funds. Trust restrictions on cash and short-term investments were $1,050,321 at September 30, 2017.

 

Results of OperationsRESULTS OF OPERATIONS

All comparisons made in this discussion are comparing the three and ninesix months ended SeptemberJune 30, 2017,2019, to the three and ninesix months ended SeptemberJune 30, 2016,2018, unless otherwise indicated.

 

For the three and ninesix months ended SeptemberJune 30, 2017,2019, total revenues were $9,293,389 and $27,495,192, respectively, an increase$7,795,098, a decrease of $295,047 (3%$848,354 (10%) and $1,244,540 (5%$14,930,572, a decrease of $2,519,769 (11%), compared to total revenues of $8,998,342$8,643,452 and $26,250,652$17,450,341 for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively. For the three and ninesix months ended SeptemberJune 30, 2017,2019, the Company had a loss before taxes of $4,435,225$342,670 and $9,053,397,$1,154,402, respectively, an increasecompared to income before taxes of $1,468,503 (49%)$287,032 and $6,025,243 (199%), compared to loss before taxes of $2,966,722 and $3,028,154$2,524,900 for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively. For the three and ninesix months ended SeptemberJune 30, 2017,2019, the Company had a net loss of $2,927,249$276,677 and $5,949,007,$947,751, respectively, an increase of $973,752 (50%) and $3,947,553 (197%), compared to net income of $168,297 and net loss of $1,953,497 and $2,001,454$2,038,955 for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively.

 

The increasedecrease in revenues of $295,047 (3%)$848,354 for the three months ended SeptemberJune 30, 2017,2019, when compared to the three months ended SeptemberJune 30, 2016,2018, was primarily due primarily to an increasea decrease in net earned premium of $187,322 (2%$844,833 (11%). The increasedecrease in revenues of $1,244,540 (5%)$2,519,769 for the ninesix months ended SeptemberJune 30, 2017,2019, when compared to the ninesix months ended SeptemberJune 30, 2016,2018, was primarily due primarily to an increasea decrease in net earned premium of $1,037,805 (4%$2,262,310 (15%).

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The increase in loss before tax of $1,468,503 (49%)$629,702 for the three months ended SeptemberJune 30, 2017,2019, compared to the three months ended SeptemberJune 30, 2016,2018, was due primarily to the increasea decrease in net earned premium of $844,833 (11%) partially offset by a decrease in policy acquisition costs of $225,995 (15%). The decrease in loss before tax of $1,370,498 for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, was primarily due to a decrease in losses and loss adjustment expenses of $1,879,796 (23%$2,517,566 (20%) partially offset by the increase in net earned premium of $187,322 (2%) and the, a decrease in other operating expensespolicy acquisition costs of $130,933 (16%). The increase in loss before tax of $6,025,243 (199%) for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, was due primarily to the increase in loss and loss adjustment expenses of $6,369,400 (35%$760,787 (24%), the increasea decrease in salaries and employee benefits of $554,495 (14%$373,926 (15%), and the increase in other operating expenses of $539,547 (26%) partially offset by the increasea decrease in net earned premium of $1,037,805 (4%$2,262,310 (15%).

 

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Written premium

Written premium is a required statutory measure. Direct written premium (written premium before reinsurance) reported on Crusader’s statutory financial statements decreased $220,841 (2%increased $1,668,203 (21%) and $267,576 (1%$1,541,241 (9%) to $9,446,205$9,454,402 and $29,387,988$17,983,583 for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, compared to $9,667,046$7,786,199 and $29,120,412$16,442,342 for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively.

 

The property casualty insurance marketplace continues to be intensely competitive. While Crusader attempts to meet such competition with competitive prices, its emphasis is on service, innovation, promotion, and distribution. Crusader believes that rate adequacy is more important than premium growth and that underwriting profit (net earned premium less losses and loss adjustment expenses and policy acquisition costs) is its primary goal. As a result, in November 2016, Crusader filed for rate increases on several programs with the California Department of Insurance; those increases were approved on May 15, 2017, and implemented during the three months ended June 30, 2017. The purpose of the rate increases is to generate higher net earned premium to offset increases in losses and loss adjustment expenses.

Crusader believes that it can grow its sales and profitability by continuing to focus upon five areas of its operations:through improved specialization and sales incentives, currently focused in four underwriting verticals: (1) product development,Transportation, (2) improved service to retail brokers,Food, Beverage & Entertainment, (3) appointment of captiveGarage & Mercantile, and independent retail agents, (4) geographical expansion, and (5) use of alternative marketing channels. While the Company’s policy administration system continues to support the Company’s existing operations, the Company believes it would realize more competitive parity with respect to product and service by switching or upgrading to a web-based platform.Apartments & Commercial Buildings. The Company is currently evaluating its alternatives.

Earnedincreases in direct written premium(before reinsurance) increased $320,748 (3%) to $9,850,659 and $1,493,078 (5%) to $29,290,593 for the three and ninesix months ended SeptemberJune 30, 2017, respectively, compared2019, are due to $9,529,911growth in Crusader’s Transportation underwriting vertical partially offset by declines in the other three underwriting verticals.

Direct earned premium

Direct earned premium (earned premium before reinsurance) decreased $762,211 (8%) to $8,254,370 and $27,797,515$2,164,874 (12%) to $16,221,774 for the three and ninesix months ended SeptemberJune 30, 2016,2019, respectively, compared to $9,016,581 and $18,386,648, for the three and six months ended June 30, 2018, respectively. The Company writes annual policies. Earned premium represents a portion of written premium that is recognized as income in the financial statements for the period presented and earned daily on a pro-rata basis over the terms of the policies, and, therefore, earnspremiums earned in the current year are related to policies written during both the current year and immediately preceding year. The decrease in direct earned premium for the three and six months ended June 30, 2019, was due primarily to a decrease in direct written premium ratably over the one-year policy term.in 2018.

 

Ceded earned premium

Ceded earned premium (premium ceded to reinsurers under reinsurance treaties) increased $133,434 (9%$82,622 (5%) to $1,682,407$1,736,258 and $455,273 (10%$97,436 (3%) to $4,981,492$3,439,512 for the three and ninesix months ended SeptemberJune 30, 2017, respectively,2019, compared to $1,548,981$1,653,636 and $4,526,219$3,342,076 for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively. Ceded earned premium as a percentage of direct earned premium was 17%21% for the three and ninesix months ended SeptemberJune 30, 2017,2019 and 16%18% for the three and ninesix months ended SeptemberJune 30, 2016.2018. The increase in the ceded earned premium as a percentage of direct earned premium for the three and six months ended June 30, 2019, compared to the three and six months ended June 30, 2018, was due primarily to higher rates on Crusader’s excess of loss reinsurance treaties.

 

Reinsurance treaties are generally structured in layers, with different negotiated economic terms and retention of participation, or liability, in each layer. In calendar years 2017year 2019, Crusader will retain a participation in its excess of loss reinsurance treaties of 0% in its 1st layer (reinsured losses between $500,000 and 2016,$1,000,000), 0% in its 2nd layer (reinsured losses between $1,000,000 and $4,000,000), and 0% in its property and casualty clash treaty. In calendar year 2018, Crusader retained a participation in its excess of loss reinsurance treaties of 5% and 10%, respectively, in its 1st layer ($500,000 in excess of $500,000)(reinsured losses between $500,000 and $1,000,000), 0% in its 2nd layer ($2,000,000 in excess of $1,000,000)(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 20172019 and 2016,2018, Crusader retained a participation in its catastrophe excess of loss reinsurance treaties of 5% in its 1st layer ($9,000,000 in excess of $1,000,000)(reinsured losses between $1,000,000 and $10,000,000) and 0% in its 2nd layer ($36,000,000 in excess(reinsured losses between $10,000,000 and $46,000,000).

22 of $10,000,000).31 

 

The Company evaluates each of its ceded reinsurance contracts at its inception to determine if there is a sufficient risk transfer to allow the contract to be accounted for as reinsurance under GAAP.current accounting literature. As of SeptemberJune 30, 2017,2019, all such ceded contracts are accounted for as risk transfer reinsurance.

 

Crusader’s direct, ceded and net earned premium are as follows:

  Three Months Ended
September 30		 Nine Months Ended
September 30
  2017 2016 Increase 2017 2016 Increase
             
Direct earned premium $9,850,659  $9,529,911  $320,748  $29,290,593  $27,797,515  $1,493,078 
Ceded earned premium  1,682,407   1,548,981   133,426   4,981,492   4,526,219   455,273 
Net earned premium $8,168,252  $7,980,930  $187,322  $24,309,101  $23,271,296  $1,037,805 
Ratio of ceded earned premium to direct earned premium  17%  16%      17%  16%    

Net investment incomeincluded in insurance company operation and other insurance operations revenues,

Net investment income increased $74,922 (32%$78,141 (17%) to $309,492$530,747 and $126,674 (19%$165,980 (18%) to $785,785$1,063,384 for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, compared to $234,570$452,606 and $659,111$897,404 for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively. This increase in investment income was due primarily to an increase in the yield on average invested assets. The Company had net realized investment losses of $4,512 and $12,661 for the three and six months ended June 30, 2019, respectively. The Company had net realized gains of $373 and $528$137 for the three and ninesix months ended SeptemberJune 30, 2017, respectively, compared to no realized gains or losses and $1,278 in realized losses for the three and nine months ended September 30, 2016, respectively.

23 of 32 

The increase in net investment income was primarily a result of an increase in the Company’s annualized yield on average invested assets to 1.2% and 1.1% for the three and nine months ended September 30, 2017, respectively, from 1.0% and 0.9% for the three and nine months ended September 30, 2016. The increase in the annualized yield on average invested assets is primarily a result of a decrease in lower yielding short-term investments and an increase in higher yielding fixed maturity investments and a result of investment into new classes of fixed maturity securities.2018.

 

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

 

Three Months Ended

September 30

 

Nine Months Ended

September 30

 

Three Months Ended June 30

 

Six Months Ended June 30

  2017  2016  2017  2016  2019  2018  2019  2018
                
Average invested assets (1) - at amortized cost $95,364,954  $92,050,184  $92,024,640  $94,312,881  $86,305,694  $88,496,289  $87,654,490  $87,707,662 
Net investment income:                
Insurance company operation (2) $309,405  $234,495  $785,579  $658,839 
Other insurance operations  87   75   206   272 
Net investment income from:                
Invested assets (2) $523,943  $443,466  $1,043,914  $882,600 
Cash equivalents  6,804   9,140   19,470   14,804 
Total investment income $309,492  $234,570  $785,785  $659,111  $530,747  $452,606  $1,063,384  $897,404 
Annualized yield on average invested assets (3)  1.2%  1.0%  1.1%  0.9%  2.4%  2.0%  2.4%  2.0%

 

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

 

(2)Investment income from insurance company operation included $30,000 and $67,619 of investment expense for the three and six months ended June 30, 2019, respectively, compared to $28,536 and $53,851 of investment expense for the three and six months ended June 30, 2018.

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

(2) Net investment income from insurance company operation included $25,745 of interest on the cash deposits in lieu of appeal bonds for the three and nine months ended September 30, 2017, respectively, compared to $25,745 and $50,745 for the three and nine months ended September 30, 2016, respectively. Investment income from insurance company operation included $25,250 of investment expense for the three and nine months ended September 30, 2017, compared to $0 for the three and nine months ended September 30, 2016.

(3) Annualized yield on average invested assets did not include the interest on the cash deposits in lieu of appeal bonds.

(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:

 

 

Par Value

 

Amortized Cost

 

 

Fair Value

 

Weighted Average Yield

Maturities by Year at June 30, 2019        
Due in one year $10,734,000  $10,713,537  $10,732,012   2.0%
Due after one year through five years  41,081,731   41,039,656   41,511,591   2.5%
Due after five years through ten years  15,035,108   15,109,018   15,613,561   3.2%
Due after ten years and beyond  17,678,346   18,127,226   18,195,548   2.9%
Total $84,529,185  $84,989,437  $86,052,712   2.6%

 

 

Par Value

 Amortized Cost 

 

Fair Value

 

Weighted Average Yield

 

Par

Value

 

Amortized Cost

 

 

Fair Value

 

Weighted Average Yield

Maturities by year at September 30, 2017:                
Due in one year or less $26,362,000  $26,361,291  $26,361,159   1.0%
Maturities by Year at December 31, 2018                
Due in one year $9,328,000  $9,326,886  $9,311,678   1.3%
Due after one year through five years  31,489,000   31,524,443   31,530,644   1.7%  43,893,000   43,821,970   43,211,883   2.5%
Due after five years through ten years  25,903,384   26,393,615   26,377,092   2.6%  15,788,408   15,876,016   15,497,513   3.2%
Due after ten years and beyond  15,964,156   16,403,716   16,015,063   2.8%
Total $83,754,384  $84,279,349  $84,268,895   1.8% $84,973,564  $85,428,588  $84,036,137   2.5%

 

  

Par Value

 Amortized Cost 

 

Fair Value

 

Weighted Average Yield

Maturities by year at December 31, 2016:                
Due in one year or less $52,282,000  $52,273,745  $52,286,222   0.8%
Due after one year through five years  28,098,000   28,098,097   28,097,703   1.1%
Due after five years through ten years  —     —     —     —   
Total $80,380,000  $80,371,842  $80,383,925   0.9%

 

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 2.7 and 1.07.3 years as of SeptemberJune 30, 2017,2019, and 6.5 years as of December 31, 2016, respectively. Due to the current interest rate environment, the current target effective duration for the Company’s investment portfolio is between 3.25 and 4.75 years. As of September 30, 2017, and December 31, 2016, the Company’s investment portfolio effective duration was below the target.2018.

 

2423 of 3231 

 

 

A summary of estimated fair value, and 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 Less than 12 Months 12 Months or Longer
 

Estimated

Fair Value

 

Gross

Unrealized Losses

 

Estimated

Fair Value

 

Gross

Unrealized Losses

 

 

Estimated Fair Value

 

Gross Unrealized Losses

 

Number of Securities

 

Estimated Fair Value

 

Gross Unrealized Losses

 

Number of Securities

September 30, 2017:        
June 30, 2019            
U.S. treasury securities $9,519,063  $(9,395) $—    $—    $—    $—     —    $3,486,173  $(10,125)  3 
Corporate securities  9,731,038   (36,981)  —     —     —     —     —     3,513,044   (6,191)  5 
Agency mortgage-backed securities  12,973,738   (17,143)  —     —     —     —     —     13,031,946   (54,932)  11 
Total $32,223,839  $(63,519) $—    $—    $—    $—     —    $20,031,163  $(71,248)  19 

 

 Less than 12 Months 12 Months or Longer Less than 12 Months 12 Months or Longer
 

Estimated

Fair Value

 

Gross

Unrealized Losses

 

Estimated

Fair Value

 

Gross

Unrealized Losses

 

Estimated Fair Value

 

Gross Unrealized Losses

 

Number of Securities

 

 

Estimated Fair Value

 

Gross Unrealized Losses

 

Number of Securities

December 31, 2016:        
December 31, 2018            
U.S. treasury securities $—    $—    $9,097,285  $(2,122) $1,760,491  $(20,181)  2  $8,496,069  $(123,101)  6 
Corporate securities  10,878,381   (272,515)  17   21,189,487   (578,609)  27 
Agency mortgage-backed securities  —     —     —     17,034,086   (472,293)  15 
Total $—    $—    $9,097,285  $(2,122) $12,638,872  $(292,696)  19  $46,719,642  $(1,174,003)  48 

 

The Company closely monitors its investments. If an unrealized loss is determined to be other-than-temporary, it is written off as a realized loss through the Condensed Consolidated Statements of Operations. The Company’s methodology of assessing other-than-temporary impairments is based on security-specific analysis, performed by the Company’s independent investment advisor, as of the balance sheet date and considers various factors including the length of time to maturity and the extent to which the fair value has been less than the cost, the financial condition and the near-term prospects of the issuer, and whether the debtor is current on its contractually obligated interest and principal payments. The unrealized losses as of SeptemberJune 30, 2017,2019, and December 31, 2016,2018, were determined to be temporary.

 

Although the Company does not intend to sell its fixed maturity investments prior to maturity, the Company may sell investment securities from time to time in response to cash flow requirements, economic, regulatory, and/or market conditions. Duringconditions or investment securities may be called by their issuers prior to the securities’ maturity. The Company sold two securities, with amortized cost of $2,498,104, prior to maturity during the three months ended SeptemberJune 30, 2017,2019 and three securities, with amortized cost of $2,997,098, during the six months ended June 30, 2019. The Company soldhad one call of investment security during the three and six months ended June 30, 2019. The Company realized net investment losses of $4,512 and $12,661 on these sales and call for the three and six months ended June 30, 2019, respectively. The Company had two fixed maturity investmentscalls of investment securities during the three and six months ended June 30, 2018 and realized a net investment gaingains of $373 on$137 for the sales. During the ninethree and six months ended SeptemberJune 30, 2017, the Company sold four fixed maturity investments and realized a net investment gain of $5282018 on the sales. Unrealizedthese calls. The unrealized gains or losses from fixed maturities are reported as “Accumulated other comprehensive income or loss,” which is a separate component of stockholders’ equity, net of any deferred tax effect.

 

Other Income,income

Other income included in insurance company operationInsurance Company Revenues and other insurance operations revenues,Other Insurance Operations increased $41,023 (61%$46,993 (39%) to $108,170$168,928 and $36,280 (17%decreased $258,700 (46%) to $243,707$(81,054) for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, compared to $67,147$121,935 and $207,427$177,646 for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively. The increasesincrease in other income during the three and nine months ended SeptemberJune 30, 2017, compared to the three and nine months ended September 30, 2016, are2019 is due primarily to higher rent resulting from higher occupancya $71,282 increase in Crusader’s share of California FAIR Plan equity compared to a $14,776 increase during the Calabasas building.three months ended June 30, 2018. The decrease in other income during the six months ended June 30, 2019 is due primarily to a $238,816 decrease in Crusader’s share of California FAIR Plan equity compared to a $29,986 decrease during the six months ended June 30, 2018.

 

Gross commissions and fees

Gross commissions and fees decreased $11,957 (2%$143,624 (21%) to $685,288$527,825 and increased $34,487 (2%$202,836 (16%) to $2,097,916$1,075,270 for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, compared to $697,245gross commissions and $2,063,429fees of $671,449 and $1,278,106 for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively.

24 of 31 

 

The changes in gross commission and fee income for the three and ninesix months ended SeptemberJune 30, 2017,2019, as compared to the three and ninesix months ended SeptemberJune 30, 2016,2018, are as follows:

  Three Months Ended
September 30		 Nine Months Ended
September 30
      Increase     Increase
  2017 2016 (Decrease) 2017 2016 (Decrease)
             
Policy fee income $403,624  $418,301  $(14,677) $1,218,214  $1,260,808  $(42,594)
Health insurance program  264,336   259,776   4,560   822,242   734,487   87,755 
Membership and fee income  17,328   19,168   (1,840)  53,084   59,315   (6,231)
Daily automobile rental insurance program contingent commission  —     —     —     4,376   8,819   (4,443)
Total $685,288  $697,245  $(11,957) $2,097,916  $2,063,429  $34,487 

25 of 32 

  Three Months Ended June 30   Six Months Ended June 30
  2019 2018 Change 2019 2018 Change
             
Policy fee income $295,334  $374,330  $(78,996) $594,035  $755,250  $(161,215)
Health insurance program  209,907   281,233   (71,326)  433,889   490,640   (56,751)
Membership and fee income  22,584   15,886   6,698   47,346   32,216   15,130 
Total $527,825  $671,449  $(143,624) $1,075,270  $1,278,106  $(202,836)

 

Unifax Insurance Systems, Inc. (“Unifax”), a wholly owned subsidiary of the Company, sells and services insurance policies for Crusader. The commissions paid by Crusader to Unifax are eliminated as intercompany transactions and are not reflected as income in the condensed consolidated financial statements. Unifax also receives non-refundable policy fee income that is directly related to the Crusader policies it sells. For financial statement reporting purposes, policy fees are earned ratably over the life of the related insurance policy. The unearned portion of the policy fee is recorded as a liability on the Condensed Consolidated Balance Sheets under “Accrued expenses and other liabilities.” The earned portion of the policy fee charged to the policyholder by Unifax is recognized as income in the condensed consolidated financial statements. Policy fee income decreased $14,677 (4%$78,996 (21%) and $42,594 (3%$161,215 (21%) in the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, compared to the three and ninesix months ended SeptemberJune 30, 2016,2018, due primarily to reduction in policy counts.

 

American Insurance Brokers, Inc. (“AIB”), a wholly owned subsidiary of the Company,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 $4,560 (2%decreased $71,326 (25%) and increased $87,75556,751 (12%) in the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, compared to the three and ninesix months ended SeptemberJune 30, 2016.2018. The increasedecrease in commission income reported in the ninethree and six months ended SeptemberJune 30, 2017,2019, when compared to the prior year period, is primarily a result of a cumulativedecrease in commission correctionincome on group health and life premiums and timing of $68,971 by the non-affiliated insurance carriers received during the three months ended March 31, 2017.commission receipts.

 

Insurance Club, Inc., dba AAQHC An Administrator (“AAQHC”), a wholly owned subsidiary of the Company, 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 $1,840 (10%increased $6,698 (42%) and $6,231 (11%$15,130 (47%) infor the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, compared to the three and ninesix months ended SeptemberJune 30, 2016.2018. This decreaseincrease is primarily a result of an increase in administration fees partially offset by a decrease in the number of individual members.association members enrolled in AAQHC.

 

The daily automobile rental insurance program was produced by Bedford Insurance Services, Inc. (“Bedford”), a wholly owned subsidiaryFinance charges and fees earned

Finance charges and fees earned consist of the Company. Bedford received commission income from non-affiliated insurance companies based on written premium and continues to receive contingent commission on previous business written. The Company no longer actively markets this program.

Finance fees earned consist offinance charges, late fees, returned check fees and payment processing fees. These charges and fees earned by American Acceptance Corporation (“AAC”), a wholly owned subsidiary of the Company,AAC increased $3,364 (18%$19,618 (57%) to $21,814$53,998 and $7,488 (15%$50,895 (97%) to $58,155$103,371 for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, compared to $18,450$34,380 and $50,667 for the three and nine months ended September 30, 2016, respectively. The increases$52,476 in fees earned during the three and ninesix months ended SeptemberJune 30, 2017, compared to the three and nine months ended September 30, 2016, are primarily a result of more late fees earned during the current periods compared to the prior year periods.2018, respectively. During the three and ninesix months ended SeptemberJune 30, 2017,2019, AAC issued 743390 and 2,276863 loans, respectively, and had 2,2951,347 loans outstanding as of SeptemberJune 30, 2017.2019. During the three and ninesix months ended SeptemberJune 30, 2016,2018, AAC issued 783543 and 2,405 loans,1203, respectively, and had 2,4351,887 loans outstanding as of SeptemberJune 30, 2016.2018. AAC provides premium financing only for Crusader policies produced by Unifax in California. From July 2010 to March 1, 2018, AAC reduced the interest rate chargedoffered 0% financing on premiums financed to 0% beginning July 20, 2010, and, therefore, did not earn any finance charges during the three and nine months ended September 30, 2017 and 2016. This reduction in the interest rate charged was initiated in an effort to increase the sales of existing renewal and new business writtenpolicies produced by Unifax for Crusader. DueFrom March 1, 2018 to March 31, 2019, the lowannual percentage rate charged by AAC on new loans increased to a single fixed interest rate environment,from 0%. Effective April 1, 2019, the costCompany converted from the single fixed interest rate for all financed policies to a tiered interest rate structure under which different fixed interest rates are charged based on amount of money to provide this incentive is not material. The Company monitors the cost of providing this incentive and depending on the cost/benefit determination, can continue to offer it or withdraw it at any time.underlying financed premium.

 

Losses and loss adjustment expenses

Losses and loss adjustment expenses were 121%78% and 100%80% of net earned premium for the three and ninesix months ended SeptemberJune 30, 2017, respectively,2019, compared to 101%67% and 77%85% of net earned premium for the three and ninesix months ended SeptemberJune 30, 2016, respectively.2018. 

 

2625 of 3231 

 

 

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

  Three Months Ended June 30
  2019 2019 Loss Ratio 2018 2018 Loss Ratio Change
           
Net earned premium $6,518,112      $7,362,945      $(844,833)
                     
Losses and loss adjustment expenses:                    
Provision for insured events of current year  5,134,626   79%  4,652,240   63%  482,386 
Development of insured events of prior years  (75,675)  (1)%  276,963   4%  (352,638)
Total losses and loss adjustment expenses $5,058,951   78% $4,929,203   67% $129,748 

 

  Three Months Ended September 30
  

2017

 

2017 Loss Ratio

 

2016

 

2016 Loss Ratio

 

Increase

(Decrease)

           
Net earned premium $8,168,292      $7,980,930      $187,362 
                     
Losses and loss adjustment expenses:                    
Provision for insured events of current year  5,982,245   73%  6,792,115   85%  (809,870)
Development of insured events of prior years  3,935,651   48%  1,245,985   16%  2,689,666 
Total losses and loss adjustment expenses $9,917,896   121% $8,038,100   101% $1,879,796 

  Nine Months Ended September 30
  2017 2017 Loss Ratio 2016 2016 Loss Ratio Increase
           
Net earned premium $24,309,101      $23,271,296      $1,037,805 
                     
Losses and loss adjustment expenses:                    
Provision for insured events of current year  18,046,953   74%  17,119,210   74%  927,743 
Development of insured events of prior years  6,304,798   26%   863,141   3%  5,441,657 
 Total losses and loss adjustment expenses $24,351,751   100% $17,982,351   77% $6,369,400 

  Six Months Ended June 30
  2019 2019 Loss Ratio 2018 2018 Loss Ratio 

 

Change

           
Net earned premium $12,782,262      $15,044,572      $(2,262,310)
                     
Losses and loss adjustment expenses:                    
Provision for insured events of current year  9,685,514   76%  10,661,378   71%  (975,864)
Development of insured events of prior years  527,880   4%  2,069,582   14%  (1,541,702)
Total losses and loss adjustment expenses $10,213,394   80% $12,730,960   85% $(2,517,566)

 

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

 

The $927,743 increase in the$5,134,626 provision for insured events of current year for the ninethree months ended SeptemberJune 30, 2017, compared to2019, was $482,386 higher than the $4,652,240 provision for insured events of current year for the ninethree months ended SeptemberJune 30, 2016, was2018, due primarily to an aberrational increaseincreases in theincurred losses and loss adjusted expenses on reported claims as a result of higher frequency and severity of accidentTransportation liability claims and higher severity of Food, Beverage & Entertainment liability claims for insured events of current year 2017 short-tail property claims during the three months ended March 31, 2017.June 30, 2019.

 

The $2,689,666 and $5,441,657 increases in the$75,675 favorable development of insured events of prior years for the three and nine months ended SeptemberJune 30, 2017, respectively, compared to2019, was $352,638 lower than the three and nine months ended September 30, 2016, were primarily due to higher than expected severity of long-tail assault and battery liability claims in accident years 2011, 2014, and 2016 associated with Crusader’s Food, Beverage and Entertainment program. The Company believes the increase in the severity$276,963 adverse development for these claims as compared to prior periods is due to relatively recent social, legal, and economic changes. For the three and nine months ended September 30, 2017, the development on the accident year 2011 was due primarily to $1,422,499 and $1,497,499 in additional losses and loss adjustment expenses incurred, respectively, due to the September 2017 $7,000,000 settlement. For the three and nine months ended September 30, 2017, the development on the accident year 2014 was due primarily to the unexpected increase in the severity of existing assault and battery claims. For the three months ended SeptemberJune 30, 2017, the development on the accident year 2016 was2018, due primarily to decreases in incurred losses and loss adjusted expenses on reported claims as a $580,329 increase inresult of lower frequency and severity of Apartments & Commercial Buildings liability claims and Food, Beverage & Entertainment liability claims for insured events of prior years during the three months ended June 30, 2019.

The $9,685,514 provision for insured events of current year for the six months ended June 30, 2019, was $975,864 lower than the $10,661,378 provision for insured events of current year for the six months ended June 30, 2018, due primarily to lower incurred but not reported (“IBNR”) reserves for the Food, Beverage and& Entertainment program; total IBNR reserves increase for all accidentliability claims associated with reduction in net earned premium during the six months ended June 30, 2019.

The $527,880 adverse development of insured events of prior years for the Food, Beverage and Entertainment programsix months ended June 30, 2019, was $1,323,665$1,541,702 lower than the $2,069,582 adverse development for the threesix months ended SeptemberJune 30, 2017. For the nine months ended September 30, 2017, the development on the accident year 2016 was2018, due primarily to the unexpected increasedecreases in the severity of existing assaultincurred losses and battery claims. Asloss adjusted expenses on reported claims as a result of the foregoing losseslower frequency and loss adjustment expenses and the observed trend of increasing severity of assaultApartments & Commercial Buildings liability claims and batteryTransportation liability claims for insured invests of prior years during the Company decided to significantly curtail or entirely exclude coverage for risks of assault and battery covered through the Food, Beverage and Entertainment program.six months ended June 30, 2019.

 

While it is difficult to estimate the adequacy

26 of loss and loss adjustment expense reserves, historically, the Company was able to establish sufficient loss and loss adjustment expense reserves to mitigate adverse prior accident year developments.

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The following table breaks out adverse (favorable) development from total losses and loss adjustment expenses quarterly since January 1, 2014:June 30, 2017:

  

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:               
  September 30, 2017  $5,982,245  $3,935,651  $9,917,896 
  June 30, 2017   5,567,142   341,532   5,908,674 
  March 31, 2017   6,497,566   2,027,615   8,525,181 
  December 31, 2016   5,731,198   (886,671)  4,844,527 
  September 30, 2016   6,792,115   1,245,985   8,038,100 
  June 30, 2016   5,603,427   (744,670)  4,858,757 
  March 31, 2016   4,723,668   361,826   5,085,494 
  December 31, 2015   5,125,146   164,230   5,289,376 
  September 30, 2015   5,195,943   (849,426)  4,346,517 
  June 30, 2015   5,280,840   (647,324)  4,633,516 
  March 31, 2015   6,005,699   (1,111,792)  4,893,907 
  December 31, 2014   4,473,359   (552,836)  3,920,523 
  September 30, 2014   4,686,287   (529,807)  4,156,480 
  June 30, 2014   4,455,943   (808,178)  3,647,765 
  March 31, 2014   4,310,293   (1,417,943)  2,892,350 
     

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, 2019  $5,134,626  $(75,675) $5,058,951 
  March 31, 2019   4,550,888   603,555   5,154,443 
  December 31, 2018   5,134,166   53,997   5,188,163 
  September 30, 2018   4,840,242   798,378   5,638,620 
  June 30, 2018   4,652,240   276,963   4,929,203 
  March 31, 2018   6,009,138   1,792,619   7,801,757 
  December 31, 2017   5,330,275   808,481   6,138,756 
  September 30, 2017   5,982,245   3,935,651   9,917,896 
  June 30, 2017   5,567,142   341,532   5,908,674 

 

The variability of Crusader’s losses and loss adjustment expenses for the periods presented is primarily due primarily to Crusader’sthe small and diverse population of Crusader’s policyholders and claims, population, which may result in greater fluctuations in claim frequency and/or severity.severity between quarters. 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 consolidated financial statements requires estimation of certain liabilities, most significantly the liability for unpaid losses and loss adjustment expenses. Management makes its best estimate of the liability for these unpaid claims costs as of the end of each fiscal quarter. Due to the inherent uncertainties in estimating the Company’s unpaid claims costs, actual loss and loss adjustment expense payments are expected to vary, perhaps significantly, from any estimate made prior to the settling of all claims. Variability is inherent in establishing loss and loss adjustment expense reserves, especially for a small insurer likesuch 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 that have emerged are different than expected for any prior accident year, the claims cost estimates for that year are revised accordingly. If the claims costs that emerge are less favorable than initially anticipated, generally, the Company increases its loss and loss adjustment expense reserves immediately. However, if the claims costs that emerge are more favorable than initially anticipated, generally, the Company reduces its loss and loss adjustment expense reserves over time while it continues to assess the validity of the observed trends based on the subsequent emerged claim costs.

 

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

 

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At the end of each fiscal quarter, the Company’s loss and loss adjustment expense reserves for each accident year (i.e., for all claims incurred within each year) are re-evaluated independently by the Company’s president, the Company’s chief financial officer, and by an independent consulting actuary.  Generally accepted actuarial methods, including the widely used Bornhuetter-Ferguson and loss development methods, are employed to estimate ultimate claims costs. An actuarial central estimate of the ultimate claims costs and incurred but not reported lossesIBNR reserves is ultimately determined by management and tested for reasonableness by the independent consulting actuary.

 

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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 policy acquisition 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. Ceding commission is received on excess of loss ceded premium, and noNo 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 policy acquisition costs to determine that costs related to successful policy acquisition are capitalized and deferred. These policy acquisition costs were approximately 23% and 20% of net earned premium for the three and nine months ended September 30, 2017, respectively, compared to 22% for the three and nine months ended September 30, 2016. The policy acquisition costs increased in the three months ended September 30, 2017 as compared to the three months ended September 30, 2016, due primarily to the $150,000 premium deficiency reserve. The policy acquisition costs decreased in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, due primarily to lower commission expense as a result of the loss experience and higher ceding commission due to an increase in premiums written for the nine months ended September 30, 2017.

 

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

 

Three Months Ended

September 30

 

Nine Months Ended

September 30

 Three Months Ended June 30 Six Months Ended June 30
 2017 2016  Increase 2017 2016 (Decrease) 2019 2018 Change 2019 2018 Change
                        
Policy acquisition costs $1,854,212  $1,741,499  $112,713  $4,943,350  $5,142,250  $(198,900) $1,289,481  $1,515,476  $(225,995) $2,376,194  $3,136,981  $(760,787)
Ratio to net earned premium (GAAP ratio)  23%  22%      20%  22%      20%  21%      19%  21%    

 

Policy acquisition costs decreased during the three and six months ended June 30, 2019, as compared to the three and six months ended June 30, 2018, due primarily to the decrease in net earned premium.

Salaries and employee benefits

Salaries and employee benefits decreased $97,440 (7%$113,698 (10%) to $1,221,182$1,012,805 and increased $554,495 (14%$373,926 (15%) to $4,534,550$2,040,654 for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, compared to $1,318,622$1,126,503 and $3,980,055$2,414,580 for the three and ninesix months ended SeptemberJune 30, 2016, respectively.2018.

 

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

 

Three Months Ended

September 30

 Three Months Ended June 30
 

 

2017

 

 

2016

 

Increase

(Decrease)

 2019 2018 Change
            
Total salaries and employee benefits incurred $1,910,494  $1,999,588  $(89,094) $1,894,165  $1,975,558  $(81,393)
Less: charged to losses and loss adjustment expenses  (353,555)  (291,711)  (61,844)  (507,433)  (452,103)  55,330 
Less: capitalized to policy acquisition costs  (335,757)  (389,255)  53,498   (308,480)  (396,952)  (88,472)
Less: charged to IT system upgrade  (65,447)  —     65,447 
Net amount charged to operating expenses $1,221,182  $1,318,622  $(97,440) $1,012,805  $1,126,503  $(113,698)

 

 

Nine Months Ended

September 30

 Six Months Ended June 30
 

 

2017

 

 

2016

 

Increase

(Decrease)

 2019 2018 Change
            
Total salaries and employee benefits incurred $6,528,380  $6,024,572  $503,808  $3,771,583  $4,068,262  $(296,679)
Less: charged to losses and loss adjustment expenses  (979,256)  (861,293)  (117,963)  (1,002,461)  (882,250)  120,211 
Less: capitalized to policy acquisition costs  (1,014,574)  (1,183,224)  168,650   (617,464)  (771,432)  (153,968)
Less: charged to IT system upgrade  (111,004)  —     111,004 
Net amount charged to operating expenses $4,534,550  $3,980,055  $554,495  $2,040,654  $2,414,580  $(373,926)

 

The decrease in the total salaries and employee benefits incurred for the three and six months ended SeptemberJune 30, 2017,2019, compared to the three and six months ended SeptemberJune 30, 2016, was due primarily lower benefits costs associated with group medical plans and the Unico American Corporation Profit Sharing Plan. The increase in salaries and employee benefits incurred for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016,2018, was due primarily to costs associated with a termination of an employment agreement with an employee; there are no such agreements for any other employees other than those agreements discloseddecrease in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

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Commissions to agents/brokers decreased $587 (1%) to $39,737headcount and increased $5,241 (4%) to $126,620several managerial vacancies for the three and ninesix months ended SeptemberJune 30, 2017, respectively,2019 compared to $40,324the three and $121,379six months ended June 30, 2018.

Commissions to agents/brokers

Commissions to agents/brokers increased $536 (1%) to $41,077 and $9,318 (11%) to $91,198 for the three and ninesix months ended SeptemberJune 30, 2016. The decrease2019, respectively, compared to $40,541 and $81,880 for the three and six months ended June 30, 2018. These increases in commissions to agents/brokers for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, waswere due primarily to timing of payment receipts. The increase in other operating expenses for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, was due primarily to the increase in the health insurance commission income.

 

Other operating expenses

Other operating expenses decreased $130,932 (16%$9,244 (1%) to $695,587$735,454 and increased $539,547 (26%$247,306 (15%) to $2,592,318$1,363,534 for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, compared to $826,519$744,697 and $2,052,771$1,610,840 for the three and ninesix months ended SeptemberJune 30, 2016, respectively.2018. The decrease in other operating expenses for the threesix months ended SeptemberJune 30, 2017,2019, compared to the threesix months ended SeptemberJune 30, 2016,2018, was due primarily to lower costs incurred to review strategic alternativesof temporary help and potential opportunities. The increase in other operating expenses for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, is related primarily to fees associated with the California Departmenta number of Insurance financial examination of Crusader and consulting expenses. The financial examination, as reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, has been completed, but the results have not been made public by the California Department of Insurance. Management does not anticipate the financial examination findings will have material impact on Crusader’s operations or financial statements.various insignificant fluctuations.

 

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Income tax expense/benefit

Income tax benefit increased $494,751 (49%) to $1,507,976 (34% was $65,993 (19% of pre-tax income) and $2,077,690 (202%) to $3,104,390 (34%$206,651 (18% of pre-tax loss) for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, compared to an income tax benefitexpense of $1,013,225 (34%$118,735 (41% of pre-tax income) and $1,026,700 (34%income tax benefit of $485,945 (19% of pre-tax income)loss) for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively. The increases in income tax benefit for the three and ninesix months ended SeptemberJune 30, 2017, compared to the three and nine months ended September 30, 2016, were2019, was due primarily to higher losslosses before tax during the 2017 reporting periods compared to 2016.taxes of $342,670 and $1,154,402, respectively. The income tax provision isexpense for the three months ended June 30, 2018, was due primarily related to income before taxes.taxes of $287,032 and a change in valuation allowance on the state net operating loss carryforward, and the income tax benefit for the six months ended June 30, 2018, was due primarily to net loss before taxes of $2,524,900. The calculated tax rate for the ninesix months ended SeptemberJune 30, 2017,2019, consisted of a federal tax benefit rate of 34%21% and a state income tax expensebenefit rate of approximately 0.5%5.3%. The calculated tax rate for the ninesix months ended SeptemberJune 30, 2016, consisted2018, was comprised of a calculated federal tax benefit rate of 34%approximately 21% and a state income tax benefit rate of 1.3%. The Company increased its valuation allowance related to deferred tax assets on federal net operating losses by $42,000 to $85,000 during the three months ended June 30, 2019, thus making the effective tax rate 19% and 18% for the three and six months ended June 30, 2019, respectively.

 

Off-Balance Sheet ArrangementsOFF-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’s Condensed Consolidated Balance Sheets include a substantial amount of invested assets whose fair values are subject to various market risk exposures including interest rate risk and equity price risk.

 

The Company’s invested assets consistCompany 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 following:

  

September 30

2017

 

December 31

2016

 

Increase

(Decrease)

       
Fixed maturity bonds (at amortized value) $48,453,349  $19,091,842  $29,361,507 
Short-term cash investments (at cost)  13,080,515   10,204,603   2,875,912 
Certificates of deposit - over 1 year (at cost)  35,826,000   61,280,000   (25,454,000)
Total invested assets $97,359,864  $90,576,445  $6,783,419 

There have been no material changes inscaled disclosure requirements applicable to smaller reporting companies and has therefore omitted the compositioninformation required under Item 305 of the Company’s invested assets or market risk exposures since the end of the preceding fiscal year end.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 SeptemberJune 30, 2017,2019, as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of SeptemberJune 30, 2017.2019.

 

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.

 

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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

ITEM 1A. RISK FACTORS

 

There were no material changes from risk factors as previously disclosed in the Company’s Form 10-K for the year ended December 31, 2016,2018, in response to Item 1A to Part I of Form 10-K and in the Company’s Form 10-QForm10-Q for the quarter ended June 30, 2017,March 31, 2019, in response to Item 1A to Part II of Form 10-Q.

29 of 31 

 

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

 

None.The following table sets forth certain information with respect to purchases of common stock of the Company during the three months ended June 30, 2019, by the Company.

 

 

 

 

 

Period

 Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part Of Publicly Announced Plans Or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
         
 April 1, 2019, to April 30, 2019   —     —     —     188,625 
 May 1, 2019, to May 31, 2019   356  $5.92   356   188,269 
 June 1, 2019, to June 30, 2019   —     —     —     188,269 
 Total   356       356     

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

31.1CertificateCertification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 ofunder the Sarbanes-OxleySecurities Exchange Act of 2002.1934.

 

31.2CertificateCertification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 ofunder the Sarbanes-OxleySecurities Exchange Act of 2002.1934.

 

32.1Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.1350.

 

32.2Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002..

 

101The following information from the Quarterly Report on Form 10-Q for the fiscal quarter ended SeptemberJune 30, 2017,2019, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss);Loss; (iv) the Condensed Consolidated Statements of Changes in Stockholders’ Equity; (v) the Condensed Consolidated Statements of Cash Flows; and (v)(vi) the Condensed Notes to Unaudited Condensed Consolidated Financial Statements (Unaudited).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.

 

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SIGNATURES

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: November 13, 2017August 14, 2019 By:/s/ CARY L. CHELDIN

Cary L. Cheldin

Chairman of the Board, President and Chief

Executive Officer,

(Principal (Principal Executive Officer)

 

 

Date: November 13, 2017August 14, 2019 By:/s/ MICHAEL BUDNITSKY

Michael Budnitsky

Treasurer, and Chief Financial Officer and Secretary, (Principal

(Principal Accounting and Principal Financial Officer)