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 endedSeptember 30, ~~2017~~2020or

[ ] 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~~

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YesXNo __

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 companyXEmerging 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.

Class	Outstanding at November 13, ~~2017~~2020
Common Stock, no par value per share	~~5,307,133~~5,305,112

1 of 3240

UNICO AMERICAN CORPORATION

INDEX TO FORM 10-Q

		Page No.

Cautionary Note Regarding Forward-Looking Statements	3
	3
Part I-Financial Information	4
	5
Item 1. Financial Statements	4
	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
	19
Item 3. Quantitative and Qualitative Disclosures About Market Risk	30
	36
Item 4. Controls and Procedures	30
	36
Part II-Other Information	31
	37
Item 1. Legal Proceedings	31
	37
Item 1A. Risk Factors	31
	37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	31
	39
Item 3. Defaults Upon Senior Securities	31
	39
Item 4. Mine Safety Disclosures	31
	39
Item 5. Other Information	31
	39
Item 6. Exhibits	31
	39
S~~ignatures~~Signatures	32		40

2 of 3240

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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 information~~which are difficult or impossible to predict accurately and ~~involve certain risks and uncertainties,~~ many of which are beyond the ~~control of~~Company’s control. These predictions are also affected by known and unknown risks, uncertainties and other factors that may cause the ~~Company. Such risks and uncertainties could cause~~Company’s actual results to be materially different from those expressed or implied by any forward-looking statement. Many of these factors are beyond the Company’s ability to control or predict. The Company’s actual results could differ materially from ~~those anticipated~~the results contemplated by these forward-looking ~~statements. Factors that could cause actual results~~statements due to ~~differ materially~~a number of factors. Such factors include, ~~among others:~~ but are not limited to, the following:

·failure to meet minimum capital and surplus requirements;

·vulnerability to significant catastrophic property loss; ~~a change~~

·the impact of the coronavirus (COVID-19) pandemic;

·changes 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;

·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;~~ 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 or long-term issuer credit rating by ~~AM Best; intense competition;~~ A.M. Best Company;

·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;

·single operating location;

·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;~~

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;~~ stockholders;

·limited trading of stock; and

·failure to maintain effective system of internal ~~controls; difficulty~~controls.

3 of 40

Please see Part I - Item 1A – “Risk Factors” in ~~effecting a change~~the Company’s 2019 Annual Report on Form 10-K as filed with the U.S. Securities and Exchange Commission (“SEC”), as well as other documents we file with the SEC from time-to-time, for other important factors that could cause the Company’s actual results to differ materially from the Company’s current expectations and from the forward-looking statements discussed herein. Because of ~~control or sale~~these and other risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. In addition, these statements speak only as of ~~any subsidiaries;~~the date of this Form 10-Q and, ~~losses in excess of reinsurance limits. Except~~except as may be required by law, ~~the Company undertakes~~we 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.

34 of 3240

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

	September 30		December 31
	2020		2019
		(Unaudited)
ASSETS
Investments
Available-for-sale:
Fixed maturities, at fair value (amortized cost: $78,351,555 at September 30, 2020, and $82,002,411 at December 31, 2019)	$	81,669,234	$	83,499,710
Held-to-maturity:
Fixed maturities, at amortized cost (fair value: $798,000 at September 30, 2020, and $798,000 at December 31, 2019)		798,000		798,000
Equity securities, at fair value (cost: $1,515,228 at September 30, 2020 and $0 at December 31, 2019)		1,557,856		—
Short-term investments, at fair value		200,000		2,196,815
Total Investments		84,225,090		86,494,525
Cash and cash equivalents		5,705,663		5,781,639
Accrued investment income		456,687		397,302
Receivables, net		3,810,210		4,019,437
Reinsurance recoverable:
Paid losses and loss adjustment expenses		885,987		685,841
Unpaid losses and loss adjustment expenses		23,349,279		14,725,855
Deferred policy acquisition costs		3,618,959		3,619,594
Property and equipment, net		10,271,863		10,226,595
Deferred income taxes		—		3,925,432
Other assets		456,734		430,305
Total Assets	$	132,780,472	$	130,306,525

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Unpaid losses and loss adjustment expenses	$	74,333,899	$	55,066,480
Unearned premiums		18,632,430		17,810,337
Advance premium and premium deposits		360,074		219,083
Accrued expenses and other liabilities		2,364,290		2,130,300
Total Liabilities	$	95,690,693	$	75,226,200

Commitments and contingencies

STOCKHOLDERS' EQUITY
Common stock, no par value – authorized 10,000,000 shares; 5,305,112 and 5,306,720, shares issued and outstanding at September 30, 2020, and December 31, 2019, respectively	$	3,771,879	$	3,772,669
Accumulated other comprehensive income		2,620,967		1,182,866
Retained earnings		30,696,933		50,124,790
Total Stockholders’ Equity	$	37,089,779	$	55,080,325

Total Liabilities and Stockholders' Equity	$	132,780,472	$	130,306,525

See notes to condensed consolidated financial statements (unaudited).

45 of 3240

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					Nine Months Ended
	September 30					September 30
	2020			2019		2020			2019
REVENUES
Insurance company operation:
Net earned premium	$	7,124,272		$	6,978,698	$	20,805,517		$	19,760,961
Investment income		477,145			518,108		1,487,335			1,581,482
Net realized investments gains (losses)		38,214			—		39,789			(12,661	)
Net unrealized investments gains on equity securities		19,670			—		42,629			—
Other income		74,784			114,531		278,544			22,660
Total Insurance Company Operation		7,734,085			7,611,337		22,653,814			21,352,442

Other insurance operations:
Gross commissions and fees		461,540			581,100		1,388,494			1,656,371
Finance charges and fees earned		56,985			66,526		191,690			169,896
Other income		7,076			3		7,096			10,830
Total Revenues		8,259,686			8,258,966		24,241,094			23,189,539

EXPENSES
Losses and loss adjustment expenses		17,320,051			5,137,974		28,086,342			15,351,368
Policy acquisition costs		1,279,703			1,194,870		3,626,154			3,571,065
Salaries and employee benefits		2,584,478			1,021,597		4,958,900			3,062,251
Commissions to agents/brokers		23,235			40,946		73,190			132,144
Other operating expenses		1,398,135			532,853		3,372,483			1,896,386
Total Expenses		22,605,602			7,928,240		40,117,069			24,013,214

Income (loss) before taxes		(14,345,916	)		330,726		(15,875,975	)		(823,675	)
Income tax expense (benefit)		3,594,572			118,259		3,543,153			(88,391	)
Net Income (loss)	$	(17,940,488	)	$	212,467	$	(19,419,128	)	$	(735,284	)



PER SHARE DATA:
Basic
Earnings (loss) per share	$	(3.38	)	$	0.04	$	(3.66	)	$	(0.14	)
Weighted average shares		5,305,742			5,306,747		5,306,068			5,306,929
Diluted
Earnings (loss) per share	$	(3.38	)	$	0.04	$	(3.66	)	$	(0.14	)
Weighted average shares		5,305,742			5,306,747		5,306,068			5,306,929

See notes to condensed consolidated financial statements (unaudited).

56 of 3240

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~LOSS~~INCOME (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					Nine Months Ended
	September 30					September 30
	2020			2019		2020			2019


Net income (loss)	$	(17,940,488	)	$	212,467	$	(19,419,128	)	$	(735,284	)
Changes in unrealized gains on securities classified as available-for-sale arising during the period, net of income tax		35,792			359,110		1,438,101			2,299,133
Comprehensive Income (Loss)	$	(17,904,696	)	$	571,577	$	(17,981,027	)	$	1,563,849

See notes to condensed consolidated financial statements (unaudited).

7 of 40

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)


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

Balance – December 31, 2018		5,307,103		$	3,772,857		$	(1,100,036	)	$	53,242,601		$	55,915,422

Shares repurchased		(356	)		(175	)		—			(1,946	)		(2,121	)
Change in comprehensive income, net of deferred income tax		—			—			1,940,023			—			1,940,023
Net loss		—			—			—			(947,751	)		(947,751	)
Balance – June 30, 2019		5,306,747		$	3,772,682		$	839,987		$	52,292,904		$	56,905,573

Shares repurchased		—			—			—			—			—
Change in comprehensive income, net of deferred income tax		—			—			359,110			—			359,110
Net income		—			—			—			212,467			212,467
Balance – September 30, 2019		5,306,747		$	3,772,682		$	1,199,097		$	52,505,371		$	57,477,150


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

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

Shares repurchased		(978	)		(480	)		—		(5,760	)		(6,240	)
Change in comprehensive income, net of deferred income tax		—			—			1,402,309		—			1,402,309
Net loss		—			—			—		(1,478,640	)		(1,478,640	)
Balance – June 30, 2020		5,305,742		$	3,772,189		$	2,585,175	$	48,640,390		$	54,997,754

Shares repurchased		(630	)		(310	)		—		(2,969	)		(3,279	)
Change in comprehensive income, net of deferred income tax		—			—			35,792		—			35,792
Net loss		—			—			—		(17,940,488	)		(17,940,488	)
Balance – September 30, 2020		5,305,112		$	3,771,879		$	2,620,967	$	30,696,933		$	37,089,779

See notes to condensed consolidated financial statements (unaudited).

68 of 3240

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

	Nine Months Ended
	September 30
	2020			2019
Cash flows from operating activities:
Net loss	$	(19,419,128	)	$	(735,284	)
Adjustments to reconcile net loss to net cash from operations:
Depreciation and amortization		567,639			402,769
Bond amortization, net		(16,989	)		24,192
Bad debt expense		7,139			(20,766	)
Net realized investment (gains) losses		(31,635	)		12,661
Net unrealized investment gains on equity securities		(42,629	)		—
Changes in assets and liabilities:
Net receivables and accrued investment income		142,703			(576,294	)
Reinsurance recoverable		(8,823,570	)		(5,616,860	)
Deferred policy acquisition costs		635			(308,780	)
Other assets		(26,428	)		265,208
Unpaid losses and loss adjustment expenses		19,267,419			(1,162	)
Unearned premiums		822,093			2,422,025
Advance premium and premium deposits		140,991			176,897
Accrued expenses and other liabilities		233,990			433,351
Income taxes current/deferred		3,543,153			(111,000	)
Net Cash Used by Operating Activities		(3,634,617	)		(3,633,043	)

Cash flows from investing activities:
Purchase of fixed maturity investments		(14,757,414	)		(8,286,568	)
Purchase of equity securities		(1,515,228	)		—
Proceeds from maturity of fixed maturity investments		12,318,203			7,313,548
Proceeds from sale or call of fixed maturity investments		6,138,690			3,472,794
Net decrease in short-term investments		1,996,815			4,490,954
Additions to property and equipment		(612,907	)		(745,389	)
Net Cash Provided by Investing Activities		3,568,159			6,245,339

Cash flows from financing activities:
Repurchase of common stock		(9,518	)		(2,121	)
Net Cash Used by Financing Activities		(9,518	)		(2,121	)

Net (decrease) increase in cash and cash equivalents		(75,976	)		2,610,175
Cash and cash equivalents at beginning of period		5,781,639			4,917,762
Cash and Cash Equivalents at End of Period	$	5,705,663		$	7,527,937

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)

SEPTEMBER 30, ~~2017~~2020

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 nine months ended September 30, ~~2017,~~2020, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~2020. Quarterly condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes in the Company’s 2019 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’s~~quarter 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. (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:

~~Fixed maturities:~~Investment securities, excluding long-term certificates of deposit, and short-term investments – Fair values are obtained from widely accepted third party vendors.

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

~~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:

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

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

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Receivables, net – The carrying amounts reported in the Condensed Consolidated Balance Sheets approximate their fair values given the short-term nature of these instruments.

Accrued expenses and other liabilities – The carrying amounts reported in the Condensed Consolidated Balance Sheets approximate the fair values given the short-term nature of these instruments.

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,~~August 10, 2020, the Board authorized a share repurchase program (the “2020 Program”) for up to $5,000,000 of the currently outstanding shares of the Company’s common stock. The 2020 Program is effective immediately and replaces the Company’s existing share repurchase program that was adopted by the Board of Directors ~~authorized a stock repurchase program~~on December 19, 2008 (the “2008 Program”) to acquire from time to time up to an aggregate of 500,000 shares of the Company’s common stock. ~~This program has no expiration date and~~The purchases under the 2020 Program may be ~~terminated by~~made from time to time in the ~~Board~~open market, through block trades, 10b5-1 trading plans, privately negotiated transactions or otherwise and in accordance with applicable laws, rules and regulations. The timing and actual number of ~~Directors~~the shares repurchased under the 2020 Program will depend on a variety of factors including price, market conditions and corporate and regulatory requirements. The Company intends to fund the share repurchases under the 2020 Program from cash on hand. The 2020 Program does not commit the Company to repurchase shares of its common stock and it may be amended, suspended or discontinued at any time. ~~As of September 30, 2017,~~The Company repurchased its shares under the 2020 Program and ~~December 31, 2016, the~~2008 Program in unsolicited transactions as follows:

	Three Months Ended September 30				Nine Months Ended September 30
	2020		2019		2020		2019

2020 Program
Number of shares repurchased		630		—		630		—
Cost of shares repurchased
Allocated to retained earnings	$	2,969	$		$	2,969	$
Allocated to capital		310		—		310		—
Total cost of shares repurchased	$	3,279	$	—	$	3,279	$	—

2008 Program
Number of shares repurchased		—		—		978		356
Cost of shares repurchased
Allocated to retained earnings	$		$		$	5,760	$	1,946
Allocated to capital		—		—		480		175
Total cost of shares repurchased	$	—	$	—	$	6,240	$	2,121

The Company ~~had~~has remaining authority under the ~~2008 program~~2020 Program to repurchase up to ~~an aggregate~~$4,996,721 of ~~188,655 shares of its common stock. The 2008 program is~~ the ~~only program under which there is authority to repurchase~~currently outstanding shares of the Company’s common ~~stock. The Company did not repurchase any~~ stock ~~during the three or nine months ended~~as of September 30, 2017. The Company repurchased 8,812 shares of stock during the nine months ended September 30, 2016, in unsolicited transactions at a cost of $89,582 of which $4,331 was allocated to capital and $85,251 was allocated to retained earnings; the Company did not repurchase any stock during the three months ended September 30, 2016.2020. The Company has retired ~~and intends to~~or will retire all stock repurchased ~~stock, as applicable.~~under the 2020 Program and 2008 Program.

NOTE 3 – LOSS PER SHARE

The following table represents the reconciliation of the Company's basic loss per share and diluted loss per share computations reported on the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, ~~2017~~2020 and ~~2016:~~2019:

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					Nine Months Ended
	September 30					September 30
	2020			2019		2020			2019
Basic Earnings (Loss) Per Share
Net income (loss)	$	(17,940,488	)	$	212,467	$	(19,419,128	)	$	(735,284	)

Weighted average shares outstanding		5,305,742			5,306,747		5,306,068			5,306,929

Basic earnings (loss) per share	$	(3.38	)	$	0.04	$	(3.66	)	$	(0.14	)

Diluted Earnings (Loss) Per Share
Net income (loss)	$	(17,940,488	)	$	212,467	$	(19,419,128	)	$	(735,284	)

Weighted average shares outstanding		5,305,742			5,306,747		5,306,068			5,306,929
Diluted shares outstanding		5,305,742			5,306,747		5,306,068			5,306,929

Diluted earnings (loss) per share	$	(3.38	)	$	0.04	$	(3.66	)	$	(0.14	)

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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 changes~~2016-02 “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 effective~~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 ~~beginning~~adopted ASU 2016-02 effective January 1, ~~2018, with early~~2019. The adoption ~~permitted. The Company does~~of ASU 2016-02 did not ~~anticipate that ASU 2017-09 will~~ have a material impact ~~on its consolidated financial statements~~to the Condensed Consolidated Statements of Operations and ~~related~~the Condensed Consolidated Balance Sheets.

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

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~~primarily impact the Company’s available-for-sale fixed maturities portfolio and reinsurance recoverables. In November 2019, the FASB issued ASU 2019-10 “Financial Instruments – Credit Losses, Derivatives and Hedging, and Leases.” ASU 2019-10 updated the effective date for implementing ASU 2016-13 for smaller reporting entities, and that effective date will be for fiscal years beginning after December ~~31, 2019, but provides for an early adoption for fiscal years beginning after December 31, 2018. The~~15, 2022. Since the Company’s fixed income portfolio is invested primarily in higher rated bonds and the reinsurance is purchased from financially strong reinsurers, the Company ~~has not determined when it will adopt ASU 2016-13.~~

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~~In February 2016,~~believes 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~~2016-13 will not have a material impact onto 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~~Condensed Consolidated Statements 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 changeOperations 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.Condensed Consolidated Balance Sheets.

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 ~~2013~~2016 and California state income tax authorities for tax returns filed starting at taxable year ~~2012.~~2015. There are no ongoing examinations of income tax returns by federal or state tax authorities.

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As of September 30, ~~2017,~~2020, and December 31, ~~2016,~~2019, the Company had no unrecognized tax benefits or ~~liabilities. In addition, the Company~~liabilities and, therefore, had not accrued interest and penalties related to unrecognized tax benefits or liabilities. However, if interest and penalties would need to be accrued related to unrecognized tax benefits or liabilities, such amounts would be recognized as a component of federal income tax expense.

The fluctuation in the income tax rate as a percentage of pre-tax loss for the three and nine months ended September 30, 2020, when compared to the three and nine months ended September 30, 2019, is primarily due to an increase in the valuation allowance related to deferred tax assets on federal net operating losses discussed below.

As of September 30, 2020, the Company had deferred tax assets of $7,318,041 generated from $34,847,822 of federal net operating loss carryforwards that will begin to expire in 2035 and deferred tax assets of $2,286,564 generated from state net operating loss carryforwards which expire between 2028 and 2040. In connection with preparation of its financial statements, the Company periodically performs an analysis of future income projections to determine the adequacy of the valuation allowance. In light of the net losses that were generated in recent years, for the nine months ended September 30, 2020, the Company has established a valuation allowance for the aggregate amount of the federal and state net operating losses and other deferred tax assets in the amount of $9,849,484 that, in management’s judgment, are not more likely than not to be realized. For the year ended December 31, 2019, the Company carried a valuation allowance on deferred tax assets generated from federal and state net operating losses in the amount of $600,000 and $1,931,665, respectively.

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

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NOTE 6 – PROPERTY AND EQUIPMENT, NET

Property and equipment consist of the following:

	September 30			December 31			September 30			December 31
	2017			2016			2020			2019

Building and leasehold improvements located in Calabasas, California	$	8,352,180		$	8,339,807
Furniture, fixtures and equipment		2,707,211			2,673,670
Real estate held for sale located in Calabasas, California, net of accumulated depreciation and amortization							$	8,335,017		$	8,535,464
Furniture, fixtures, and equipment								2,184,752			2,110,653
Computer software		344,544			169,177			461,900			459,899
Accumulated depreciation and amortization		(3,073,857	)		(2,687,607	)		(2,317,361	)		(1,953,819	)
Land located in Calabasas, California		1,787,485			1,787,485
Computer software under development								1,607,555			1,074,398
Property and equipment, net	$	10,117,563		$	10,282,532		$	10,271,863		$	10,226,595

~~Depreciation~~Real estate held for sale, owned by Crusader, includes land, building, and leasehold improvements. On September 29, 2020, the real estate was listed for sale at a price of $12,999,000. Upon the listing, the Company stopped recording the depreciation expense on the Calabasas building ~~owned by Crusader, is~~and the leasehold improvements in the Calabasas building. The carrying value of the real estate held for sale less expected disposal costs do not present impairment issues.

Through the date of the real estate listing, depreciation on the Calabasas building was 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~~Through the date of the real estate listing, amortization of leasehold improvements in the Calabasas building ~~is being~~was 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 nine months ended September 30, ~~2017,~~2020, was ~~$121,540~~$190,916 and ~~$386,250,~~$567,639 respectively, and for the three and nine months ended September 30, ~~2016,~~2019, was ~~$121,577~~$132,664 and ~~$361,490,~~$402,769, respectively.

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For the three and nine months ended September 30, ~~2017,~~2020, the Calabasas building ~~has~~ generated rental revenue from non-affiliated tenants in the amount of ~~$83,257~~$33,325 and ~~$198,902,~~$122,684, respectively, and for the three and nine months ended September 30, ~~2016,~~2019, rental revenue from non-affiliated tenants in the amount of ~~$55,099~~$43,158 and ~~$171,133, respectively. This rental revenue~~$125,545, respectively, which is included in “Other income” from insurance company operation in the Company’s Condensed Consolidated Statements of Operations.

~~The~~For the three and nine months ended September 30, 2020, the Calabasas building ~~has~~ incurred operating expenses (including depreciation) in the amount of ~~$201,701~~$200,067 and ~~$549,295~~$573,100, respectively, and, for the three and nine months ended September 30, ~~2017, respectively, and $207,401 and $543,638 for the three and nine months ended September 30, 2016, respectively. These~~2019, it incurred operating expenses of $126,962 and $482,257, respectively, which 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 September 30, ~~2017, 14,481~~2020, 6,942 square feet of the Calabasas building was leased to non-affiliated ~~entities. As of September 30, 2017, the Calabasas building~~entities and 7,539 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.

~~12 of 32~~

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 September 30, ~~2017,~~2020, and December 31, ~~2016:~~2019:

Level 1 Level 2 Level 3 Total
September 30, 2017
Financial instruments:
Fixed maturity securities:
U.S. treasury securities $ 9,519,063 $ —   $ —   $ 9,519,063
Corporate securities —   22,995,709 —   22,995,709
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
Short-term investments 12,080,638 999,877 —   13,080,515
Total financial instruments at fair value $ 21,599,701 $ 75,749,709 $ —   $ 97,349,410

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
September 30, 2020
Financial instruments:
Available-for-sale fixed maturities:
U.S. Treasury securities	$	10,376,994	$	—	$	—	$	10,376,994
Corporate securities		—		47,946,647		—		47,946,647
Agency mortgage backed securities		—		23,345,593		—		23,345,593
Equity securities		1,557,856		—		—		1,557,856
Short-term investments		200,000		—		—		200,000
Total financial instruments at fair value	$	12,134,850	$	71,292,240	$	—	$	83,427,090

	Level 1		Level 2		Level 3		Total
December 31, 2019
Financial instruments:
Available-for-sale fixed maturities:
U.S. Treasury securities	$	15,235,332	$	—	$	—	$	15,235,332
Corporate securities		—		43,029,333		—		43,029,333
Agency mortgage backed securities		—		25,235,045		—		25,235,045
Short-term investments		2,196,815		—		—		2,196,815
Total financial instruments at fair value	$	17,432,147	$	68,264,378	$	—	$	85,696,525

Fair value measurements are not adjusted for transaction costs. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer. The Company did not have any transfers between Levels 1, 2, and 3 of the fair value hierarchy during the three and nine months ended September 30, ~~2017~~2020 and ~~2016.~~2019.

As a result of the spread of the ongoing coronavirus (COVID-19) pandemic, economic uncertainties have arisen which are likely to impact the fair value of investments, day to day administration of the business and premium volume. While the Company does not believe it is exposed to substantial risk from coronavirus-related claims under the insurance policies written by Crusader, it is likely that the fair value of its investment portfolio will be adversely affected by the volatility in the capital markets, as well as general economic conditions as a result of the coronavirus and governmental responses to the pandemic. The financial impact of these uncertainties is unknown at this time.

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 September 30						Nine Months Ended September 30
	2020			2019			2020			2019

Fixed maturities	$	499,649		$	532,307		$	1,551,380		$	1,626,843
Equity securities		5,888			—			12,220			—
Short-term investments and cash equivalents		4,582			16,808			24,496			53,266
Gross investment income		510,119			549,115			1,588,096			1,680,109
Less: investment expenses		(32,974	)		(31,007	)		(100,761	)		(98,627	)
Net investment income		477,145			518,108			1,487,335			1,581,482
Net realized investment gains (losses)		38,214			—			39,789			(12,661	)
Net unrealized investment gains on equity securities		19,670			—			42,629			—
Net investment income, realized investment gains (losses) and unrealized investment gains on equity securities	$	535,029		$	518,108		$	1,569,753		$	1,568,821

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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
September 30, 2017
Available for sale:
Fixed maturities:
Certificates of deposit $ 35,826,000 $ — $ — $ 35,826,000
U.S. treasury securities 9,528,210 248 (9,395 ) 9,519,063
Corporate securities 22,983,627 49,063 (36,981 ) 22,995,709
Agency mortgage-backed securities 15,941,512 3,754 (17,143 ) 15,928,123
Total fixed maturities $ 84,279,349 $ 53,065 $ (63,519 ) $ 84,268,895

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
September 30, 2020
Available-for-sale fixed maturities:
U.S. Treasury securities	$	10,090,505	$	286,489	$	—		$	10,376,994
Corporate securities		45,799,041		2,351,571		(203,965	)		47,946,647
Agency mortgage-backed securities		22,462,009		887,506		(3,922	)		23,345,593
Held-to-maturity fixed securities:
Certificates of deposits		798,000		—		—			798,000
Total fixed maturities	$	79,149,555	$	3,525,566	$	(207,887	)	$	82,467,234

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
December 31, 2019
Available-for-sale fixed maturities:
U.S. Treasury securities	$	15,105,795	$	130,564	$	(1,027	)	$	15,235,332
Corporate securities		41,953,378		1,076,012		(57	)		43,029,333
Agency mortgage-backed securities		24,943,238		293,757		(1,950	)		25,235,045
Held-to-maturity fixed securities:
Certificates of deposits		798,000		—		—			798,000
Total fixed maturities	$	82,800,411	$	1,500,333	$	(3,034	)	$	84,297,710

13As of 32 September 30, 2020, one corporate security, included in available-for-sale fixed maturities, was held as collateral with Comerica Bank & Trust, N. A. (“Comerica”), pursuant to the reinsurance trust agreement among Crusader, United Specialty Insurance Company (“USIC”) and Comerica to secure payment of Crusader’s liabilities and performance of its obligations under the reinsurance arrangement with USIC. The estimated fair value and amortized cost of that security was $723,625 and $688,147 on September 30, 2020, respectively.

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

	September 30			December 31
	2020			2019

Gross unrealized gains on fixed maturities	$	3,525,566		$	1,500,333
Gross unrealized losses on fixed maturities		(207,887	)		(3,034	)
Net unrealized gains on fixed maturities		3,317,679			1,497,299
Deferred federal tax expense		(696,712	)		(314,433	)
Net unrealized gains, net of deferred income taxes	$	2,620,967		$	1,182,866

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:
U.S. treasury securities	$	9,519,063	$	(9,395	)	$	—	$	—
September 30, 2020
Corporate securities		9,731,038		(36,981	)		—		—	$	3,431,312	$	(203,965	)		6	$	—	$	—		—
Agency mortgage-backed securities		12,973,738		(17,143	)		—		—		1,215,171		(3,922	)		2		—		—		—
Total	$	32,223,839	$	(63,519	)	$	—	$	—	$	4,646,483	$	(207,887	)		8	$	—	$	—		—

Less than 12 Months 12 Months or Longer
Estimated
Fair Value
Gross
Unrealized Losses
Estimated
Fair Value
Gross
Unrealized Losses
December 31, 2016:
U.S. treasury securities $ — $ — $ 9,097,285 $ (2,122 )
Total $ — $ — $ 9,097,285 $ (2,122 )

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	Less than 12 Months							12 Months or Longer
	Estimated Fair Value		Gross Unrealized Losses			Number of Securities		Estimated Fair Value		Gross Unrealized Losses			Number of Securities
December 31, 2019
U.S. Treasury securities	$	1,996,562	$	(252	)		1	$	1,002,031	$	(775	)		1
Corporate securities		999,818		(57	)		1		—		—			—
Agency mortgage-backed securities		750,058		(1,950	)		2		—		—			—
Total	$	3,746,438	$	(2,259	)		4	$	1,002,031	$	(775	)		1

The Company closely monitors its investments. If an unrealized loss is determined to be other-than-temporary, it is written off as a realized loss through the Condensed Consolidated Statements of Operations. The Company’s methodology of assessing other-than-temporary impairments is based on security-specific analysis as of the balance sheet date and considers various factors including the length of time to maturity and the extent to which the fair value has been less than the cost, the financial condition and the near-term prospects of the issuer, and whether the debtor is current on its contractually obligated interest and principal payments. During the three and nine months ended September 30, 2020, one fixed maturity corporate security experienced a significant decline in market value; the market and book value of that security at September 30, 2020, was $744,750 and $911,492, respectively. The unrealized losses on all securities as of September 30, ~~2017,~~2020, and December 31, ~~2016,~~2019, 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. During~~conditions or investment securities may be called by their issuers prior to the ~~three months ended September 30, 2017,~~securities’ maturity. The fixed maturity securities previously held by the Company were sold ~~two fixed~~and called 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. as follows:

	Three Months Ended September 30				Nine Months Ended September 30
	2020		2019		2020		2019

Fixed maturities securities sold
Number of securities sold		6		—		7		3
Amortized cost of sold securities	$	2,923,386	$	—	$	3,524,702	$	2,997,098
Realized gains (losses) on sales	$	30,057	$	—	$	31,171	$	(12,679	)

Fixed maturities securities called
Number of securities called		1		—		3		1
Amortized cost of called securities	$	249,998	$	—	$	1,949,536	$	999,982
Realized gains on calls	$	2	$	—	$	464	$	18

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 September 30, 2016. Unrealizedunrealized 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.

14The Company started investing in common stock equity securities during the three months ended March 31, 2020. The Company’s equity securities allocation is intended to enhance the return of 32 and provide diversification for the total investment portfolio. A summary of equity securities is shown below:

	September 30		December 31
	2020		2019

Cost	$	1,515,227	$	—
Unrealized gain		42,629		—
Fair market value of equity securities	$	1,557,856	$	—

The primary cause for the increase in fair value of the Company’s equity securities portfolio for the nine months ended September 30, 2020 was the overall increase in equity markets during the period.

The Company’s investment in certificates of deposit included ~~$35,426,000 and $60,780,000~~$598,000 of brokered certificates of deposit as of September 30, ~~2017,~~2020 and December 31, ~~2016, respectively. Brokered certificates~~2019.

17 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 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.40

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

	September 30		December 31		September 30		December 31
	2017		2016		2020		2019

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 Crusader~~with 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~~

	September 30		December 31
	2020		2019
U.S. Treasury bills	$	—	$	1,996,815
Certificates of deposit		200,000		200,000
Total short-term investments	$	200,000	$	2,196,815

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				Nine Months Ended September 30
	2017		2016		2020		2019

Reserve for unpaid losses and loss adjustment expenses at January 1 – gross of reinsurance	$	47,055,787	$	49,093,571	$	55,066,480	$	51,657,155
Less reinsurance recoverable on unpaid losses and loss adjustment expenses		9,520,970		9,636,961		14,725,855		9,531,602
Reserve for unpaid losses and loss adjustment expenses at January 1 – net of reinsurance		37,534,817		39,456,610		40,340,625		42,125,553

Incurred losses and loss adjustment expenses:
Provision for insured events of current year		18,046,953		17,119,210		19,925,024		13,984,532
Development of insured events of prior years		6,304,798		863,141		8,161,318		1,366,836
Total incurred losses and loss adjustment expenses		24,351,751		17,982,351		28,086,342		15,351,368

Loss and loss adjustment expense payments:
Attributable to insured events of the current year		4,375,729		4,783,251		5,685,642		4,531,844
Attributable to insured events of prior years		16,335,178		12,487,969		11,756,705		15,088,952
Total payments		20,710,907		17,271,220		17,442,347		19,620,796

Reserve for unpaid losses and loss adjustment expenses at September 30 – net of reinsurance		41,175,661		40,167,741		50,984,620		37,856,125
Reinsurance recoverable on unpaid losses and loss adjustment expenses		11,890,854		9,653,714		23,349,279		13,799,868
Reserve for unpaid losses and loss adjustment expenses at September 30 – gross of reinsurance	$	53,066,515	$	49,821,455	$	74,333,899	$	51,655,993

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 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.

1618 of 3240

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 against customers or their agents to enforce collection of premiums, commissions, or fees. These routine items of litigation do not materially affect the Company and are handled on a routine basis by the Company through its counsel.

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

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

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

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 the~~Company'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.

~~17 of 32~~

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 that~~company. Currently, the Company’s subsidiary Crusader Insurance Company (“Crusader”) underwrites commercial property and casualty insurance, ~~through its insurance company subsidiary; provides~~the Company’s subsidiaries Unifax Insurance Systems, Inc. (“Unifax”) and American Insurance Brokers, Inc. (“AIB”) provide marketing and various underwriting support services related to property, casualty, health and life insurance, ~~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 September 30, ~~2017,~~2020, were ~~$9,293,389~~$8,259,686 compared to ~~$8,998,342~~$8,258,966 for the three months ended September 30, ~~2016,~~2019, an increase of ~~$295,047 (3%~~$720 (0%). Total revenues for the nine months ended September 30, ~~2017,~~2020, were ~~$27,495,192~~$24,241,094 compared to ~~$26,250,652~~$23,189,539 for the nine months ended September 30, ~~2016,~~2019, an increase of ~~$1,244,540~~$1,051,555 (5%). The Company had a net loss of ~~$2,927,249~~$17,940,488 for the three months ended September 30, ~~2017,~~2020, compared to a net ~~loss~~income of ~~$1,953,497~~$212,467 for the three months ended September 30, ~~2016, an increase of $973,752 (50%).~~2019. The Company had a net loss of ~~$5,949,007~~$19,419,128 for the nine months ended September 30, ~~2017,~~2020, compared to a net loss of ~~$2,001,454~~$735,284 for the nine months ended September 30, ~~2016, an increase of $3,947,553 (197%).~~2019.

~~In December 2015,~~Repeated and sustained underwriting losses in Crusader’s Apartments & Commercial Buildings vertical and growth in Crusader’s Transportation vertical, a ~~judgment was finalized on a~~product which is generally known for its difficulty to be underwritten profitably, coupled with changes in the market conditions and increases in social inflation, caused Crusader ~~Insurance Company (“Crusader”, a wholly owned subsidiary~~management to reevaluate the assumptions used in its process for estimating loss and loss adjustment expense reserves. This reevaluation and the use of ~~the Company) policy liability claim. In March 2016, an additional judgment~~updated assumptions led to significantly more conservative estimates for ~~plaintiff’s attorney fees~~expected claims frequency, claims severity 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~~ultimate incurred ~~$1,422,499 and $1,497,499 in additional~~ losses and loss adjustment expenses during the ~~three~~quarterly re-evaluation of the loss and ~~nine~~loss adjustment expense reserves as of September 30, 2020. The reevaluation resulted in a $10,308,150 increase in Crusader’s incurred but not reported (“IBNR”) reserves from June 30, 2020, to September 30, 2020, which was a primary contributor to the $17,320,051 losses and loss adjustment expenses recognized for the three months ended September 30, ~~2017, respectively.~~2020.

19 of 40

This overview discusses some of the relevant ~~material~~ factors that management considers in evaluating the Company's performance, prospects, and risks. ~~This discussion should~~It is not all inclusive and is meant to be read in conjunction with the ~~Company’s Annual Report on Form 10-K for~~entirety of the ~~year ended December 31, 2016, including management’s~~management 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 2019 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

As a result of the ongoing coronavirus (COVID-19) pandemic, economic uncertainties have arisen, which negatively impacted and may continue to negatively impact the fair value of investments, day to day administration of the Company’s business and the Company’s results of operations, financial condition and prospects.

The effects of the ongoing COVID-19 pandemic were a major contributor to the variability in fair value of the Company’s fixed income and equity investments during the nine months ended September 30, 2020, and the economic uncertainty caused by the pandemic may lead to further investment valuation volatility. In addition, the recent decline in investment yields resulted in lower reinvestment rates, compared to the previous years, which will cap the Company’s investment portfolio’s ability to generate higher levels of investment income, absent a larger invested asset base or a change in investment philosophy.

Although the COVID-19 pandemic did not have a material impact on Crusader’s overall gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties) during the three and nine months ended September 30, 2020, Crusader has experienced a decrease in new business submissions and renewals related to the pandemic in its Bars/Taverns market sector niche as a result of government regulations, such as shelter-in-place orders and in-door dining limitations, which has adversely impacted the gross written premium for that niche.

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

The Company’s financial results for the three and nine months ended September 30, 2020, do not fully reflect the potential adverse impacts that the ongoing coronavirus pandemic has had or will have on its business due to a high degree of uncertainty around this relatively new and continuously evolving environment. The financial impact of these uncertainties is unknown at this time but could result in a material adverse effect on the Company’s business, results of operations, financial condition and prospects.

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

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

In light of the challenges faced and operational results, the Company has taken several steps to improve. To improve Crusader's loss ratios, beginning in January 2017, the Company made significant changes in its staffing and in its pricing and risk selection practices. To improve revenues the Company is working to improve its sales in the markets that it has historically served, to gain access to markets that it has not previously served, and to generate new sources of revenue on a fee-for-service basis. For example, the Company also re-activated its US Risk Managers, Inc. subsidiary so that it can provide claims adjustment services to non-affiliated insurers and to self-insurers on a fee-for-service basis (i.e., where Crusader will not be underwriting the risk), providing the potential for an alternative revenue source to the Company.

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The Company previously announced an arrangement, executed on April 6, 2020, with United Specialty Insurance Company (“USIC”), a non-admitted and non-affiliated insurer. The arrangement provided Crusader with the ability to issue USIC policies which are rated “A” by A.M. Best Company and which provide pricing and coverage flexibility previously unavailable through Crusader policies. The agreements with USIC were entered into by Crusader and Unifax, an affiliate of Crusader, prior to obtaining approval of the transactions by the California Department of Insurance (the “DOI”) as required by the California Insurance Holding Company System Act for transactions that include affiliates. On September 2, 2020, the Company placed a moratorium on placing any new risks with USIC by Unifax pending resolutions of issues relating to the structure of the transactions. Crusader and Unifax are in negotiations with USIC to determine whether and how the transactions can be restructured in order to address issues raised by the DOI. There can be no assurance that such efforts will be successful. If the transactions are not restructured, the agreements with USIC may need to be terminated. If the agreements with USIC are terminated, such termination could result in significant financial expenses regarding such termination and the Company’s reputation could be adversely affected.

In 2018, the Company determined that the cost to replace its legacy IT system would be between $4,000,000 and $8,000,000, and the installation of such a system would take between two to four years. After weighing the time and expense involved against the anticipated benefit from such an investment, the Company opted for what it then perceived to be a less expensive upgrade to its legacy system, 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, at a cost of approximately $300,000, excluding costs of Unico’s employees involved in the upgrade, the system upgrade is now expected to be completed at a cost of approximately $1,300,000, excluding costs of Unico’s employees involved in the upgrade, due to unexpected technical challenges. The expected completion of the upgrade was moved from end of 2020 to end of first quarter of 2021 due to personnel changes. In light of the significant delays and increases in cost associated with its legacy upgrade project, the Company has deployed additional resources toward the management of this project and has renegotiated the relationship that it has with the non-affiliated vendor working on this project.

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 cash generated primarily from the insurance company operation. The insurance company operation generated approximately ~~92%~~94% of ~~total~~consolidated revenues for ~~each of~~ the three and nine months ended September 30, ~~2017, and~~2020, compared to 92% of consolidated revenues for the three and nine months ended September 30, ~~2016. The~~2019. None of the Company’s ~~remaining~~other operations ~~constitute a variety of specialty insurance services, each with unique characteristics and~~is individually ~~not~~ material to ~~total~~consolidated revenues.

Insurance Company Operation

As of September 30, ~~2017,~~2020, 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 writing~~Crusader’s business remains concentrated in California (99.9% of gross written premium during the ~~states~~three and nine months ended September 30, 2020 and 99.8% of ~~Arizona~~gross written premium during the three and ~~Washington in~~nine months ended 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)30, 2019).

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.

~~18 of 32~~

Crusader’s total ~~direct~~gross 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 September 30						Nine Months Ended September 30
	2020		2019		Change		2020		2019			Change

California	$	9,653,326	$	9,444,753	$	208,573	$	27,619,957	$	27,397,892		$	222,065
Arizona		3,435		—		3,435		24,817		31,593			(6,776	)
Washington		—		—		—		—		(1,149	)		1,149
Total gross written premium	$	9,656,761	$	9,444,753	$	212,008	$	27,644,774	$	27,428,336		$	216,438

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

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

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

	Three Months Ended September 30					Nine Months Ended September 30						Three Months Ended September 30						Nine Months Ended September 30
	2017		2016			2017			2016			2020			2019			2020			2019

Gross written premium												$	9,656,761		$	9,444,753		$	27,644,774		$	27,428,336
Less: written premium ceded to reinsurers													(2,021,261	)		(1,788,682	)		(6,003,698	)		(5,205,210	)
Net written premium	$	7,754,793	$	8,120,565		$	24,380,186		$	24,580,923			7,635,500			7,656,071			21,641,076			22,223,126
Change in direct unearned premium		404,454		(137,144	)		(97,396	)		(1,322,897	)
Change in ceded unearned premium		9,005		(2,491	)		26,311			13,270
Change in gross unearned premium													(504,769	)		(660,216	)		(822,093	)		(2,422,025	)
Change in ceded unearned premiums													(6,459	)		(17,157	)		(13,466	)		(40,140	)
Net earned premium	$	8,168,252	$	7,980,930		$	24,309,101		$	23,271,296		$	7,124,272		$	6,978,698		$	20,805,517		$	19,760,961

The insurance company operation 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 ~~profit (loss)~~gain before income taxes is as follows:

	Three Months Ended September 30									Nine Months Ended September 30									Three Months Ended September 30									Nine Months Ended September 30
	2017			2016			Increase (Decrease)			2017			2016			Increase (Decrease)			2020			2019			Change			2020			2019			Change

Net written premium	$	7,754,793		$	8,120,565		$	(365,772	)	$	24,380,186		$	24,580,923		$	(200,737	)	$	7,635,500		$	7,656,071		$	(20,571	)	$	21,641,076		$	22,223,126		$	(582,050	)
Change in net unearned premium		413,459			(139,635	)		553,094			(71,085	)		(1,309,627	)		1,238,542			(511,228	)		(677,373	)		166,145			(835,559	)		(2,462,165	)		1,626,606
Net earned premium		8,168,252			7,980,930			187,322			24,309,101			23,271,296			1,037,805			7,124,272			6,978,698			145,574			20,805,517			19,760,961			1,044,556
Less:
Losses and loss adjustment expenses		9,917,896			8,038,100			1,879,796			24,351,751			17,982,351			6,369,400			17,320,051			5,137,974			12,182,077			28,086,342			15,351,368			12,734,974
Policy acquisition costs		1,854,212			1,741,499			112,713			4,943,350			5,142,250			(198,900	)		1,279,703			1,194,870			84,833			3,626,154			3,571,065			55,089
Total underwriting expenses		11,772,108			9,779,599			1,992,509			29,295,101			23,124,601			6,170,500			18,599,754			6,332,844			12,266,910			31,712,496			18,922,433			12,790,063
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																			$	(11,475,482	)	$	645,854		$	(12,121,336	)	$	(10,906,979	)	$	838,528		$	(11,745,507	)

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

~~Crusader~~22 of 40

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

	Three Months Ended September 30						Nine Months Ended September 30
	2020			2019			2020			2019

Underwriting gain (loss) before income taxes	$	(11,475,482	)	$	645,854		$	(10,906,979	)	$	838,528
Insurance company operation revenues:
Investment income		477,145			518,108			1,487,335			1,581,482
Net realized investment gains (losses)		38,214			—			39,789			(12,661	)
Net unrealized investment gains on
equity securities		19,670			—			42,629			—
Other income		74,784			114,531			278,544			22,660
Other insurance operations revenues:
Gross commissions and fees		461,540			581,100			1,388,494			1,656,371
Finance charges and fees earned		56,985			66,526			191,690			169,896
Other income		7,076			3			7,096			10,830
Less expenses:
Salaries and employee benefits		2,584,478			1,021,597			4,958,900			3,062,251
Commissions to agents/brokers		23,235			40,946			73,190			132,144
Other operating expenses		1,398,135			532,853	��		3,372,483			1,896,386
Income (loss) before taxes	$	(14,345,916	)	$	330,726		$	(15,875,975	)	$	(823,675	)

Unearned premiums represent premium applicable to the unexpired terms of policies in force. The Company evaluates its unearned premiums periodically for premium deficiencies by comparing the sum of expected claim costs, unamortized deferred policy acquisition costs, and maintenance costs partially offset by net investment income to related unearned premiums. To the extent that any of ~~Crusader’s~~the Company’s programs become unprofitable, a premium deficiency reserve may be required. ~~During the three months ended~~The Company recognized a premium deficiency of $100,000 and $0 as of September 30, ~~2017, Crusader established a $150,000~~2020 and 2019, respectively. The premium deficiency ~~reserve; Crusader did not carry such reserve prior to the three months ended September 30, 2017.~~was recorded as a reduction in deferred policy acquisition costs.

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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 September 30						Nine Months Ended September 30
	2020		2019		Change		2020		2019		Change

Losses and loss adjustment expenses:
Provision for insured events of current year	$	9,385,389	$	4,299,018	$	5,086,371	$	19,925,024	$	13,984,532	$	5,940,492
Development of insured events of prior years		7,934,662		838,956		7,095,706		8,161,318		1,366,836		6,794,482
Total losses and loss adjustment expenses	$	17,320,051	$	5,137,974	$	12,182,077	$	28,086,342	$	15,351,368	$	12,734,974

Losses and loss adjustment expenses were ~~121%~~243% and ~~100%~~135% of net earned premium for the three and nine months ended September 30, ~~2017,~~2020, respectively, compared to ~~101%~~74% and ~~77%~~78% of net earned premium for the three and nine months ended September 30, ~~2016,~~2019, respectively. For further analysis, refer to “Results of Operations.”

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On January 17, 2019, A.M. Best downgraded Crusader’s Financial Strength Rating (“FSR”) to “B++” (Good) from “A-“ (Excellent) and its Long-Term Issuer Credit Rating (“Long-Term ICR”) to “bbb+” from “a-“. The outlook of the FSR was revised at that time to stable from negative while the outlook of the Long-Term ICR remained negative. The rating downgrades reflected a revision in A.M. Best’s assessment of Crusader’s operating performance to adequate from strong.

On January 30, 2020, A.M. Best affirmed Crusader’s FSR of “B++” (Good) and further downgraded Crusader’s Long-Term ICR to “bbb” from “bbb+”. The outlook of the FSR of Crusader remains stable while the outlook of the Long-Term ICR of Crusader was revised to stable from negative. Also on January 30, 2020, A.M Best downgraded the Long-Term ICR of Unico to “bb” from “bb+”. The outlook of the Long-Term ICR of Unico was revised to stable from negative.

The January 30, 2020, ratings reflect Crusader’s balance sheet strength, which A.M. Best categorizes as very strong, as well as its marginal operating performance, limited business profile and marginal enterprise risk management. The downgrade of the Long-Term ICR reflects a revision in A.M. Best’s assessment of Crusader‘s operating performance to marginal from adequate. According to A.M. Best, (i) the downgrades consider a material decline in Crusader’s operating performance, resulting from sub-par underwriting results in a relatively compact time frame, (ii) Crusader’s adverse performance has been amplified by increased frequency and severity of apartment building insurance related claims, (iii) multiple operating metrics of Crusader trail the commercial casualty composite on a five-year and 10-year basis, and (iv) the consequential business changes being implemented to address these conditions lead to significant execution risk in returning Crusader’s operational results to historical levels.

Some of Crusader’s policyholders, or the lenders, landlords or clients of Crusader’s policyholders, require insurance from a company that has an A.M. Best FSR of “A-” or higher, and the A.M. Best’s changed ratings of Crusader may also have a negative impact on Crusader’s reputation. Therefore, Crusader’s and Unico’s changed ratings may have a negative impact on the Company’s revenue and results of operations. The Company cannot quantify the impact that the rating changes have had or will have on its revenue and results of operations, and the Company cannot determine if or when Crusader might regain the “A-” FSR from A.M. Best.

The reinsurance arrangement with USIC allows Unifax to offer its customers policies written on USIC paper, which has A.M. Best FSR of “A,” when such rating is required. On September 2, 2020, the Company placed a moratorium on placing any new risks with USIC.

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 8%6% of total revenues in ~~each of~~ the three and nine months ended September 30, ~~2017, and~~2020, compared to approximately 8% of total revenues in the three and nine months ended September 30, ~~2016.~~2019, respectively.

Investments ~~and Liquidity~~

The Company generated revenues from its total invested assets of ~~$97,359,864 (at~~$80,864,783 (fixed maturities at amortized cost and equity securities at cost) and ~~$90,782,232 (at~~$83,091,961 (fixed maturities at amortized cost) as of September 30, ~~2017~~2020 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.2019, respectively.

Net investment income (net of investment expenses) ~~included in insurance company operation and other insurance operations revenue increased $74,922 (32%~~decreased $40,963 (8%) and ~~$126,674 (19%~~$94,147 (6%) to ~~$309,492~~$477,145 and ~~$785,785~~$1,487,335 for the three and nine months ended September 30, ~~2017,~~2020, respectively, compared to ~~$234,570~~$518,108 and ~~$659,111~~$1,581,482 for the three and nine months ended September 30, ~~2016,~~2019, respectively. ~~The increase~~This decrease in net investment income was due primarily ~~a result of an increase~~to decrease 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 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. Due to the current interest rate environment, athe current target effective duration for the Company’s investment portfolio is between ~~3.25~~2.0 and ~~4.75~~4.0 years. As of September 30, ~~2017,~~2020, all of the Company’s investments are in U.S. ~~treasury~~Treasury securities, corporate fixed maturity securities, agency mortgage-backed securities, equity securities, Federal Deposit Insurance Corporation (“FDIC”) insured certificates of deposit, money market funds, and a savings account. ~~The~~All of the Company’s investments, ~~in U.S treasury securities, corporate fixed maturity securities, agency mortgage-backed securities, and money market funds~~except for the certificates of deposit, are readily marketable.

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As of September 30, ~~2017,~~2020, the weighted average maturity of the Company’s investments was approximately ~~2.7~~8.0 years, and the effective duration for available-for-sale investments (investments managed under the investment guidelines) was 3.16 years.

~~Liquidity~~LIQUIDITY AND CAPITAL RESOURCES

The most significant liquidity risk faced by the Company is adverse development of the insurance company’s loss and ~~Capital Resources~~loss adjustment expense reserves. Based on the Company’s current loss and loss expense reserves and expected current and future payments, the Company believes that there are no current liquidity issues. However, no assurance can be given that the Company’s estimate of ultimate loss and loss adjustment expense reserves will be sufficient.

Crusader has a significant amount of cash, 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 September 30, ~~2017,~~2020, were ~~$97,590,240~~$86,570,446 compared to ~~$104,072,824~~$90,778,865 at December 31, ~~2016.~~2019. Crusader's cash, ~~restricted~~ cash equivalents, and investments ~~were 94%~~was 98% of the total cash and investments (at amortized cost) held by the Company as of September 30, ~~2017,~~2020, and December 31, ~~2016.~~2019.

20As of 32 September 30, 2020, all of the Company’s investments are in U.S. Treasury securities, FDIC insured certificates of deposit, corporate fixed maturity securities, agency mortgage-backed securities, equity securities and short-term investments. All of the Company’s investments, except for the certificates of deposit, are readily marketable.

The Company’s investments, fixed maturities and short-term bonds at amortized cost, and equities and other short-term investments at cost, were as follows:

					September 30		December 31
	September 30		December 31		2020		2019
	2017		2016
Fixed maturities:
Certificates of deposit	$	35,826,000	$	61,280,000
U.S. treasury securities		9,528,210		19,091,842
U.S. Treasury securities					$	10,090,505	$	15,105,795
Corporate securities		22,983,627		—		45,799,041		41,953,378
Agency mortgage-backed securities		15,941,512		—		22,462,009		24,943,238
Certificates of deposit						798,000		798,000
Total fixed maturities		84,279,349		80,371,842		79,149,555		82,800,411
Equity securities						1,515,228		—
Short-term investments		13,080,515		10,204,603		200,000		2,196,815
Total investments	$	97,359,864	$	90,576,445	$	80,864,783	$	84,997,226

~~The increase in total investments from December 31, 2016, to~~

As of September 30, ~~2017, is due~~2020, one corporate security, included in available-for-sale fixed maturities, was held as collateral with Comerica Bank & Trust, N. A. (“Comerica”), pursuant to ~~receipt~~the reinsurance trust agreement among Crusader, USIC and Comerica to secure payment of ~~funds previously held~~Crusader’s liabilities and performance of its obligations under the reinsurance arrangement with USIC. The estimated fair value and amortized cost of that security was $723,625 and $688,147 on ~~deposit with the Los Angeles Superior Court.~~September 30, 2020, respectively.

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

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 are similar to what the Company believes are general investment guidelines used by Crusader’s peers.

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Under the ~~new~~Company’s investment guidelines, investments may only include U.S. ~~treasury~~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.

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 outside~~An independent investment advisor ~~began managing~~manages 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.

	Three Months Ended September 30				Nine Months Ended September 30
	2020		2019		2020		2019

2020 Program
Number of shares repurchased		630		—		630		—
Cost of shares repurchased
Allocated to retained earnings	$	2,969	$		$	2,969	$
Allocated to capital		310		—		310		—
Total cost of shares repurchased	$	3,279	$	—	$	3,279	$	—

2008 Program
Number of shares repurchased		—		—		978		356
Cost of shares repurchased
Allocated to retained earnings	$		$		$	5,760	$	1,946
Allocated to capital		—		—		480		175
Total cost of shares repurchased	$	—	$	—	$	6,240	$	2,121

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The Company reported ~~$6,794,954~~$3,634,617 net cash used by operating activities for the nine months ended September 30, ~~2017,~~2020, compared to ~~$117,638~~$3,633,043 net cash used by operating activities for the nine months ended September 30, ~~2016. The change in cash flows from operating activities is primarily attributable to the increase in loss and loss adjustment expense payments. Other fluctuations~~2019. 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.

On September 14, 2020, and May 20, 2020, Crusader paid cash dividends of $2,000,000 to Unico, its parent and sole shareholder. These two dividends totaling $4,000,000 are intended to be used primarily for general corporate purposes. Based on Crusader’s statutory surplus for the year ended December 31, 2019, the maximum aggregate dividend that could be made by Crusader to Unico without prior regulatory approval in 2020 is $4,649,896.

While material capital expenditures may be funded through borrowings, the Company believes that its cash and short-term investments at September 30, ~~2017,~~2020, 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 Operations~~RESULTS OF OPERATIONS

All comparisons made in this discussion are comparing the three and nine months ended September 30, ~~2017,~~2020, to the three and nine months ended September 30, ~~2016,~~2019, unless otherwise indicated.

For the three and nine months ended September 30, ~~2017,~~2020, total revenues were ~~$9,293,389 and $27,495,192, respectively,~~$8,259,686, an increase of ~~$295,047 (3%~~$720 (0%) and ~~$1,244,540~~$24,241,094, an increase of $1,051,555 (5%), compared to total revenues of ~~$8,998,342~~$8,258,966 and ~~$26,250,652~~$23,189,539 for the three and nine months ended September 30, ~~2016,~~2019, respectively. For the three and nine months ended September 30, ~~2017,~~2020, the Company had a loss before taxes of ~~$4,435,225~~$14,345,916 and ~~$9,053,397,~~$15,875,975, respectively, ~~an increase~~compared to income before taxes of ~~$1,468,503 (49%)~~$330,726 and ~~$6,025,243 (199%), compared to~~ loss before taxes of ~~$2,966,722 and $3,028,154~~$823,675 for the three and nine months ended September 30, ~~2016,~~2019, respectively. For the three and nine months ended September 30, ~~2017,~~2020, the Company had a net loss of ~~$2,927,249~~$17,940,488 and ~~$5,949,007,~~$19,419,127, respectively, ~~an increase of $973,752 (50%) and $3,947,553 (197%),~~ compared to net income of $212,467 and net loss of ~~$1,953,497 and $2,001,454~~$735,284, for the three and nine months ended September 30, ~~2016, respectively.~~2019, respectively

The was a slight increase in revenues of ~~$295,047 (3%~~$720 (0%) for the three months ended September 30, ~~2017,~~2020, when compared to the three months ended September 30, ~~2016,~~2019. The increase in revenues of 1,051,555 (5%) for the nine months ended September 30, 2020, when compared to the nine months ended September 30, 2019, was due primarily to an increase in net earned premium of ~~$187,322 (2%). The increase in revenues of $1,244,540~~$1,044,556 (5%~~) for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, was due primarily to an increase in net earned premium of $1,037,805 (4%~~).

The increase in loss before tax of ~~$1,468,503 (49%)~~$14,676,642 for the three months ended September 30, ~~2017,~~2020, compared to the three months ended September 30, ~~2016,~~2019, was due primarily to ~~the~~an increase in ~~loss~~losses and loss adjustment expenses of ~~$1,879,796 (23%~~$12,182,077 (237%) ~~partially offset by the~~, an increase in ~~net earned premium~~salaries and employee benefits of ~~$187,322 (2%~~$1,562,881 (153%), and ~~the decrease~~an increase in other operating expenses of ~~$130,933 (16%~~$865,282 (162%)~~. The~~.The increase in loss before tax of ~~$6,025,243 (199%)~~$15,052,300 for the nine months ended September 30, ~~2017,~~2020, compared to the nine months ended September 30, ~~2016,~~2019, was primarily due ~~primarily~~ to ~~the~~an increase in ~~loss~~losses and loss adjustment expenses of ~~$6,369,400 (35%~~$12,734,974 (83%), ~~the~~an increase in salaries and employee benefits of ~~$554,495 (14%~~$1,896,649 (62%), ~~and the~~an increase in other operating expenses of ~~$539,547 (26%~~$1,476,097 (78%) partially offset by ~~the~~an increase in net earned premium of ~~$1,037,805 (4%~~$1,044,556 (5%) and an increase in other income of $255,884 (1129%).

During the three months ended September 30, 2020, the Company reevaluated assumptions used in its process for estimating loss and loss adjustment reserves due to its experiences in Crusader’s Apartments & Commercial Buildings and Transportation verticals as well as changes in the market conditions. The reevaluation resulted in a $10,308,150 increase in Crusader’s IBNR reserves from June 30, 2020, to September 30, 2020, which primarily contributed to the increase of $12,182,077 in the losses and loss adjustment expenses.

The increase in salaries and employee benefits of $1,562,300 was due primarily to costs associated with the retirement of the Company’s former President and Chief Executive officer.

Written premium

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

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~~Written premium~~~~is a required statutory measure. Direct~~

Gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties) reported on Crusader’s statutory financial statements ~~decreased $220,841~~increased $212,008 (2%) and ~~$267,576~~$216,438 (1%) to ~~$9,446,205~~$9,656,761 and ~~$29,387,988~~$27,644,774 for the three and nine months ended September 30, ~~2017,~~2020, respectively, compared to ~~$9,667,046~~$9,444,753 and ~~$29,120,412~~$27,428,336 for the three and nine months ended September 30, ~~2016,~~2019, 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~~Company believes that it can grow its sales and profitability ~~by continuing~~through improved specialization and sales incentives, currently focused in four underwriting verticals: (1) Transportation, (2) Food, Beverage & Entertainment, (3) Garage & Mercantile, and (4) Apartments & Commercial Buildings. The decrease in gross written premium for the three months ended September 30, 2020, is due primarily to focus upon five areas of its operations: (1) product development, (2) improved service to retail brokers, (3) appointment of captive and independent retail agents, (4) geographical expansion, and (5) use of alternative marketing channels. Whilecoronavirus-related contraction in 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.Food, Beverage & Entertainment underwriting vertical. The ~~Company is currently evaluating its alternatives.~~

~~Earned~~increase in gross 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 nine months ended September 30, ~~2017, respectively, compared~~2020, is due to ~~$9,529,911~~growth in the Company’s Transportation underwriting vertical partially offset by declines in the other three underwriting verticals.

Although the ongoing coronavirus pandemic did not have a significant impact on Crusader’s overall gross written premium (direct and ~~$27,797,515~~assumed written premium before cessions to reinsurers under reinsurance treaties) during the three and nine months ended September 30, 2020, Crusader has experienced a decrease in new business submissions and renewals related to the pandemic in its Bars/Taverns market sector niche as a result of government regulations, such as shelter-in-place orders and in-door dining limitations, which has adversely impacted the gross written premium for that niche.

Crusader’s primary line of business is CMP policies. This line of business represented approximately 99.6% and 99.8% of Crusader’s total written premium for the three and nine months ended September 30, ~~2016,~~2020, respectively. ~~The Company writes annual policies~~This line of business represented approximately 98.9% and ~~therefore, earns~~97.7% Crusader’s total written premium ~~ratably over the one-year policy term.~~

~~Ceded earned premium increased $133,434 (9%) to $1,682,407 and $455,273 (10%) to $4,981,492~~ for the three and nine months ended September 30, ~~2017, respectively, compared~~2019, respectively.

Gross earned premium

Gross earned premium (direct and assumed earned premium before cessions to ~~$1,548,981~~reinsurers under reinsurance treaties) increased $367,455 (4%) to $9,151,992 and ~~$4,526,219~~$1,816,370 (7%) to $26,822,681 for the three and nine months ended September 30, ~~2016, respectively. Ceded earned premium as a percentage of direct earned premium was 17%~~2020, respectively, compared to $8,784,537 and $25,006,311 for the three and nine months ended September 30, ~~2017,~~2019, 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 ~~16%~~earned daily on a pro-rata basis over the terms of the policies, and, therefore, premiums earned in the current year are related to policies written during both the current year and immediately preceding year. The increase in gross earned premium for the three and nine months ended September 30, ~~2016.~~2020, was due primarily to an increase in gross written premium in 2019.

Ceded earned premium

Ceded earned premium (premium ceded to reinsurers under reinsurance treaties) increased $221,881 (12%) to $2,027,720 and $771,814 (15%) to $6,017,164 for the three and nine months ended September 30, 2020, compared to $1,805,839 and $5,245,350 for the three and nine months ended September 30, 2019, respectively. Ceded earned premium as a percentage of gross earned premium was 22% for the three and nine months ended September 30, 2020, and 21% for the three and nine months ended September 30, 2019. The increase in the ceded earned premium as a percentage of gross earned premium for the three and nine months ended September 30, 2020, compared to the three and nine months ended September 30, 2019, was due primarily to higher gross earned premium subject to reinsurance treaties and higher rates on excess of loss reinsurance treaties.

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Reinsurance treaties are generally structured in layers, with different negotiated economic terms and retention of participation, or liability, in each layer. In calendar years ~~2017~~2020 and ~~2016,~~2019, Crusader retained a participation in its excess of loss reinsurance treaties of ~~5% and 10%, respectively,~~0% in its 1^st layer ~~($500,000 in excess of $500,000)~~(reinsured losses between $500,000 and $1,000,000), 0% in its 2^nd 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 ~~2017~~2020 and ~~2016,~~2019, Crusader retained a participation in its catastrophe excess of loss reinsurance treaties of 5% in its 1^st layer ~~($9,000,000 in excess of $1,000,000)~~(reinsured losses between $1,000,000 and $10,000,000) and 0% in its 2^nd layer ~~($36,000,000 in excess of $10,000,000)~~(reinsured losses between $10,000,000 and $46,000,000).

~~The Company~~Crusader evaluates each of its ceded reinsurance contracts at its inception to determine if there is a sufficient risk transfer to allow the contract to be accounted for as reinsurance under ~~GAAP.~~current accounting literature. As of September 30, ~~2017,~~2020, all such ceded contracts are accounted for as risk transfer reinsurance.

~~Crusader’s direct, ceded~~Investment Income, Net Realized Investment Gains 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 %

Losses, and Net Unrealized Investment Losses on Equity Securities

~~Net investment~~Investment income~~included in insurance company operation and other insurance operations revenues, increased $74,922 (32%~~ decreased $40,963 (8%) to ~~$309,492~~$477,145 and ~~$126,674 (19%~~$94,147 (6%) to ~~$785,785~~$1,487,335 for the three and nine months ended September 30, ~~2017,~~2020 respectively, compared to ~~$234,570~~$518,108 and ~~$659,111~~$1,581,482 for the three and nine months ended September 30, ~~2016,~~2019, respectively. This decrease in investment income was due primarily to a decrease in average invested assets and lower market yields. The Company had net realized gains of ~~$373~~$38,214 and ~~$528~~$39,789 for the three and nine months ended September 30, ~~2017, respectively, compared to~~2020, respectively. The Company had no net realized gains or losses for the three months ended September 30, 2019. The Company had net realized investment losses of $12,661 for the nine months ended September 30, 2019. The Company had net unrealized investment gains on equity securities of $19,670 and ~~$1,278 in realized losses~~$42,629 for the three and nine months ended September 30, ~~2016, respectively.~~

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~~The increase in net investment income was primarily a result of an increase in the Company’s annualized yield on average invested assets~~2020 compared to ~~1.2% and 1.1%~~none for the three and nine months ended September 30, ~~2017, respectively, from 1.0% and 0.9%~~2019. The net unrealized investment gains on equity securities for the three and nine months ended September 30, ~~2016. The~~2020 were due primarily to the increase in fair value of equity securities during the ~~annualized yield on average invested assets is primarily a result of a decrease in lower yielding short-term investments~~three and ~~an increase in higher yielding fixed maturity investments and a result of investment into new classes of fixed maturity securities.~~nine months ended September 30, 2020.

~~Net investment income, excluding net realized investment losses, and average~~

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

Three Months Ended
September 30

Nine Months Ended
September 30
2017 2016 2017 2016

Average invested assets (1) - at amortized cost $ 95,364,954 $ 92,050,184 $ 92,024,640 $ 94,312,881
Net investment income:
Insurance company operation (2) $ 309,405 $ 234,495 $ 785,579 $ 658,839
Other insurance operations 87 75 206 272
Total investment income $ 309,492 $ 234,570 $ 785,785 $ 659,111
Annualized yield on average invested assets (3) 1.2 % 1.0 % 1.1 % 0.9 %

	Three Months Ended September 30						Nine Months Ended September 30
	2020			2019			2020			2019

Average invested assets (1) - at amortized cost	$	82,652,749		$	84,140,699		$	82,931,005		$	86,605,752
Net investment income from:
Invested assets (2)	$	477,103		$	501,543		$	1,483,670		$	1,545,456
Cash equivalents		42			16,565			3,665			36,026
Total investment income	$	477,145		$	518,108		$	1,487,335		$	1,581,482
Annualized yield on average invested assets (3)		2.3	%		2.4	%		2.4	%		2.4	%

(1)

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

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

(2)

Investment income included $32,974 and $100,761 of investment expense for the three and nine months ended September 30, 2020, compared to $31,007 and $98,627 of investment expense for the three and nine months ended September 30, 2019.

(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 September 30, 2017:
Due in one year or less $ 26,362,000 $ 26,361,291 $ 26,361,159 1.0 %
Due after one year through five years 31,489,000 31,524,443 31,530,644 1.7 %
Due after five years through ten years 25,903,384 26,393,615 26,377,092 2.6 %
Total $ 83,754,384 $ 84,279,349 $ 84,268,895 1.8 %

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 %

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Maturities by Year at September 30, 2020	Par Value		Amortized Cost		Fair Value		Weighted Average Yield

Due in one year	$	11,260,000	$	11,257,239	$	11,407,757		2.6	%
Due after one year through five years		32,480,748		32,510,017		33,719,090		2.6	%
Due after five years through ten years		16,563,091		16,684,676		17,836,383		2.5	%
Due after ten years and beyond		18,353,830		18,697,623		19,504,004		2.6	%
Total	$	78,657,669	$	79,149,555	$	82,467,234		2.6	%

Maturities by Year at December 31, 2019	Par Value		Amortized Cost		Fair Value		Weighted Average Yield

Due in one year	$	10,070,000	$	10,063,975	$	10,087,478		2.3	%
Due after one year through five years		42,936,754		42,944,463		43,654,657		2.6	%
Due after five years through ten years		9,982,374		9,996,830		10,529,528		3.3	%
Due after ten years and beyond		19,336,385		19,795,143		20,026,047		2.8	%
Total	$	82,325,513	$	82,800,411	$	84,297,710		2.7	%

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 1.0~~8.0 years as of September 30, ~~2017,~~2020, and ~~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~~7.2 years as of September 30, ~~2017, and December 31, 2016, the Company’s investment portfolio effective duration was below the target.~~2019.

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	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:
U.S. treasury securities	$	9,519,063	$	(9,395	)	$	—	$	—
September 30, 2020
Corporate securities		9,731,038		(36,981	)		—		—	$	3,431,312	$	(203,965	)		6	$	—	$	—		—
Agency mortgage-backed securities		12,973,738		(17,143	)		—		—		1,215,171		(3,922	)		2		—		—		—
Total	$	32,223,839	$	(63,519	)	$	—	$	—	$	4,646,483	$	(207,887	)		8	$	—	$	—		—

Less than 12 Months 12 Months or Longer

Estimated
Fair Value

Gross
Unrealized Losses

Estimated
Fair Value

Gross
Unrealized Losses
December 31, 2016:
U.S. treasury securities $ — $ — $ 9,097,285 $ (2,122 )
Total $ — $ — $ 9,097,285 $ (2,122 )

	Less than 12 Months							12 Months or Longer
	Estimated Fair Value		Gross Unrealized Losses			Number of Securities		Estimated Fair Value		Gross Unrealized Losses			Number of Securities
December 31, 2019
U.S. Treasury securities	$	1,996,562	$	(252	)		1	$	1,002,031	$	(775	)		1
Corporate securities		999,818		(57	)		1		—		—			—
Agency mortgage-backed securities		750,058		(1,950	)		2		—		—			—
Total	$	3,746,438	$	(2,259	)		4	$	1,002,031	$	(775	)		1

While the fair value of Company’s investment portfolio at September 30, 2020, has recovered from the declines recorded for the three months ended March 31, 2020, the effects of the coronavirus pandemic were a major contributor to the variability in fair value of the Company’s fixed income and equity investments during the three months ended March 31, 2020, and September 30, 2020, and the economic uncertainty caused by the pandemic may lead to further investment valuation volatility. In addition, the recent decline in investment yields resulted in lower reinvestment rates, compared to the previous years, which will cap the Company’s investment portfolio’s ability to generate higher levels of investment income, absent a larger invested asset base or a change in investment philosophy.

The Company closely monitors its investments. If an unrealized loss is determined to be other-than-temporary, it is written off as a realized loss through the Condensed Consolidated Statements of Operations. The Company’s methodology of assessing other-than-temporary impairments is based on security-specific analysis as of the balance sheet date and considers various factors including the length of time to maturity and the extent to which the fair value has been less than the cost, the financial condition and the near-term prospects of the issuer, and whether the debtor is current on its contractually obligated interest and principal payments. During the three and nine months ended September 30, 2020, one fixed maturity corporate security experienced a significant decline in market value; the market and book value of that security at September 30, 2020, was $723,625 and $688,147, respectively. The unrealized losses on all securities as of September 30, ~~2017,~~2020, and December 31, ~~2016,~~2019, were determined to be temporary.

30 of 40

	Three Months Ended September 30				Nine Months Ended September 30
	2020		2019		2020		2019

Fixed maturities securities sold
Number of securities sold		6		—		7		3
Amortized cost of sold securities	$	2,923,386	$	—	$	3,524,702	$	2,997,098
Realized gains (losses) on sales	$	30,057	$	—	$	31,171	$	(12,679	)

Fixed maturities securities called
Number of securities called		1		—		3		1
Amortized cost of called securities	$	249,998	$	—	$	1,949,536	$	999,982
Realized gains on calls	$	2	$	—	$	464	$	18

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 operation~~Insurance Company Revenues and ~~other insurance operations revenues, increased $41,023 (61%~~Other Insurance Operations decreased $32,674 (29%) to ~~$108,170~~$81,860 and ~~$36,280 (17%~~increased $252,150 (753%) to ~~$243,707~~$285,640 for the three and nine months ended September 30, ~~2017,~~2020, respectively, compared to ~~$67,147~~$114,534 and ~~$207,427~~$33,490 for the three and nine months ended September 30, ~~2016,~~2019, respectively. The ~~increases~~decrease in other income during the three ~~and~~months ended September 30, 2020, is due primarily to a $35,449 increase in Crusader’s share of California FAIR Plan equity compared to a $60,176 increase during the three months ended September 30, 2019. The increase in other income during the nine months ended September 30, ~~2017,~~2020, is due primarily to an $83,652 increase in Crusader’s share of California FAIR Plan equity compared to a $178,640 decrease during the ~~three and~~ nine months ended September 30, ~~2016, are due primarily to higher rent resulting from higher occupancy of the Calabasas building.~~2019.

Gross commissions and fees

Gross commissions and fees decreased ~~$11,957 (2%~~$119,560 (21%) to ~~$685,288~~$461,540 and ~~increased $34,487 (2%~~$267,877 (16%) to ~~$2,097,916~~$1,388,494 for the three and nine months ended September 30, ~~2017,~~2020, respectively, compared to ~~$697,245~~gross commissions and ~~$2,063,429~~fees of $581,100 and $1,656,371 for the three and nine months ended September 30, ~~2016,~~2019, respectively.

The changes in gross commission and fee income for the three and nine months ended September 30, ~~2017,~~2020, as compared to the three and nine months ended September 30, ~~2016,~~2019, 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 September 30							Nine Months Ended September 30
	2020		2019		Change			2020		2019		Change

Brokerage fee income	$	233,818	$	276,047	$	(42,229	)	$	760,486	$	870,082	$	(109,596	)
Health insurance program		204,352		283,700		(79,348	)		557,634		717,590		(159,956	)
Membership and fee income		23,370		21,353		2,017			70,374		68,699		1,675
Total	$	461,540	$	581,100	$	(119,560	)	$	1,388,494	$	1,656,371	$	(267,877	)

Unifax ~~Insurance Systems, Inc. (“Unifax”), a wholly owned subsidiary of the Company,~~ sells and services insurance policies for ~~Crusader.~~Crusader and USIC. For these brokerage services, Unifax receives commissions from insurance companies and fees from policyholders. The commissions paid by Crusader to Unifax are eliminated as intercompany transactions and are not reflected as income in the condensed consolidated financial statements. ~~Unifax also receives non-refundable policy~~Policy fee income ~~that~~received by Unifax is ~~directly~~ related to the Crusader policies ~~it sells.~~and service fee income received by Unifax is related to the USIC policies. For financial statement reporting purposes, ~~policy~~brokerage fees are earned ratably over the life of the related insurance policy. The unearned portion of the ~~policy fee~~brokerage fees is recorded as a liability on the Condensed Consolidated Balance Sheets under “Accrued expenses and other liabilities.” The earned portion of the ~~policy fee~~brokerage fees charged to the policyholder by Unifax is recognized as income in the condensed consolidated financial statements. ~~Policy~~Brokerage fee income decreased ~~$14,677 (4%~~$42,229 (15%) and ~~$42,594 (3%~~$109,596 (13%) in the three and nine months ended September 30, ~~2017,~~2020, respectively, compared to the three and nine months ended September 30, ~~2016,~~2019, due primarily to reduction in policy counts.

~~American Insurance Brokers, Inc. (“AIB”), a wholly owned subsidiary~~

31 of ~~the Company,~~40

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 $79,348 (28%) and ~~increased $87,755 (12%~~$159,956 (22%) in the three and nine months ended September 30, ~~2017,~~2020, respectively, compared to the three and nine months ended September 30, ~~2016.~~2019. The ~~increase~~decrease in commission income reported in the three and nine months ended September 30, ~~2017,~~2020, when compared to the prior year period, is primarily a result of a ~~cumulative commission correction~~loss of ~~$68,971 by the non-affiliated insurance carriers received during the three months ended March 31, 2017.~~a large group account.

~~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 $2,017 (9%) and ~~$6,231 (11%~~increased $1,675 (2%) infor the three and nine months ended September 30, ~~2017,~~2020, respectively, compared to the three and nine months ended September 30, ~~2016. This decrease is primarily a result of a decrease in the number of individual members.~~2019.

~~The daily automobile rental insurance program was produced by Bedford Insurance Services, Inc. (“Bedford”), a wholly owned subsidiary~~Finance 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 of~~finance 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, increased $3,364 (18%~~AAC decreased $9,541 (14%) to ~~$21,814 and $7,488 (15%) to $58,155~~$56,985 for the three ~~and nine~~ months ended September 30, ~~2017, respectively,~~2020, compared to ~~$18,450 and $50,667 for the three and nine months ended September 30, 2016, respectively. The increases~~$66,526 in fees earned during the three months ended September 30, 2019, due primarily to a decrease in the number of issued loans. Charges and fees earned by AAC increased $21,794 (13%) to $191,690 for the nine months ended September 30, ~~2017,~~2020, compared to $169,896 in fees earned during the ~~three and~~ nine months ended September 30, ~~2016, are~~2019, due primarily to the increase in earned finance charges as a result of ~~more late fees earned during~~ the ~~current periods compared~~change in annual percentage rate charged on AAC new loans from a single fixed interest rate to ~~the prior year periods.~~a tiered interest rate structure effective April 1, 2019. During the three and nine months ended September 30, ~~2017,~~2020, AAC issued ~~743~~288 and ~~2,276~~929 loans, respectively, and had ~~2,295~~944 loans outstanding as of September 30, ~~2017.~~2020. During the three and nine months ended September 30, ~~2016,~~2019, AAC issued ~~783~~404 and ~~2,405~~1,267 loans, respectively, and had ~~2,435~~1,254 loans outstanding as of September 30, ~~2016.~~2019. AAC provides premium financing only for Crusader policies produced by Unifax in California. AAC reduced the interest rate charged 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 written by Unifax for Crusader. Due to the low interest rate environment, the cost 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.

Losses and loss adjustment expenses were 121% and 100% of net earned premium for the three and nine months ended September 30, 2017, respectively, compared to 101% and 77% of net earned premium for the three and nine months ended September 30, 2016, respectively.

~~26 of 32~~

Loss ratio, which is calculated by dividing losses and loss adjustment expenses by net earned ~~premium.~~ premium, was 243% and 135% for the three and nine months ended September 30, 2020, compared to 74% and 78% for the three and nine months ended September 30, 2019.

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

	Three Months Ended September 30
	2020		2020 Loss Ratio			2019		2019 Loss Ratio			Change

Net earned premium	$	7,124,272				$	6,978,698				$	145,574

Losses and loss adjustment expenses:
Provision for insured events of current year		9,385,389		132	%		4,299,018		62	%		5,086,371
Development of insured events of prior years		7,934,662		111	%		838,956		12	%		7,095,706
Total losses and loss adjustment expenses	$	17,320,051		243	%	$	5,137,974		74	%	$	12,182,077

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
	2020		2020 Loss Ratio			2019		2019 Loss Ratio			Change

Net earned premium	$	20,805,517				$	19,760,961				$	1,044,556

Losses and loss adjustment expenses:
Provision for insured events of current year		19,925,024		96	%		13,984,532		71	%		5,940,492
Development of insured events of prior years		8,161,318		39	%		1,366,836		7	%		6,794,482
Total losses and loss adjustment expenses	$	28,086,342		135	%	$	15,351,368		78	%	$	12,734,974

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

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The ~~$927,743 increase in~~$9,385,389 provision for insured events of current year for the three months ended September 30, 2020, was $5,086,371 higher than the $4,299,018 provision for insured events of current year for the three months ended September 30, 2019, and the $19,925,024 provision for insured events of current year for the nine months ended September 30, ~~2017, compared to~~2020, was $5,940,492 higher than the $13,984,532 provision for insured events of current year for the nine months ended September 30, ~~2016, was~~2019, due primarily to ~~an aberrational increase~~increases IBNR reserves associated with the Apartments & Commercial Buildings and Transportation verticals. The increases in ~~the frequency~~IBNR were due to higher actuarially developed ultimate incurred losses and ~~severity~~loss adjustment expenses primarily as a result of ~~accident year 2017 short-tail property~~elevated expected claims ~~during the three months ended March 31, 2017.~~severity.

The ~~$2,689,666 and $5,441,657 increases in the~~$7,934,662 adverse development of insured events of prior years for the three ~~and nine~~ months ended September 30, ~~2017, respectively, compared to the three and nine months ended September 30, 2016, were primarily due to~~2020, was $7,095,706 higher than ~~expected severity~~the $838,956 adverse development of ~~long-tail assault and battery liability claims in accident~~insured events of prior 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. 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 September 30, 2017, the development on the accident year 2016 was due primarily to a $580,329 increase in incurred but not reported (“IBNR”) reserves for the Food, Beverage and Entertainment program; total IBNR reserves increase for all accident years for the Food, Beverage and Entertainment program was $1,323,665 for the three months ended September 30, ~~2017. For~~2019, and the $8,161,318 adverse development of insured events of prior years for the nine months ended September 30, ~~2017,~~2020, was $6,794,482 higher than the $1,366,836 adverse development onof insured events for the ~~accident year 2016 was~~nine months ended September 30, 2019, due primarily to increases in 2018 and 2019 accident year IBNR reserves associated with the ~~unexpected increase~~Apartments & Commercial Buildings and Transportation verticals. The increases in ~~the severity of existing assault and battery claims. As a result of the foregoing~~IBNR were due to higher actuarially developed ultimate incurred losses and loss adjustment expenses ~~and the observed trend~~primarily as a result of ~~increasing severity of assault and battery~~elevated expected claims severity.

Crusader has received 150 coronavirus-related business interruption claims through September 30, 2020. While the Company ~~decided~~does not believe it is exposed to ~~significantly curtail~~substantial risk from those claims under the insurance policies written by Crusader, the individual circumstances of each such claim are reviewed to fulfill Crusader’s obligation to its policyholders if coverage applies. Further, there may be impacts to the timing of loss emergence and ultimate loss ratios for certain Crusader’s products due to postponements of civil court cases, extensions of various statutes of limitations, changes in settlement trends and other new legislative, regulatory or ~~entirely exclude coverage for risks~~judicial developments which could result in loss reserve deficiencies and negative impact on results of ~~assault and battery covered through the Food, Beverage and Entertainment program.~~operations.

~~While it is difficult~~Crusader has received seven claims related to ~~estimate~~ the ~~adequacy~~recent civil unrest through September 30, 2020. Crusader has sufficient excess of loss and ~~loss adjustment expense reserves, historically,~~catastrophe reinsurance treaties to protect from exposure of such claims. The Company believes the ~~Company was able to establish sufficient loss~~losses and loss adjustment ~~expense reserves to mitigate adverse prior accident year developments.~~expenses associated with those claims will not exceed Crusader’s $500,000 excess of loss reinsurance treaty retention.

~~27 of 32~~

The following table breaks out adverse (favorable) development from total losses and loss adjustment expenses quarterly since ~~January 1, 2014:~~September 30, 2018:

	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, 2020	$	9,385,389	$	7,934,662		$	17,320,051
June 30, 2020		5,378,459		(489,553	)		4,888,906
March 31, 2020		5,161,176		716,209			5,877,385
December 31, 2019		5,400,410		1,824,349			7,224,759
September 30, 2019		4,299,018		838,956			5,137,974
June 30, 2019		5,134,626		(75,675	)		5,058,951
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

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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

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

Repeated and sustained underwriting losses in Crusader’s Apartments & Commercial Buildings vertical and growth in Crusader’s Transportation vertical, a product which is generally known for its difficulty to be underwritten profitably, coupled with changes in the market conditions and increases in social inflation (discussed below), caused Crusader management to reevaluate the assumptions used in its process for estimating loss and loss adjustment expense reserves. This reevaluation and the use of updated assumptions led to significantly more conservative estimates for expected claims frequency, claims severity and ultimate incurred losses and loss adjustment expenses during the quarterly re-evaluation of the loss and loss adjustment expense reserves as of September 30, 2020. The increase in the ultimate incurred losses and loss adjustment expenses manifested primarily through higher IBNR reserves as of September 30, 2020, for 2018, 2019, and 2020 accident year claims pertaining to Apartments & Commercial Buildings and Transportation liability coverages. Accordingly, the increase of Crusader’s IBNR reserves of $10,308,150, from June 30, 2020, to September 30, 2020, resulted in the provision for insured events of current year and the adverse development of insured events of prior years for the three months ended September 30, 2020 being significantly higher than the nine preceding quarters and was a primary contributor to the $17,320,051 losses and loss adjustment expenses recognized for the three months ended September 30, 2020.

Crusader attributes much of its quarterly adverse loss development experienced in the three most recent years ending September 30, 2020, to social inflation. Used here, social inflation is a term that encompasses a relatively new adverse trend related to society’s application of the law when it comes to insurance. In this context, social inflation is generally described by the rising costs of insurance claims due to societal trends which results in increased litigation, broader definitions of liability and contractual interpretations, plaintiff friendly legal decisions, larger compensatory jury awards, and larger awards for non-economic damages Crusader has experienced increased costs due to social inflation in all three of its largest market sector niches, Long-haul Transportation, Residential Apartment Buildings, and Bars/Taverns, resulting in higher-than-expected frequency and severity of third-party liability claims.

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

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

When there is clear evidence that the actual claims costs ~~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~~Crusader 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~~Crusader reduces its loss and loss adjustment expense reserves over time while it continues to assess the validity of the observed trends based on the subsequent emerged claim costs.

34 of 40

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~~Crusader’s current and historical accident year claims data, including but not limited to reported claim counts, open claim counts, closed claim counts, closed claim counts with payments, paid losses, paid loss adjustment expenses, case loss reserves, case loss adjustment expense reserves, earned premiums and policy exposures, salvage and subrogation, and unallocated loss adjustment expenses paid. Many other factors, including changes in reinsurance, changes in pricing, changes in policy forms and coverage, changes in underwriting and risk selection, legislative changes, results of litigation and inflation are also taken into account.

~~28 of 32~~

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 losses is ultimately determined by management and tested for reasonableness by the independent consulting actuary.

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 no~~No ceding commission is received on facultative or catastrophe ceded premium. Policy acquisition costs, net of ceding commission, are deferred and amortized as the related premiums are earned. The Company annually reevaluates its ~~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 policy~~Policy 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 September 30								Nine Months Ended September 30
	2017			2016			Increase		2017			2016			(Decrease)			2020			2019			Change		2020			2019			Change

Policy acquisition costs	$	1,854,212		$	1,741,499		$	112,713	$	4,943,350		$	5,142,250		$	(198,900	)	$	1,279,703		$	1,194,870		$	84,833	$	3,626,154		$	3,571,065		$	55,089
Ratio to net earned premium (GAAP ratio)		23	%		22	%				20	%		22	%					18	%		17	%				17	%		18	%

Policy acquisition costs increased during the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019, due primarily to growth in net earned premium.

Salaries and employee benefits~~decreased $97,440 (7%~~

Salaries and employee benefits increased $1,562,881 (153%) to ~~$1,221,182~~$2,584,478 and ~~increased $554,495 (14%~~$1,896,649 (62%) to ~~$4,534,550~~$4,958,900 for the three and nine months ended September 30, ~~2017,~~2020, respectively, compared to ~~$1,318,622~~$1,021,597 and ~~$3,980,055~~$3,062,251 for the three and nine months ended September 30, ~~2016, respectively.~~2019.

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

	Three Months Ended September 30									Three Months Ended September 30
	2017			2016			Increase (Decrease)			2020			2019			Change

Total salaries and employee benefits incurred	$	1,910,494		$	1,999,588		$	(89,094	)	$	3,530,182		$	1,966,406		$	1,563,776
Less: charged to losses and loss adjustment expenses		(353,555	)		(291,711	)		(61,844	)		(550,143	)		(530,122	)		(20,021	)
Less: capitalized to policy acquisition costs		(335,757	)		(389,255	)		53,498			(328,440	)		(332,568	)		4,128
Less: charged to IT system upgrade											(67,121	)		(82,119	)		14,998
Net amount charged to operating expenses	$	1,221,182		$	1,318,622		$	(97,440	)	$	2,584,478		$	1,021,597		$	1,562,881

	Nine Months Ended September 30									Nine Months Ended September 30
	2017			2016			Increase (Decrease)			2020			2019			Change

Total salaries and employee benefits incurred	$	6,528,380		$	6,024,572		$	503,808		$	7,603,460		$	5,737,989		$	1,865,471
Less: charged to losses and loss adjustment expenses		(979,256	)		(861,293	)		(117,963	)		(1,459,208	)		(1,532,583	)		73,375
Less: capitalized to policy acquisition costs		(1,014,574	)		(1,183,224	)		168,650			(1,010,517	)		(950,032	)		(60,485	)
Less: charged to IT system upgrade											(174,835	)		(193,123	)		18,288
Net amount charged to operating expenses	$	4,534,550		$	3,980,055		$	554,495		$	4,958,900		$	3,062,251		$	1,896,649

The ~~decrease~~increase in the total salaries and employee benefits incurred for the three ~~months ended September 30, 2017, compared to the three months ended September 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,~~2020, compared to the three and nine months ended September 30, ~~2016,~~2019, was due primarily to costs associated with a termination of an employment agreement with an ~~employee; there are no such agreements for any other~~executive, increases in executive compensation, increases in employee benefits due to higher medical insurance rates, and vacation accruals due to less vacation taken by the employees ~~other than those agreements disclosed in~~as a result of the ~~Company’s Annual Report on Form 10-K for the year ended December 31, 2016.~~ongoing coronavirus pandemic.

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~~29 of 32~~

Commissions to agents/brokers

Commissions to agents/brokers decreased ~~$587 (1%~~$17,711 (43%) to ~~$39,737~~$23,235 and ~~increased $5,241 (4%~~$58,954 (45%) to ~~$126,620~~$73,190 for the three and nine months ended September 30, ~~2017,~~2020, respectively, compared to ~~$40,324~~$40,946 and ~~$121,379~~$132,144 for the three and nine months ended September 30, ~~2016. The decrease~~2019. These decreases in commissions to agents/brokers were due primarily to lower commissions associated with loss of a large group account.

Other operating expenses

Other operating expenses increased $865,282 (162%) to $1,398,135 and $1,476,097 (78%) to $3,372,483 for the three and nine months ended September 30, ~~2017,~~2020, respectively, compared to $532,853 and $1,896,386 for the three and nine months ended September 30, ~~2016, was due primarily to timing of payment receipts.~~2019. The increase in other operating expenses for the nine months ended September 30, ~~2017,~~2020, compared to the nine months ended September 30, ~~2016,~~2019, was due ~~primarily~~ to ~~the~~an increase in ~~the health insurance commission income.~~legal expense, an increase in depreciation expense, an increase in board of director fees and timing of expenses.

~~Other operating expenses~~~~decreased $130,932 (16%) to $695,587~~Income tax expense/benefit

Income tax expense was $3,594,573 (-25% of pre-tax loss) for the three months ended September 30, 2020, and ~~increased $539,547 (26%) to $2,592,318~~income tax expense was $118,259 (36% of pre-tax income) for the three months ended September 30, 2019. Income tax expense was $3,543,152 (-22% of pre-tax loss) for the nine months ended September 30, 2020 and income tax benefit was $88,391 (11% of pre-tax loss) for the nine months ended September 30, 2019. The fluctuation in the income tax rate as a percentage of pre-tax loss for the three and nine months ended September 30, 2017, respectively, compared to $826,519 and $2,052,771 for the three and nine months ended September 30, 2016, respectively. The decrease in other operating expenses for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, was due primarily to lower costs incurred to review strategic alternatives 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 Department 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.

~~Income tax benefit~~ increased $494,751 (49%) to $1,507,976 (34% of pre-tax income) and $2,077,690 (202%) to $3,104,390 (34% of pre-tax loss) for the three and nine months ended September 30, 2017, respectively, compared to an income tax benefit of $1,013,225 (34% of pre-tax income) and $1,026,700 (34% of pre-tax income) for the three and nine months ended September 30, 2016, respectively. The increases in income tax benefit for the three and nine months ended September 30, 2017,2020, when compared to the three and nine months ended September 30, ~~2016, were due primarily to higher loss before tax during the 2017 reporting periods compared to 2016. The income tax provision~~2019, is primarily due to an increase in the valuation allowance related to deferred tax assets on federal net operating losses.

As of September 30, 2020, the Company had deferred tax assets of $7,318,041 generated from $34,847,822 of federal net operating loss carryforwards that will begin to expire in 2035 and deferred tax assets of $2,286,564 generated from state net operating loss carryforwards which expire between 2028 and 2040. In connection with preparation of its financial statements, the Company periodically performs an analysis of future income ~~before taxes. The calculated tax rate~~projections to determine the adequacy of the valuation allowance. In light of the net losses that were generated in recent years, for the nine months ended September 30, ~~2017, consisted of~~2020, the Company has established a ~~federal tax benefit rate of 34% and a state income tax expense rate of approximately 0.5%. The calculated tax rate~~valuation allowance for the ~~nine months~~aggregate amount of the federal and state net operating losses and other deferred tax assets in the amount of $9,849,484 that, in management’s judgment, are not more likely than not to be realized. For the year ended ~~September 30, 2016, consisted~~December 31, 2019, the Company carried a valuation allowance on deferred tax assets generated from federal and state net operating losses in the amount of ~~a federal tax benefit rate of 34%.~~$600,000 and $1,931,665, respectively.

~~Off-Balance Sheet Arrangements~~OFF-BALANCE SHEET ARRANGEMENTS

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’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 consist~~Company is currently a “smaller reporting company,” as defined in Item 10(f)(1) of Regulation S-K. The Company has elected to comply with the ~~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 in~~scaled disclosure requirements applicable to smaller reporting companies and has therefore omitted the ~~composition~~information 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 September 30, ~~2017,~~2020, 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 September 30, ~~2017.~~2020.

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.

3036 of 3240

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~~Crusader is also subject to regulatory and governmental examinations, requests for information, inquiries, investigations and threatened legal actions and proceedings by state regulators and others. Crusader receives numerous requests, orders for documents, and information in connection with various aspects of its regulated business.

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

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

ITEM 1A. RISK FACTORS

~~There~~Except as described below, 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,~~2019, in response to Item 1A to Part I of Form 10-K and in the Company’s Form 10-Q for the quarter ended ~~June 30, 2017,~~March 31, 2020, in response to Item 1A to Part II of Form 10-Q.

The Company’s business may be adversely affected by the ongoing coronavirus (COVID-19) pandemic.

In December 2019, a novel strain of coronavirus, SARS CoV-2 (COVID-19), emerged in China, rapidly spread to other countries, including the United States, and has been declared to be a pandemic by the World Health Organization. The coronavirus pandemic has resulted in numerous deaths, adversely impacted global commercial activity and resulted in extensive governmental responses, including quarantines, prohibitions on travel and the closure of offices, businesses, restaurants, schools, retail stores and other public venues. The coronavirus pandemic and any preventative or protective actions that the Company, its clients, their respective suppliers, or governments may take in respect of COVID-19 may disrupt the Company’s business and the business of its clients. If global, national or regional economies are unable to substantially reopen, or, if reopened, are forced to close again, these disruptions will be exacerbated. The Company is diligently working to ensure that it can operate with minimal disruption, and to mitigate the impact of the pandemic on its employees’ health and safety. However, given the interconnectivity of the global economy and the possible rate of future global transmission, the full extent to which the coronavirus pandemic could affect the global economy is unknown and its impact may extend beyond the areas which are currently known to be impacted. Any resulting financial impact will depend on future developments and cannot be reasonably estimated at this time, but may materially affect the business, financial condition and results of operations of the Company. The Company has experienced a decrease in new business submissions and renewals related to the pandemic in its Bars/Taverns market sector niche as a result of government regulations, such as shelter-in-place orders and in-door dining limitations, which has adversely impacted the gross written premium for that niche.

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

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

Loss and loss adjustment expense reserves represent an estimate of amounts needed to pay and administer claims with respect to insured events that have occurred, including events that have occurred but have not yet been reported to Crusader. If claims exceed the related reserves, the Company may not have sufficient funds available to satisfy all such claims, and in any event, the Company’s operating results and financial condition would be adversely affected. There is a high level of uncertainty inherent in the evaluation of the required loss and loss adjustment expense reserves for Crusader. The long-tailed nature of liability claims and the volatility of jury awards exacerbate that uncertainty. The difficulty in estimating the loss and loss adjustment expense reserves contributed to adverse development of insured events of prior years in the amount of $3,191,185 which Crusader experienced in 2019. During the three months ended September 30, 2020, the Company reevaluated certain assumptions used in its process for estimating loss and loss adjustment reserves due to its experiences in Crusader’s Apartments & Commercial Buildings and Transportation verticals as well as changes in market conditions. This reevaluation resulted in a $10,308,150 increase in Crusader’s IBNR reserves from June 30, 2020, to September 30, 2020, which was a primary contributor to the $17,320,051 losses and loss adjustment expenses recognized for the three months ended September 30, 2020. Crusader sets loss and loss adjustment expense reserves at each balance sheet date based upon management’s best estimate of the ultimate payments that it anticipates will be made to settle all losses incurred and related loss adjustment expenses incurred as of that date for both reported and unreported losses. The ultimate cost of claims is dependent upon future events, the outcomes of which are affected by many factors. Crusader claim reserving procedures and settlement philosophy, current and perceived social and economic inflation, current and future court rulings and jury attitudes, improvements in medical technology, and many other economic, scientific, legal, political, and social factors all can have significant effects on the ultimate costs of claims. Changes in Crusader operations and management philosophy also may cause actual developments to vary from the past. Since the emergence and disposition of claims are subject to uncertainties, the net amounts that will ultimately be paid to settle claims may vary significantly from the estimated amounts provided for in the accompanying consolidated financial statements. Any adjustments to reserves are reflected in the operating results of the periods in which they are made.

Any inability of the Company to realize its deferred tax assets may have a materially adverse effect on the Company’s financial condition and results of operations.

The Company recognizes deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases, and for tax credits. The Company evaluates its deferred tax assets for recoverability based on available evidence, including assumptions about future profitability, reversal patterns of recorded deferred tax assets and deferred tax liabilities, and capital gain generation. Some or all of the Company’s deferred tax assets could expire unused if the Company is unable to generate taxable income of a sufficient nature in the future to utilize them.

If the Company determines it is more-likely-than-not that it would not be able to realize all or a portion of its deferred tax assets in the future, the Company would reduce the deferred tax asset through a charge to earnings in the period in which the determination is made. This charge could have a materially adverse effect on the Company’s results of operations and financial condition. For example, in light of the net losses that were generated in recent years, for the nine months ended September 30, 2020, the Company has established a valuation allowance for the aggregate amount of the federal and state net operating losses and other deferred tax assets in the amount of $9,849,484 that, in management’s judgment, are not more likely than not to be realized. In addition, the assumptions used to make this determination are subject to change from period to period based on changes in tax laws or variances between the Company’s projected operating performance and actual results. As a result, management’s judgment is required in assessing the possible need for a deferred tax asset valuation allowance.

The Company has experienced delays and cost overruns in connection with the upgrade of its legacy information technology system.

In 2018, the Company identified the need to replace or upgrade its legacy information technology system to process its smaller premium accounts more efficiently. At that time, 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 quarter of 2021, due to unexpected technical challenges and personnel changes. The Company has also experienced repeated cost overruns in connection with the system upgrade, which have adversely impacted the Company’s results of operations. The Company believes that the failure to have replaced or upgraded its legacy information technology system has contributed to its operating losses in recent years. If the Company experiences further delays or cost overruns, its results of operations may be adversely affected in future periods.

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The ability of the Company to attract, develop and retain employees and to maintain appropriate staffing levels is critical to the Company’s success.

The Company must hire and train new employees and retain current employees to handle its operations. The failure of the Company to successfully hire and retain a sufficient number of skilled employees could have an adverse effect on the Company’s business. In the third quarter of 2020, the Company’s management team underwent significant changes, including the retirement of its former Chairman of the Board, Chief Executive Officer and President, who was replaced by Ronald Closser as the Interim Chairman of the Board, Chief Executive Officer and President. If the Company is unsuccessful in hiring and retaining a permanent Chief Executive Officer and President, as well as other key employees, the resulting disruption could have a significant adverse effect on the Company’s operations.

The Company’s non-compliance with regulatory requirements in connection with its arrangement with United Specialty Insurance Company (“USIC”) may adversely affect the Company’s business, financial condition and results of operations.

On April 6, 2020, the Company previously announced an arrangement with USIC, a non-admitted, non-affiliated insurer that is rated "A" by A.M. Best Company, that would allow the Company to issue USIC policies which provide pricing and coverage flexibility previously unavailable through Crusader policies. The agreements with USIC were entered into prior to obtaining approval of the transactions by the DOI as required by the California Insurance Holding Company System Act. On September 2, 2020, the Company placed a moratorium on placing any new risks with USIC pending resolutions of issues relating to the structure of the transactions. Crusader and Unifax are in negotiations with USIC and the DOI to determine whether and how the transactions can be restructured in order to address issues raised by the DOI. There can be no assurance that such efforts will be successful. If the transactions are not restructured, the agreements with USIC may need to be terminated. If the agreements with USIC are terminated, such termination could result in significant financial expenses related to such termination and the Company’s reputation could be adversely affected. In addition, Crusader could face regulatory sanctions by the DOI for entering into the agreements without the prior approval of the DOI.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

31.1

~~Certificate~~Certification of Chief Executive Officer pursuant to Rule 13a-14(a) ~~or Rule 15d-14(a), as adopted pursuant to Section 302 of~~under the ~~Sarbanes-Oxley~~Securities Exchange Act of ~~2002.~~1934.

31.2

~~Certificate~~Certification of Chief Financial Officer pursuant to Rule 13a-14(a) ~~or Rule 15d-14(a), as adopted pursuant to Section 302 of~~under the ~~Sarbanes-Oxley~~Securities Exchange Act of ~~2002.~~1934.

32.1

Certification 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.~~.

32.2

Certification 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.~~.

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101

The following information from the Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, ~~2017,~~2020, 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 Cash Flows; and (v) 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.

~~31 of 32~~

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, ~~2017~~2020 By:/s/ ~~CARY L. CHELDIN~~RONALD A. CLOSSER

~~Cary L. Cheldin~~Ronald A. Closser

Chairman of the Board, President and Chief

Executive Officer,

~~(Principal~~ (Principal Executive Officer)

Date: November 13, ~~2017~~2020 By:/s/ MICHAEL BUDNITSKY

Michael Budnitsky

Treasurer, ~~and~~ Chief Financial Officer and Secretary, (Principal

~~(Principal~~ Accounting and Principal Financial Officer)

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	Amortized Cost		Gross Unrealized Gains		Gross UnrealizedLosses			Estimated Fair Value
September 30, 2017
Available for sale:
Fixed maturities:
Certificates of deposit	$	35,826,000	$	—	$	—		$	35,826,000
U.S. treasury securities		9,528,210		248		(9,395	)		9,519,063
Corporate securities		22,983,627		49,063		(36,981	)		22,995,709
Agency mortgage-backed securities		15,941,512		3,754		(17,143	)		15,928,123
Total fixed maturities	$	84,279,349	$	53,065	$	(63,519	)	$	84,268,895

	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

	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

	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