Unico American (UNAM) 10-Q 2019 Q2 Quarterly report

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 endedJune 30, 2019or

[ ]       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
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
26050 Mureau Road, Calabasas, California	91302
(Address of Principal Executive Offices)	(Zip Code)

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

No Change

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

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

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, No Par Value	UNAM	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.

YesX No __ 

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

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

Large accelerated filer__ Accelerated filer__

Non-accelerated filer__ Smaller reporting companyX Emerging growth company__

(Do not check if a smaller reporting company)

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

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

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

Class	Outstanding at August 14, 2019
Common Stock, no par value per share	5,306,747

1 of 31 

UNICO AMERICAN CORPORATION

INDEX TO FORM 10-Q

	Page No.
Cautionary Note Regarding Forward-Looking Statements		3
Part I - Financial Information		4
Item 1. Financial Statements		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3. Quantitative and Qualitative Disclosures About Market Risk		29
Item 4. Controls and Procedures		29
Part II - Other Information		29
Item 1. Legal Proceedings		29
Item 1A. Risk Factors		29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3. Defaults Upon Senior Securities		30
Item 4. Mine Safety Disclosures		30
Item 5. Other Information		30
Item 6. Exhibits		30
Signatures		31

2 of 31 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

· failure to meet minimum capital and surplus requirements;

· vulnerability to significant catastrophic property loss;

· a change in accounting standards issued by the Financial Accounting Standards Board;

· ability to adjust claims accurately;

· insufficiency of loss and loss adjustment expense reserves to cover future losses;

· changes in federal or state tax laws;

· ability to realize deferred tax assets;

· ability to accurately underwrite risks and charge adequate premium;

· ability to obtain reinsurance or collect from reinsurers and or losses in excess of reinsurance limits;

· extensive regulation and legislative changes;

· reliance on subsidiaries to satisfy obligations;

· downgrade in financial strength rating by A.M. Best;

· changes in interest rates;

· investments subject to credit, prepayment and other risks;

· geographic concentration;

· reliance on independent insurance agents and brokers;

· insufficient reserve for doubtful accounts;

· litigation;

· enforceability of exclusions and limitations in policies;

· reliance on information technology systems;

· ability to prevent or detect acts of fraud with disclosure controls and procedures;

· change in general economic conditions;

· dependence on key personnel;

· ability to attract, develop and retain employees and maintain appropriate staffing levels;

· insolvency, financial difficulties, or default in performance of obligations by parties with significant contracts or relationships;

· ability to effectively compete;

· maximization of long-term value and no focus on short-term earnings expectations;

· control by a small number of shareholders;

· limited trading of stock;

· failure to maintain effective system of internal controls; and

· difficulty in effecting a change of control or sale of any subsidiaries.

Please see Part I - Item 1A – “Risk Factors” in the Company’s 2018 Annual Report on Form 10-K as filed with the U.S. Securities and Exchange Commission (“SEC”), as well as other documents we file with the SEC from time-to-time, for other important factors that could cause our actual results to differ materially from our current expectations and from the forward-looking statements discussed herein. Because of these and other risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. In addition, these statements speak only as of the date of this Form 10-Q and, except as may be required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

3 of 31 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

See notes to condensed consolidated financial statements (unaudited).

4 of 31 

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

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

See notes to condensed consolidated financial statements (unaudited).

5 of 31 

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

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

See notes to condensed consolidated financial statements (unaudited).

6 of 31 

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

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

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

See notes to condensed consolidated financial statements (unaudited).

7 of 31 

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

See notes to condensed consolidated financial statements (unaudited).

8 of 31 

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2019

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 financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. Quarterly condensed financial statements should be read in conjunction with the consolidated financial statements and related notes in the Company’s 2018 Annual Report on Form 10-K as filed with the Securities and Exchange Commission. Certain reclassifications have been made to prior period amounts to conform to current 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 7).

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

• Short-term investments and investment securities, excluding long-term certificates of deposit – Fair values are obtained from widely accepted third party vendors.

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

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

9 of 31 

• 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.

• 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, the Board of Directors authorized a stock repurchase program to acquire from time to time up to an aggregate of 500,000 shares of the Company’s common stock. This program has no expiration date and may be terminated by the Board of Directors at any time. As of June 30, 2019, and December 31, 2018, the Company had remaining authority under the 2008 program to repurchase up to an aggregate of 188,269 and 188,625 shares of its common stock, respectively. The 2008 program is the only program under which there is authority to repurchase shares of the Company’s common stock. The Company repurchased 356 shares of stock during the three and six months ended June 30, 2019, in unsolicited transactions at a cost of $2,121 of which $175 was allocated to capital and $1,946 was allocated to retained earnings. The Company did not repurchase any stock during the three and six months ended June 30, 2018. The Company has retired or will retire all stock repurchased.

NOTE 3 – EARNINGS (LOSS) PER SHARE

The following table represents the reconciliation of the Company's basic earnings (loss) per share and diluted earnings (loss) per share computations reported on the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018:

	Three Months Ended June 30					Six Months Ended June 30
	2019			2018		2019			2018
Basic Earnings (Loss) Per Share
Net income (loss)	$	(276,677	)	$	168,297	$	(947,751	)	$	(2,038,955	)
Weighted average shares outstanding		5,306,938			5,307,133		5,307,021			5,307,133
Basic earnings (loss) per share	$	(0.05	)	$	0.03	$	(0.18	)	$	(0.38	)
Diluted Earnings (Loss) Per Share
Net income (loss)	$	(276,677	)	$	168,297	$	(947,751	)	$	(2,038,955	)
Weighted average shares outstanding		5,306,938			5,307,133		5,307,021			5,307,133
Diluted shares outstanding		5,306,938			5,307,133		5,307,021			5,307,133
Diluted earnings (loss) per share	$	(0.05	)	$	0.03	$	(0.18	)	$	(0.38	)

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

NOTE 4 – RECENTLY ISSUED ACCOUNTING STANDARDS

Recently adopted standards

In February 2016, the FASB issued ASU 2016-02 “Leases.” ASU 2016-02 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 adopted ASU 2016-02 effective January 1, 2019. The adoption of ASU 2016-02 did not have a material impact to the Condensed Consolidated Statements of Operations and the Condensed Consolidated Balance Sheets.

10 of 31 

Standards not yet adopted

In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 replaces the current incurred loss methodology for recognizing credit losses with a current expected credit loss model, which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 also requires enhanced disclosures for better understanding of significant estimates and judgments used in estimating credit losses. The Company is currently evaluating the effect ASU 2016-13 will have on the Company's consolidated financial statements, but expects the primary changes to be (i) the use of the expected credit loss model for its premium receivables and reinsurance recoverables and (ii) the presentation of credit losses within the available-for-sale fixed maturities portfolio through an allowance method rather than as a direct write-down. ASU 2016-13 will become effective for fiscal years beginning after December 31, 2019.

NOTE 5 – ACCOUNTING FOR TAXES

The Company and its wholly owned subsidiaries file consolidated federal and state income tax returns. Pursuant to a tax allocation agreement, the Company’s subsidiaries, Crusader 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 2015 and California state income tax authorities for tax returns filed starting at taxable year 2014. There are no ongoing examinations of income tax returns by federal or state tax authorities.

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

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

NOTE 6 – PROPERTY AND EQUIPMENT, NET

Property and equipment consist of the following:

	June 30			December 31
	2019			2018
Building  and leasehold improvements located in Calabasas, California	$	8,398,275		$	8,398,275
Furniture, fixtures, and equipment		2,081,157			2,063,549
Computer software		363,016			363,016
Accumulated depreciation and amortization		(3,321,610	)		(3,051,505	)
Computer software under development		601,634			131,505
Land located in Calabasas, California		1,787,485			1,787,485
Property and equipment, net	$	9,909,957		$	9,692,325

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

For the three and six months ended June 30, 2019, the Calabasas building has generated rental revenue from non-affiliated tenants in the amount of $40,158 and $82,388, respectively, and for the three and six months ended June 30, 2018, rental revenue from non-affiliated tenants in the amount of $89,211 and $175,117, respectively, which is included in “Other income” from insurance company operation in the Company’s Condensed Consolidated Statements of Operations.

11 of 31 

For the three and six months ended June 30, 2019, the Calabasas building incurred operating expenses (including depreciation) in the amount of $198,507 and $355,296, respectively, and $186,205 and $374,109 for the three and six months ended June 30, 2018, 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 June 30, 2019, 5,092 square feet of the Calabasas building was leased to non-affiliated entities and 9,389 square feet was vacant and available to be leased to non-affiliated entities.

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

NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

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

The following table presents information about the Company’s 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 June 30, 2019, and December 31, 2018:

	Level 1		Level 2		Level 3		Total
June 30, 2019
Financial instruments:
Available-for-sale fixed maturities:
U.S. treasury securities	$	15,198,840	$	—	$	—	$	15,198,840
Corporate securities		—		42,276,974		—		42,276,974
Agency mortgage backed securities		—		23,794,898		—		23,794,898
Short-term investments		200,000		—		—		200,000
Total financial instruments at fair value	$	15,398,840	$	66,071,872	$	—	$	81,470,712

12 of 31 

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

Fair value measurements are not adjusted for transaction costs. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer. The Company did not have any transfers between Levels 1, 2, and 3 of the fair value hierarchy during the three and six months ended June 30, 2019 and 2018.

NOTE 8 – INVESTMENTS

A summary of investment income, net of investment expenses, is as follows:

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

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
June 30, 2019
Available-for-sale fixed maturities:
U.S. treasury securities	$	15,076,613	$	132,352	$	(10,125	)	$	15,198,840
Corporate securities		41,465,815		817,350		(6,191	)		42,276,974
Agency mortgage-backed securities		23,665,009		184,821		(54,932	)		23,794,898
Held-to-maturity fixed securities:
Certificates of deposits		4,782,000		—		—			4,782,000
Total fixed maturities	$	84,989,437	$	1,134,523	$	(71,248	)	$	86,052,712

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

13 of 31 

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

	June 30			December 31
	2019			2018
Gross unrealized gains on fixed maturities	$	1,134,523		$	74,248
Gross unrealized losses on fixed maturities		(71,248	)		(1,466,699	)
Net unrealized gains (losses) on fixed maturities		1,063,275			(1,392,451	)
Deferred federal tax benefit (expense)		(223,288	)		292,415
Net unrealized gains (losses), net of deferred income taxes	$	839,987		$	(1,100,036	)

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

	Less than 12 Months						12 Months or Longer
	Estimated Fair Value		Gross Unrealized Losses		Number of Securities		Estimated Fair Value		Gross Unrealized Losses			Number of Securities
June 30, 2019
U.S. treasury securities	$	—	$	—		—	$	3,486,173	$	(10,125	)		3
Corporate securities		—		—		—		3,513,044		(6,191	)		5
Agency mortgage-backed securities		—		—		—		13,031,946		(54,932	)		11
Total	$	—	$	—		—	$	20,031,163	$	(71,248	)		19

	Less than 12 Months							12 Months or Longer
	Estimated Fair Value		Gross Unrealized Losses			Number of Securities		Estimated Fair Value		Gross Unrealized Losses			Number of Securities
December 31, 2018
U.S. treasury securities	$	1,760,491	$	(20,181	)		2	$	8,496,069	$	(123,101	)		6
Corporate securities		10,878,381		(272,515	)		17		21,189,487		(578,609	)		27
Agency mortgage-backed securities		—		—			—		17,034,086		(472,293	)		15
Total	$	12,638,872	$	(292,696	)		19	$	46,719,642	$	(1,174,003	)		48

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

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

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

14 of 31 

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

	June 30		December 31
	2019		2018
Certificates of deposit	$	200,000	$	200,000
Short-term investments		200,000		200,000
Total state held deposits	$	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:

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

NOTE 9 – UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

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

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

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

15 of 31 

NOTE 10 – CONTINGENCIES

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

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

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

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

OVERVIEW

General

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

Total revenues for the three months ended June 30, 2019, were $7,795,098 compared to $8,643,452 for the three months ended June 30, 2018, a decrease of $848,354 (10%). Total revenues for the six months ended June 30, 2019, were $14,930,572 compared to $17,450,341 for the six months ended June 30, 2018, a decrease of $2,519,769 (14%). The Company had net loss of $276,677 for the three months ended June 30, 2019, compared to net income of $168,297 for the three months ended June 30, 2018. The Company had net loss of $947,751 for the six months ended June 30, 2019, compared to net loss of $2,038,955 for the six months ended June 30, 2018.

This overview discusses some of the relevant factors that management considers in evaluating the Company's performance, prospects, and risks. It is not all inclusive and is meant to be read in conjunction with the entirety of the management discussion and analysis, the Company's consolidated financial statements and notes thereto, and all other items contained within the Company’s 2018 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

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

16 of 31 

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

Revenue and Income Generation

The Company receives its revenues primarily from earned premium derived from the insurance company operations, commission and fee income generated from the insurance agency operations, finance charges and fee income from the premium finance operations, and investment income from funds generated primarily from the insurance company operation. The insurance company operation generated approximately 92% and 93% of consolidated revenues for the three and six months ended June 30, 2019, respectively, compared to 93% and 92% of consolidated revenues for the three and six months ended June 30, 2018, respectively. None of the Company’s other operations is individually material to consolidated revenues.

Insurance Company Operation

As of June 30, 2019, Crusader was licensed as an admitted insurance carrier in the states of Arizona, California, Nevada, Oregon, and Washington. From 2004 until September 2014, all of Crusader’s business was written in the state of California. Crusader’s business remains concentrated in California (99.8% of direct written premium (before reinsurance ceded) during the three and six months ended June 30, 2019 and 99.6% of direct written premium (before reinsurance ceded) during the three and six months ended June 30, 2018).

Crusader’s total direct written premium, as reported on Crusader’s statutory financial statements, was produced geographically as follows:

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

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

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

17 of 31 

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

	Three Months Ended June 30						Six Months Ended June 30
	2019			2018			2019			2018
Direct written premium	$	9,454,402		$	7,786,199		$	17,983,583		$	16,442,342
Less: written premium ceded to reinsurers		(1,732,839	)		(1,690,611	)		(3,416,529	)		(3,442,442	)
Net written premium		7,721,563			6,095,588			14,567,054			12,999,900
Change in direct unearned premium		(1,200,032	)		1,230,382			(1,761,809	)		1,944,306
Change in ceded unearned premium		(3,419	)		36,975			(22,983	)		100,366
Net earned premium	$	6,518,112		$	7,362,945		$	12,782,262		$	15,044,572

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

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

	Three Months Ended June 30								Six Months Ended June 30
	2019			2018		Change			2019			2018			Change
Net written premium	$	7,721,563		$	6,095,588	$	1,625,975		$	14,567,054		$	12,999,900		$	1,567,154
Change in net unearned premium		(1,203,451	)		1,267,357		(2,470,808	)		(1,784,792	)		2,044,672			(3,829,464	)
Net earned premium		6,518,112			7,362,945		(844,833	)		12,782,262			15,044,572			(2,262,310	)
Less:
Losses and loss adjustment expenses		5,058,951			4,929,203		129,748			10,213,394			12,730,960			(2,517,566	)
Policy acquisition costs		1,289,481			1,515,476		(225,995	)		2,376,194			3,136,981			(760,787	)
Total underwriting expenses		6,348,432			6,444,679		(96,247	)		12,589,588			15,867,941			(3,278,353	)
Underwriting gain (loss) before income taxes	$	169,680		$	918,266	$	(748,586	)	$	192,674		$	(823,369	)	$	1,016,043

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

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

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

18 of 31 

The Company evaluates its unearned premiums periodically for premium deficiencies by comparing the sum of expected claim costs, unamortized deferred policy acquisition costs, and maintenance costs partially offset by net investment income to related unearned premiums. To the extent that any of the Company’s programs become unprofitable, a premium deficiency reserve may be required. The Company did not carry a premium deficiency reserve as of June 30, 2019 and 2018.

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

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

Losses and loss adjustment expenses were 78% and 80% of net earned premium for the three and six months ended June 30, 2019, respectively, compared to 67% and 85% of net earned premium for the three and six months ended June 30, 2018, respectively. For further analysis, refer to “Results of Operations.”

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

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

Revenues from Other Insurance Operations

The Company’s revenues from other insurance operations consist of commissions, fees, investment and other income. Excluding investment and other income, these operations accounted for approximately 7% and 8% of total revenues in the three and six months ended June 30, 2019, respectively, compared to approximately 8% of total revenues in the three and six months ended June 30, 2018.

Investments

The Company generated revenues from its total invested assets of $85,189,437 (at amortized cost) and $87,316,426 (at amortized cost) as of June 30, 2019 and 2018, respectively.

Net investment income (net of investment expenses) included in insurance company operation and other insurance operations revenue increased $78,141 (17%) and $165,980 (18%) to $530,747 and $1,063,384 for the three and six months ended June 30, 2019, respectively, compared to $452,606 and $897,404 for the three and six months ended June 30, 2018, respectively.This increase in net investment income was due primarily to increase in the yield on average invested assets.

19 of 31 

Due to the current interest rate environment, the current target effective duration for the Company’s investment portfolio is between 3.25 and 4.75 years. As of June 30, 2019, all of the Company’s investments are in U.S. treasury securities, corporate fixed maturity securities, agency mortgage-backed securities, Federal Deposit Insurance Corporation (“FDIC”) insured certificates of deposit, money market funds, and a savings account. The Company’s investments in U.S. treasury securities, corporate fixed maturity securities, agency mortgage-backed securities, and money market funds are readily marketable. As of June 30, 2019, the weighted average maturity of the Company’s investments was approximately 7.3 years, and the effective duration for available-for-sale investments (investments managed under the investment guidelines) was 3.14 years.

LIQUIDITY AND CAPITAL RESOURCES

Crusader has a significant amount of cash, cash equivalents, and investments as a result of its holdings of unearned premium reserves, its reserves for loss and loss adjustment expense payments, 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, cash equivalents, and investments (at amortized cost) of the Company at June 30, 2019, were $90,780,522 compared to $95,037,304 at December 31, 2018. Crusader's cash, cash equivalents, and investments were 99% and 98% of the total cash and investments (at amortized cost) held by the Company as of June 30, 2019, and December 31, 2018, respectively.

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

	June 30		December 31
	2019		2018
Fixed maturities:
Certificates of deposit	$	4,782,000	$	7,126,000
U.S. treasury securities		15,076,613		16,746,832
Corporate securities		41,465,815		40,804,425
Agency mortgage-backed securities		23,665,009		20,751,331
Total fixed maturities		84,989,437		85,428,588
Short-term investments		200,000		4,690,954
Total investments	$	85,189,437	$	90,119,542

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

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

The Company’s Board of Directors approved investment guidelines which are similar to what the Company believes are general investment guidelines used by Crusader’s peers.

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

20 of 31 

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

• Mortgage loans, except for mortgage backed securities issued by an agency of the U.S. government.

• Derivative mortgage-backed securities including interest only, principal only and inverse floating rate securities.

• All fixed maturity real estate securities, except mortgage-backed securities (including pass through securities and collateralized mortgage obligations) that are backed by agency and non-agency collateral and commercial mortgage-backed securities.

• Options and futures contracts.

• All non-U.S. dollar denominated securities.

• Any security that would not be in compliance with the regulations of Crusader’s state of domicile.

An independent investment advisor manages Crusader’s investments.  The advisor’s role currently is limited to maintaining Crusader’s portfolio within the investment guidelines and providing investment accounting services to the Company.  The investments continue to be held by Crusader’s current custodian, Union Bank Global Custody Services.

On December 19, 2008, the Board of Directors authorized a stock repurchase program to acquire from time to time up to an aggregate of 500,000 shares of the Company’s common stock. This program has no expiration date and may be terminated by the Board of Directors at any time. As of June 30, 2019, and December 31, 2018, the Company had remaining authority under the 2008 program to repurchase up to an aggregate of 188,269 and 188,625 shares of its common stock, respectively. The 2008 program is the only program under which there is authority to repurchase shares of the Company’s common stock. The Company repurchased 356 shares of stock during the three and six months ended June 30, 2019, in unsolicited transactions at a cost of $2,121 of which $175 was allocated to capital and $1,946 was allocated to retained earnings. The Company did not repurchase any stock during the three and six months ended June 30, 2018. The Company has retired or will retire all stock repurchased.

The Company reported $3,759,491 net cash used by operating activities for the six months ended June 30, 2019, compared to $2,100,724 net cash used by operating activities for the six months ended June 30, 2018. 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 it continues to be well capitalized and adequately reserved. 

While material capital expenditures may be funded through borrowings, the Company believes that its cash, cash equivalents, and short-term investments at June 30, 2019,net ofstatutory deposits of $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.

RESULTS OF OPERATIONS

All comparisons made in this discussion are comparing the three and six months ended June 30, 2019, to the three and six months ended June 30, 2018, unless otherwise indicated.

For the three and six months ended June 30, 2019, total revenues were $7,795,098, a decrease of $848,354 (10%) and $14,930,572, a decrease of $2,519,769 (11%) compared to total revenues of $8,643,452 and $17,450,341 for the three and six months ended June 30, 2018, respectively. For the three and six months ended June 30, 2019, the Company had loss before taxes of $342,670 and $1,154,402, respectively, compared to income before taxes of $287,032 and loss before taxes of $2,524,900 for the three and six months ended June 30, 2018, respectively. For the three and six months ended June 30, 2019, the Company had net loss of $276,677 and $947,751, respectively, compared to net income of $168,297 and net loss of $2,038,955 for the three and six months ended June 30, 2018, respectively.

The decrease in revenues of $848,354 for the three months ended June 30, 2019, when compared to the three months ended June 30, 2018, was primarily due to a decrease in net earned premium of $844,833 (11%). The decrease in revenues of $2,519,769 for the six months ended June 30, 2019, when compared to the six months ended June 30, 2018, was primarily due to a decrease in net earned premium of $2,262,310 (15%).

21 of 31 

The increase in loss before tax of $629,702 for the three months ended June 30, 2019, compared to the three months ended June 30, 2018, was due primarily to a decrease in net earned premium of $844,833 (11%) partially offset by a decrease in policy acquisition costs of $225,995 (15%). The decrease in loss before tax of $1,370,498 for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, was primarily due to a decrease in losses and loss adjustment expenses of $2,517,566 (20%), a decrease in policy acquisition costs of $760,787 (24%), a decrease in salaries and employee benefits of $373,926 (15%), partially offset by a decrease in net earned premium of $2,262,310 (15%).

Written premium

Written premium is a required statutory measure. Direct written premium (written premium before reinsurance) reported on Crusader’s statutory financial statements increased $1,668,203 (21%) and $1,541,241 (9%) to $9,454,402 and $17,983,583 for the three and six months ended June 30, 2019, respectively, compared to $7,786,199 and $16,442,342 for the three and six months ended June 30, 2018, respectively.

The property casualty insurance marketplace continues to be intensely competitive. While Crusader attempts to meet such competition with competitive prices, its emphasis is on service, innovation, promotion, and distribution. Crusader believes that rate adequacy is more important than premium growth and that underwriting profit (net earned premium less losses and loss adjustment expenses and policy acquisition costs) is its primary goal. Crusader believes that it can grow its sales and profitability 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 increases in direct written premium for the three and six months ended June 30, 2019, are due to growth in Crusader’s Transportation underwriting vertical partially offset by declines in the other three underwriting verticals.

Direct earned premium

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

Ceded earned premium

Ceded earned premium (premium ceded to reinsurers under reinsurance treaties) increased $82,622 (5%) to $1,736,258 and $97,436 (3%) to $3,439,512 for the three and six months ended June 30, 2019, compared to $1,653,636 and $3,342,076 for the three and six months ended June 30, 2018, respectively. Ceded earned premium as a percentage of direct earned premium was 21% for the three and six months ended June 30, 2019 and 18% for the three and six months ended June 30, 2018. The increase in the ceded earned premium as a percentage of direct earned premium for the three and six months ended June 30, 2019, compared to the three and six months ended June 30, 2018, was due primarily to higher rates on Crusader’s excess of loss reinsurance treaties.

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

Crusader also has catastrophe reinsurance treaties from various highly rated California authorized and California unauthorized reinsurance companies. These reinsurance treaties help protect Crusader against losses in excess of certain retentions from catastrophic events that may occur on property risks which Crusader insures. In calendar years 2019 and 2018, Crusader retained a participation in its catastrophe excess of loss reinsurance treaties of 5% in its 1^st layer (reinsured losses between $1,000,000 and $10,000,000) and 0% in its 2^nd layer (reinsured losses between $10,000,000 and $46,000,000).

22 of 31 

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

Net investment income

Net investment income increased $78,141 (17%) to $530,747 and $165,980 (18%) to $1,063,384 for the three and six months ended June 30, 2019, respectively, compared to $452,606 and $897,404 for the three and six months ended June 30, 2018, respectively. This increase in investment income was due primarily to an increase in the yield on average invested assets. The Company had net realized investment losses of $4,512 and $12,661 for the three and six months ended June 30, 2019, respectively. The Company had net realized gains of $137 for the three and six months ended June 30, 2018.

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

	Three Months Ended June 30						Six Months Ended June 30
	2019			2018			2019			2018
Average invested assets (1) - at amortized cost	$	86,305,694		$	88,496,289		$	87,654,490		$	87,707,662
Net investment income from:
Invested assets (2)	$	523,943		$	443,466		$	1,043,914		$	882,600
Cash equivalents		6,804			9,140			19,470			14,804
Total investment income	$	530,747		$	452,606		$	1,063,384		$	897,404
Annualized yield on average invested assets (3)		2.4	%		2.0	%		2.4	%		2.0	%

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

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

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

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

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

	Par Value		Amortized Cost		Fair Value		Weighted Average Yield
Maturities by Year at December 31, 2018
Due in one year	$	9,328,000	$	9,326,886	$	9,311,678		1.3	%
Due after one year through five years		43,893,000		43,821,970		43,211,883		2.5	%
Due after five years through ten years		15,788,408		15,876,016		15,497,513		3.2	%
Due after ten years and beyond		15,964,156		16,403,716		16,015,063		2.8	%
Total	$	84,973,564	$	85,428,588	$	84,036,137		2.5	%

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

The weighted average maturity of the Company’s fixed maturity investments was 7.3 years as of June 30, 2019, and 6.5 years as of December 31, 2018.

23 of 31 

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

	Less than 12 Months						12 Months or Longer
	Estimated Fair Value		Gross Unrealized Losses		Number of Securities		Estimated Fair Value		Gross Unrealized Losses			Number of Securities
June 30, 2019
U.S. treasury securities	$	—	$	—		—	$	3,486,173	$	(10,125	)		3
Corporate securities		—		—		—		3,513,044		(6,191	)		5
Agency mortgage-backed securities		—		—		—		13,031,946		(54,932	)		11
Total	$	—	$	—		—	$	20,031,163	$	(71,248	)		19

	Less than 12 Months							12 Months or Longer
	Estimated Fair Value		Gross Unrealized Losses			Number of Securities		Estimated Fair Value		Gross Unrealized Losses			Number of Securities
December 31, 2018
U.S. treasury securities	$	1,760,491	$	(20,181	)		2	$	8,496,069	$	(123,101	)		6
Corporate securities		10,878,381		(272,515	)		17		21,189,487		(578,609	)		27
Agency mortgage-backed securities		—		—			—		17,034,086		(472,293	)		15
Total	$	12,638,872	$	(292,696	)		19	$	46,719,642	$	(1,174,003	)		48

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

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

Other income

Other income included in Insurance Company Revenues and Other Insurance Operations increased $46,993 (39%) to $168,928 and decreased $258,700 (46%) to $(81,054) for the three and six months ended June 30, 2019, respectively, compared to $121,935 and $177,646 for the three and six months ended June 30, 2018, respectively. The increase in other income during the three months ended June 30, 2019 is due primarily to a $71,282 increase in Crusader’s share of California FAIR Plan equity compared to a $14,776 increase during the three months ended June 30, 2018. The decrease in other income during the six months ended June 30, 2019 is due primarily to a $238,816 decrease in Crusader’s share of California FAIR Plan equity compared to a $29,986 decrease during the six months ended June 30, 2018.

Gross commissions and fees

Gross commissions and fees decreased $143,624 (21%) to $527,825 and $202,836 (16%) to $1,075,270 for the three and six months ended June 30, 2019, respectively, compared to gross commissions and fees of $671,449 and $1,278,106 for the three and six months ended June 30, 2018, respectively.

24 of 31 

The changes in gross commission and fee income for the three and six months ended June 30, 2019, as compared to the three and six months ended June 30, 2018, are as follows:

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

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

AIB markets health insurance in California through non-affiliated insurance companies for individuals and groups. For these services, AIB receives commission based on the premiums that it writes. Commission income decreased $71,326 (25%) and 56,751 (12%) in the three and six months ended June 30, 2019, respectively, compared to the three and six months ended June 30, 2018. The decrease in commission income reported in the three and six months ended June 30, 2019, when compared to the prior year period, is primarily a result of a decrease in commission income on group health and life premiums and timing of commission receipts.

AAQHC is a third party administrator for contracted insurance companies and is a membership association that provides various consumer benefits to its members, including participation in group health care insurance policies that AAQHC negotiates for the association. For these services, AAQHC receives membership and fee income from its members. Membership and fee income increased $6,698 (42%) and $15,130 (47%) for the three and six months ended June 30, 2019, respectively, compared to the three and six months ended June 30, 2018. This increase is primarily a result of an increase in administration fees partially offset by a decrease in the number of association members enrolled in AAQHC.

Finance charges and fees earned

Finance charges and fees earned consist of finance charges, late fees, returned check fees and payment processing fees. These charges and fees earned by AAC increased $19,618 (57%) to $53,998 and $50,895 (97%) to $103,371 for the three and six months ended June 30, 2019, respectively, compared to $34,380 and $52,476 in fees earned during the three and six months ended June 30, 2018, respectively. During the three and six months ended June 30, 2019, AAC issued 390 and 863 loans, respectively, and had 1,347 loans outstanding as of June 30, 2019. During the three and six months ended June 30, 2018, AAC issued 543 and 1203, respectively, and had 1,887 loans outstanding as of June 30, 2018. AAC provides premium financing only for Crusader policies produced by Unifax in California. From July 2010 to March 1, 2018, AAC offered 0% financing on policies produced by Unifax for Crusader. From March 1, 2018 to March 31, 2019, the annual percentage rate charged by AAC on new loans increased to a single fixed interest rate from 0%. Effective April 1, 2019, the Company converted from the single fixed interest rate for all financed policies to a tiered interest rate structure under which different fixed interest rates are charged based on amount of underlying financed premium.

Losses and loss adjustment expenses

Losses and loss adjustment expenses were 78% and 80% of net earned premium for the three and six months ended June 30, 2019, compared to 67% and 85% of net earned premium for the three and six months ended June 30, 2018. 

25 of 31 

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

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

	Six Months Ended June 30
	2019		2019 Loss Ratio			2018		2018 Loss Ratio			Change
Net earned premium	$	12,782,262				$	15,044,572				$	(2,262,310	)
Losses and loss adjustment expenses:
Provision for insured events of current year		9,685,514		76	%		10,661,378		71	%		(975,864	)
Development of insured events of prior years		527,880		4	%		2,069,582		14	%		(1,541,702	)
Total losses and loss adjustment expenses	$	10,213,394		80	%	$	12,730,960		85	%	$	(2,517,566	)

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

The $5,134,626 provision for insured events of current year for the three months ended June 30, 2019, was $482,386 higher than the $4,652,240 provision for insured events of current year for the three months ended June 30, 2018, due primarily to increases in incurred losses and loss adjusted expenses on reported claims as a result of higher frequency and severity of Transportation liability claims and higher severity of Food, Beverage & Entertainment liability claims for insured events of current year during the three months ended June 30, 2019.

The $75,675 favorable development of insured events of prior years for the three months ended June 30, 2019, was $352,638 lower than the $276,963 adverse development for the three months ended June 30, 2018, due primarily to decreases in incurred losses and loss adjusted expenses on reported claims as a result of lower frequency and severity of Apartments & Commercial Buildings liability claims and Food, Beverage & Entertainment liability claims for insured events of prior years during the three months ended June 30, 2019.

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

The $527,880 adverse development of insured events of prior years for the six months ended June 30, 2019, was $1,541,702 lower than the $2,069,582 adverse development for the six months ended June 30, 2018, due primarily to decreases in incurred losses and loss adjusted expenses on reported claims as a result of lower frequency and severity of Apartments & Commercial Buildings liability claims and Transportation liability claims for insured invests of prior years during the six months ended June 30, 2019.

26 of 31 

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

		Provision for Insured Events of Current Year		Adverse (Favorable) Development of Insured Events of Prior Years			Total Losses and Loss Adjustment Expenses
Three Months Ended:
June 30, 2019	$	5,134,626	$	(75,675	)	$	5,058,951
March 31, 2019		4,550,888		603,555			5,154,443
December 31, 2018		5,134,166		53,997			5,188,163
September 30, 2018		4,840,242		798,378			5,638,620
June 30, 2018		4,652,240		276,963			4,929,203
March 31, 2018		6,009,138		1,792,619			7,801,757
December 31, 2017		5,330,275		808,481			6,138,756
September 30, 2017		5,982,245		3,935,651			9,917,896
June 30, 2017		5,567,142		341,532			5,908,674

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

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

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

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

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

27 of 31 

Policy acquisition costs

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

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

	Three Months Ended June 30									Six Months Ended June 30
	2019			2018			Change			2019			2018			Change
Policy acquisition costs	$	1,289,481		$	1,515,476		$	(225,995	)	$	2,376,194		$	3,136,981		$	(760,787	)
Ratio to net earned premium (GAAP ratio)		20	%		21	%					19	%		21	%

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

Salaries and employee benefits

Salaries and employee benefits decreased $113,698 (10%) to $1,012,805 and $373,926 (15%) to $2,040,654 for the three and six months ended June 30, 2019, respectively, compared to $1,126,503 and $2,414,580 for the three and six months ended June 30, 2018.

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

	Three Months Ended June 30
	2019			2018			Change
Total salaries and employee benefits incurred	$	1,894,165		$	1,975,558		$	(81,393	)
Less: charged to losses and loss adjustment expenses		(507,433	)		(452,103	)		55,330
Less: capitalized to policy acquisition costs		(308,480	)		(396,952	)		(88,472	)
Less: charged to IT system upgrade		(65,447	)		—			65,447
Net amount charged to operating expenses	$	1,012,805		$	1,126,503		$	(113,698	)

	Six Months Ended June 30
	2019			2018			Change
Total salaries and employee benefits incurred	$	3,771,583		$	4,068,262		$	(296,679	)
Less: charged to losses and loss adjustment expenses		(1,002,461	)		(882,250	)		120,211
Less: capitalized to policy acquisition costs		(617,464	)		(771,432	)		(153,968	)
Less: charged to IT system upgrade		(111,004	)		—			111,004
Net amount charged to operating expenses	$	2,040,654		$	2,414,580		$	(373,926	)

The decrease in the total salaries and employee benefits incurred for the three and six months ended June 30, 2019, compared to the three and six months ended June 30, 2018, was due primarily to a decrease in the headcount and several managerial vacancies for the three and six months ended June 30, 2019 compared to the three and six months ended June 30, 2018.

Commissions to agents/brokers

Commissions to agents/brokers increased $536 (1%) to $41,077 and $9,318 (11%) to $91,198 for the three and six months ended June 30, 2019, respectively, compared to $40,541 and $81,880 for the three and six months ended June 30, 2018. These increases in commissions to agents/brokers were due primarily to timing of payment receipts.

Other operating expenses

Other operating expenses decreased $9,244 (1%) to $735,454 and $247,306 (15%) to $1,363,534 for the three and six months ended June 30, 2019, respectively, compared to $744,697 and $1,610,840 for the three and six months ended June 30, 2018. The decrease in other operating expenses for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, was due to lower costs of temporary help and a number of various insignificant fluctuations.

28 of 31 

Income tax expense/benefit

Income tax benefit was $65,993 (19% of pre-tax income) and $206,651 (18% of pre-tax loss) for the three and six months ended June 30, 2019, respectively, compared to an income tax expense of $118,735 (41% of pre-tax income) and income tax benefit of $485,945 (19% of pre-tax loss) for the three and six months ended June 30, 2018, respectively. The income tax benefit for the three and six months ended June 30, 2019, was due primarily to losses before taxes of $342,670 and $1,154,402, respectively. The income tax expense for the three months ended June 30, 2018, was due primarily to income before taxes of $287,032 and a change in valuation allowance on the state net operating loss carryforward, and the income tax benefit for the six months ended June 30, 2018, was due primarily to net loss before taxes of $2,524,900. The calculated tax rate for the six months ended June 30, 2019, consisted of federal tax benefit rate of 21% and a state income tax benefit rate of 5.3%. The calculated tax rate for the six months ended June 30, 2018, was comprised of a calculated federal tax benefit rate of approximately 21% and a state income tax benefit rate of 1.3%. The Company increased its valuation allowance related to deferred tax assets on federal net operating losses by $42,000 to $85,000 during the three months ended June 30, 2019, thus making the effective tax rate 19% and 18% for the three and six months ended June 30, 2019, respectively.

OFF-BALANCE SHEET ARRANGEMENTS

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was carried out by the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of June 30, 2019, as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of June 30, 2019.

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

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There were no material changes from risk factors as previously disclosed in the Company’s Form 10-K for the year ended December 31, 2018, in response to Item 1A to Part I of Form 10-K and in the Company’s Form10-Q for the quarter ended March 31, 2019, in response to Item 1A to Part II of Form 10-Q.

29 of 31 

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

The following table sets forth certain information with respect to purchases of common stock of the Company during the three months ended June 30, 2019, by the Company.

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

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

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

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

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

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

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

30 of 31 

SIGNATURES

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

UNICO AMERICAN CORPORATION

Date: August 14, 2019 By:/s/ CARY L. CHELDIN

Cary L. Cheldin

Chairman of the Board, President and Chief

Executive Officer, (Principal Executive Officer)

Date: August 14, 2019 By:/s/ MICHAEL BUDNITSKY

Michael Budnitsky

Treasurer, Chief Financial Officer and Secretary, (Principal

Accounting and Principal Financial Officer)