Unico American (UNAM) 10-Q 2020 Q1 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 endedMarch 31, 2020or

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

For the transition period from ____ to ____.

Commission File No. 000-03978

UNICO AMERICAN CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Nevada	95-2583928
(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 May15, 2020
Common Stock, no par value per share	5,305,742

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UNICO AMERICAN CORPORATION

INDEX TO FORM 10-Q

	Page No.
Cautionary Note Regarding Forward-Looking Statements		3
Part I - Financial Information		5
Item 1. Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3. Quantitative and Qualitative Disclosures About Market Risk		31
Item 4. Controls and Procedures		31
Part II - Other Information		32
Item 1. Legal Proceedings		32
Item 1A. Risk Factors		32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		32
Item 3. Defaults Upon Senior Securities		32
Item 4. Mine Safety Disclosures		32
Item 5. Other Information		33
Item 6. Exhibits		33
Signatures		33

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

·failure to meet minimum capital and surplus requirements;

·vulnerability to significant catastrophic property loss;

·the impact of the recent coronavirus outbreak;

·changes 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 or long-term issuer credit 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;

·single operating location;

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

·change in general economic conditions;

·dependence on key personnel;

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

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

relationships

·ability to effectively compete;

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

·control by a small number of stockholders;

·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.

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Please see Part I - Item 1A – “Risk Factors” in the Company’s 2019 Annual Report on Form 10-K as filed with the U.S. Securities and Exchange Commission (“SEC”), as well as other documents we file with the SEC from time-to-time, for other important factors that could cause the Company’s actual results to differ materially from the Company’s current expectations and from the forward-looking statements discussed herein. Because of 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.

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31		December 31
	2020		2019
		(Unaudited)
ASSETS
Investments
Available-for-sale:
Fixed maturities, at fair value (amortized cost: $81,814,388 a March 31, 2020, and $82,002,411 at December 31, 2019)	$	82,931,949	$	83,499,710
Held-to-maturity:
Fixed maturities, at amortized cost (fair value: $798,000 at March 31, 2020, and $798,000 at December 31, 2019)		798,000		798,000
Equity securities, at fair value (cost: $502,484 at March 31, 2020, and $0 at December 31, 2019)		457,684		—
Short-term investments, at fair value		2,198,017		2,196,815
Total Investments		86,385,650		86,494,525
Cash and cash equivalents		5,276,025		5,781,639
Accrued investment income		503,388		397,302
Receivables, net		3,986,844		4,019,437
Reinsurance recoverable:
Paid losses and loss adjustment expenses		365,668		685,841
Unpaid losses and loss adjustment expenses		15,399,752		14,725,855
Deferred policy acquisition costs		3,687,979		3,619,594
Property and equipment, net		10,223,162		10,226,595
Deferred income taxes		4,106,849		3,925,432
Other assets		468,458		430,305
Total Assets	$	130,403,775	$	130,306,525
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Unpaid losses and loss adjustment expenses	$	56,139,598	$	55,066,480
Unearned premiums		18,107,398		17,810,337
Advance premium and premium deposits		345,027		219,083
Accrued expenses and other liabilities		2,081,486		2,130,300
Total Liabilities	$	76,673,509	$	75,226,200
Commitments and contingencies
STOCKHOLDERS'  EQUITY
Common stock, no par value – authorized 10,000,000 shares;  5,305,742 and 5,306,720, shares issued and outstanding at March 31, 2020, and December 31, 2019, respectively	$	3,772,189	$	3,772,669
Accumulated other comprehensive loss		882,873		1,182,866
Retained earnings		49,075,204		50,124,790
Total Stockholders’ Equity	$	53,730,266	$	55,080,325
Total Liabilities and Stockholders' Equity	$	130,403,775	$	130,306,525

See notes to condensed consolidated financial statements (unaudited).

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended
	March 31
	2020			2019
REVENUES
Insurance company operation:
Net earned premium	$	6,911,134		$	6,264,150
Investment income		520,692			532,630
Net realized investments gains (losses)		1,114			(8,149	)
Net unrealized investments losses on equity securities		(44,800	)		—
Other income (loss)		80,937			(260,700	)
Total Insurance Company Operation		7,469,077			6,527,931
Other insurance operations:
Gross commissions and fees		469,069			547,445
Investment income		2			7
Finance charges and fees earned		67,019			49,373
Other income		14			10,718
Total Revenues		8,005,181			7,135,474
EXPENSES
Losses and loss adjustment expenses		5,877,385			5,154,443
Policy acquisition costs		1,144,425			1,086,713
Salaries and employee benefits		1,122,499			1,027,849
Commissions to agents/brokers		25,955			50,121
Other operating expenses		980,415			628,080
Total Expenses		9,150,679			7,947,206
Loss before taxes		(1,145,498	)		(811,732	)
Income tax benefit		101,672			140,658
Net Loss	$	(1,043,826	)	$	(671,074	)
PER SHARE DATA:
Basic
Loss Per Share	$	(0.20	)	$	(0.13	)
Weighted Average Shares		5,306,720			5,307,103
Diluted
Loss Per Share	$	(0.20	)	$	(0.13	)
Weighted Average Shares		5,306,720			5,307,103

See notes to condensed consolidated financial statements (unaudited).

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

	Three Months Ended
	March 31
	2020			2019
Net loss	$	(1,043,826	)	$	(671,074	)
Changes in unrealized (losses) gains on securities classified as available-for-sale arising during the period, net of income tax		(299,993	)		975,885
Comprehensive (Loss) Income	$	(1,343,819	)	$	304,811

See notes to condensed consolidated financial statements (unaudited).

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

							Accumulated
	Common Shares						Other
	Issued and						Comprehensive			Retained
	Outstanding			Amount			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
								Accumulated
	Common Shares							Other
		Issued and						Comprehensive			Retained
		Outstanding			Amount			Income (Loss)			Earnings			Total
Balance – December 31, 2019		5,306,720		$	3,772,669		$	1,182,866		$	50,124,790		$	55,080,325
Shares repurchased		(978	)		(480	)		—			(5,760	)		(6,240	)
Change in comprehensive loss, net of deferred income tax		—			—			(299,993	)		—			(299,993	)
Net loss		—			—			—			(1,043,826	)		(1,043,826	)
Balance – March 31, 2020		5,305,742		$	3,772,189		$	882,873		$	49,075,204		$	53,730,266

See notes to condensed consolidated financial statements (unaudited).

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended
	March 31
	2020			2019
Cash flows from operating activities:
Net loss	$	(1,043,826	)	$	(671,074	)
Adjustments to reconcile net loss to net cash from operations:
Depreciation and amortization		188,085			135,027
Bond amortization, net		(6,711	)		6,880
Bad debt expense		(25	)		2,739
Net realized investment (gains) losses		(1,114	)		8,149
Net unrealized investment losses on equity securities		44,800			—
Changes in assets and liabilities:
Net receivables and accrued investment income		(73,468	)		(456,919	)
Reinsurance recoverable		(353,724	)		(3,136,056	)
Deferred policy acquisition costs		(68,385	)		(81,052	)
Other assets		(38,153	)		351,282
Unpaid losses and loss adjustment expenses		1,073,118			(324,284	)
Unearned premiums		297,061			561,777
Advance premium and premium deposits		125,944			108,521
Accrued expenses and other liabilities		(48,814	)		(78,202	)
Income taxes current/deferred		(101,672	)		(149,458	)
Net Cash Used by Operating Activities		(6,884	)		(3,722,670	)
Cash flows from investing activities:
Purchase of fixed maturity investments		(1,735,823	)		(3,573,566	)
Purchase of equity securities		(502,484	)		—
Proceeds from maturity of fixed maturity investments		1,328,128			1,779,271
Proceeds from sale or call of fixed maturity investments		603,543			482,696
Net decrease (increase) in short-term investments		(1,202	)		3,994,162
Additions to property and equipment		(184,652	)		(231,521	)
Net Cash Provided (Used) by Investing Activities		(492,490	)		2,451,042
Cash flows from financing activities:
Repurchase of common stock		(6,240	)		—
Net Cash Used by Financing Activities		(6,240	)		—
Net decrease in cash and cash equivalents		(505,614	)		(1,271,628	)
Cash and cash equivalents at beginning of period		5,781,639			4,917,762
Cash and Cash Equivalents at End of Period	$	5,276,025		$	3,646,134
Supplemental cash flow information
Cash paid during the period for:
Interest		—			—
Income taxes	$	8,800			8,800

See notes to condensed consolidated financial statements (unaudited).

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2020

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

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

Principles of Consolidation

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

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X for smaller reporting companies. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. Quarterly condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes in the Company’s 2019 Annual Report on Form 10-K 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:

• Investment securities, excluding long-term certificates of deposit, and short-term investments – 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.

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

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

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

Cash Equivalents

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

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

On December 19, 2008, 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 March 31, 2020, and December 31, 2019, the Company had remaining authority under the 2008 program to repurchase up to an aggregate of 187,264 and 188,242 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 978 shares of stock during the three months ended March 31, 2020, in unsolicited transactions at a cost of $6,240 of which $480 was allocated to capital and $5,760 was allocated to retained earnings. The Company did not repurchase any stock during the three months ended March 31, 2019. The Company has retired or will retire all stock repurchased.

NOTE 3 – LOSS PER SHARE

The following table represents the reconciliation of the Company's basic loss per share and diluted loss per share computations reported on the Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019:

	Three Months Ended March 31
	2020			2019
Basic Loss Per Share
Net loss	$	(1,043,826	)	$	(671,074	)
Weighted average shares outstanding		5,306,720			5,307,103
Basic loss per share	$	(0.20	)	$	(0.13	)
Diluted Loss per Share
Net loss	$	(1,043,826	)	$	(671,074	)
Weighted average shares outstanding		5,306,720			5,307,103
Diluted shares outstanding		5,306,720			5,307,103
Diluted loss per share	$	(0.20	)	$	(0.13	)

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.

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

Standards not yet adopted

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

NOTE 5 – ACCOUNTING FOR TAXES

The Company and its wholly owned subsidiaries file consolidated federal and state income tax returns. Pursuant to a tax allocation agreement, the Company’s subsidiaries, Crusader 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 2016 and California state income tax authorities for tax returns filed starting at taxable year 2015. There are no ongoing examinations of income tax returns by federal or state tax authorities.

As of March 31, 2020, and December 31, 2019, 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:

	March 31			December 31
	2020			2019
Building  and leasehold improvements located in Calabasas, California	$	8,411,541		$	8,411,541
Furniture, fixtures, and equipment		2,120,078			2,110,653
Computer software		459,899			459,899
Accumulated depreciation and amortization		(3,805,466	)		(3,617,381	)
Computer software under development		1,249,625			1,074,398
Land located in Calabasas, California		1,787,485			1,787,485
Property and equipment, net	$	10,223,162		$	10,226,595

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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 months ended March 31, 2020 and 2019 was $188,085 and $135,027, respectively.

For the three months ended March 31, 2020 and 2019, the Calabasas building has generated rental revenue from non-affiliated tenants in the amount of $53,290 and $42,230, respectively, which is included in “Other income” from insurance company operation in the Company’s Condensed Consolidated Statements of Operations.

For the three months ended March 31, 2020 and 2019, the Calabasas building incurred operating expenses (including depreciation) in the amount of $190,097 and $156,789, 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 March 31, 2020, 6,942 square feet of the Calabasas building was leased to non-affiliated entities and 7,539 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 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 March 31, 2020, and December 31, 2019:

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	Level 1		Level 2		Level 3		Total
March 31, 2020
Financial instruments:
Available-for-sale fixed maturities:
U.S. Treasury securities	$	14,902,906	$	—	$	—	$	14,902,906
Corporate securities		—		43,175,098		—		43,175,098
Agency mortgage backed securities		—		24,853,945		—		24,853,945
Equity securities		457,684		—		—		457,684
Short-term investments		2,198,017		—		—		2,198,017
Total financial instruments at fair value	$	17,558,607	$	68,029,043	$	—	$	85,587,650

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

Fair value measurements are not adjusted for transaction costs. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer. The Company did not have any transfers between Levels 1, 2, and 3 of the fair value hierarchy during the three months ended March 31, 2020 and 2019.

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

NOTE 8 – INVESTMENTS

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

	Three Months ended March 31
	2020			2019
Fixed maturities	$	542,407		$	543,695
Equity securities		1,442			—
Short-term investments and cash equivalents		11,724			26,561
Gross investment income		555,573			570,256
Less investment expenses		(34,879	)		(37,619	)
Net investment income		520,694			532,637
Net realized investment (gains) losses		1,114			(8,149	)
Net unrealized investment losses on equity securities		(44,800	)		—
Net investment income, realized investment gains (losses) and unrealized investment losses on equity securities	$	477,008		$	524,488

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

	Amortized Cost		Gross UnrealizedGains		Gross UnrealizedLosses			Estimated Fair Value
March 31, 2020
Available-for-sale fixed maturities:
U.S. Treasury securities	$	14,519,461	$	383,445	$	—		$	14,902,906
Corporate securities		42,936,116		792,504		(553,522	)		43,175,098
Agency mortgage-backed securities		24,358,811		668,201		(173,067	)		24,853,945
Held-to-maturity fixed securities:
Certificates of deposits		798,000		—		—			798,000
Total fixed maturities	$	82,612,388	$	1,844,150	$	(726,589	)	$	83,729,949

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

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:

	March 31			December 31
	2020			2019
Gross unrealized gains on fixed maturities	$	1,844,150		$	1,500,333
Gross unrealized losses on fixed maturities		(726,589	)		(3,034	)
Net unrealized gains on fixed maturities		1,117,561			1,497,299
Deferred federal tax expense		(234,688	)		(314,433	)
Net unrealized gains, net of deferred income taxes	$	882,873		$	1,182,866

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
	EstimatedFair Value		Gross UnrealizedLosses			Number ofSecurities		EstimatedFair Value		Gross UnrealizedLosses		Number ofSecurities
March 31, 2020
Corporate securities		8,840,514		(553,522	)		16		—		—		—
Agency mortgage-backed securities		3,758,080		(173,067	)		7		—		—		—
Total	$	12,598,594	$	(726,589	)		23	$	—	$	—		—

	Less than 12 Months							12 Months or Longer
	EstimatedFair Value		Gross UnrealizedLosses			Number ofSecurities		EstimatedFair Value		Gross UnrealizedLosses			Number ofSecurities
December 31, 2019
U.S. Treasury securities	$	1,996,562	$	(253	)		1	$	1,002,031	$	(775	)		1
Corporate securities		999,818		(56	)		1		—		—			—
Agency mortgage-backed securities		750,058		(1,950	)		2		—		—			—
Total	$	3,746,438	$	(2,259	)		4	$	1,002,031	$	(775	)		1

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The Company closely monitors its investments. If an unrealized loss is determined to be other-than-temporary, it is written off as a realized loss through the Condensed Consolidated Statements of Operations. The Company’s methodology of assessing other-than-temporary impairments is based on security-specific analysis as of the balance sheet date and considers various factors including the length of time to maturity and the extent to which the fair value has been less than the cost, the financial condition and the near-term prospects of the issuer, and whether the debtor is current on its contractually obligated interest and principal payments. During the three months ended March 31, 2020, one fixed maturity corporate security experienced a significant decline in market value; the market and book value of that security at March 31, 2020, was $459,000 and $912,681, respectively. The unrealized losses on all securities as of March 31, 2020, and December 31, 2019, were determined to be temporary.

Although the Company does not intend to sell its fixed maturity investments prior to maturity, the Company may sell investment securities from time to time in response to cash flow requirements, economic, regulatory, and/or market conditions or investment securities may be called by their issuers prior to the securities’ maturity. The Company sold one security prior to maturity during the three months ended March 31, 2020. This security had amortized cost of $601,316. The Company realized a net investment gain of $1,114 on this sale for the three months ended March 31, 2020. The Company sold one security prior to maturity during the three months ended March 31, 2019. This security had amortized cost of $498,994. The Company realized a net investment loss of $8,149 on this sale for the three months ended March 31, 2019. The unrealized gains or losses from fixed maturities are reported as “Accumulated other comprehensive income or loss,” which is a separate component of stockholders’ equity, net of any deferred tax effect.

The Company started investing in common stock equity securities during the three months ended March 31, 2020. The Company’s common stock allocation is intended to enhance the return of and provide diversification for the total investment portfolio. At March 31, 2020, less than 1% of the total investment portfolio at fair value was held in equity securities. A summary of equity securities is shown below:

	March 31			December 31
	2020			2019
Cost	$	502,484		$	—
Unrealized loss		(44,800	)		—
Fair market value of equity securities	$	457,684		$	—

The primary cause for the decrease in fair value of the Company’s equity securities portfolio for the three months ended March 31, 2020 was overall decline in equity markets during the period.

The Company’s investment in certificates of deposit included $598,000 of brokered certificates of deposit as of March 31, 2020 and December 2019. All of the Company’s 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.

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

	March 31		December 31
	2020		2019
Certificates of deposit	$	200,000	$	200,000
Short-term investments		200,000		200,000
Total state held deposits	$	400,000	$	400,000

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

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

	March 31		December 31
	2020		2019
U.S. Treasury bills	$	1,998,017	$	1,996,815
Certificates of deposit		200,000		200,000
Total short-term investments	$	2,198,017	$	2,196,815

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:

	Three Months Ended March 31
	2020		2019
Reserve for unpaid losses and loss adjustment expenses at January 1 – gross of reinsurance	$	55,066,480	$	51,657,155
Less reinsurance recoverable on unpaid losses and loss adjustment expenses		14,725,855		9,531,602
Reserve for unpaid losses and loss adjustment expenses at January 1 – net of reinsurance		40,340,625		42,125,553
Incurred losses and loss adjustment expenses:
Provision for insured events of current year		5,161,176		4,550,888
Development of insured events of prior years		716,209		603,555
Total incurred losses and loss adjustment expenses		5,877,385		5,154,443
Loss and loss adjustment expense payments:
Attributable to insured events of the current year		1,444,009		1,158,426
Attributable to insured events of prior years		4,034,155		6,468,019
Total payments		5,478,164		7,626,445
Reserve for unpaid losses and loss adjustment expenses at March 31 – net of reinsurance		40,739,846		39,653,551
Reinsurance recoverable on unpaid losses and loss adjustment expenses		15,399,752		11,679,320
Reserve for unpaid losses and loss adjustment expenses at March 31 – gross of reinsurance	$	56,139,598	$	51,332,871

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.

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.

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

NOTE 11 – SUBSEQUENT EVENTS

The Company evaluated its March 31, 2020, consolidated financial statements for subsequent events through the date the consolidated financial statements were issued. As a result of the spread of the recent coronavirus outbreak, economic uncertainties have arisen which impacted and may continue to impact the fair value of investments, day to day administration of the Company’s business and the Company’s revenue.  The effects of that outbreak were a major contributor to the decrease in fair value of the Company’s fixed income and equity investments during the three months ended March 31, 2020, due primarily to the volatility and economic uncertainty caused by the outbreak, affecting various sectors of the Company’s investment portfolio.  Although the outbreak did not have a significant impact on Crusader’s direct written premium during the three months ended March 31, 2020, it experienced, in the second half of March 2020, a decrease in new business submissions and renewals, particularly in its Bar/Taverns market sector niche, as a result of government regulations, such as shelter-in-place orders, which the Company believes may adversely impact its direct written premium in future periods.  The Company’s financial results for the three months ended March 31, 2020, do not fully reflect the potential adverse impacts that the coronavirus outbreak has had or will have on its business as the Company’s business first experienced the impact of the resulting economic slowdown at the end of the three months ended March 31, 2020.  While the Company does not believe it is exposed to substantial risk from coronavirus related claims under the insurance policies written by Crusader, it is possible that the fair value of its investment portfolio will be further adversely affected by the severe disruption and volatility in the capital markets, as well as general economic conditions as a result of the coronavirus and governmental responses to the outbreak.  Additionally, related disruptions to the business of the Company’s subsidiaries and their customers could further adversely affect the demand for the Company’s subsidiaries’ insurance products and otherwise adversely impact the Company’s results of operations or financial condition.  The financial impact of these uncertainties is unknown at this time but could result in a material adverse effect on the Company’s business, results of operations, financial condition and prospects.

On April 28, 2020, Crusader declared a cash dividend of $2,000,000 to Unico, its parent and sole shareholder, to be paid to Unico on or before May 22, 2020. This dividend is intended to be used primarily for general corporate purposes. Based on Crusader’s statutory surplus for the year ended December 31, 2019, the maximum dividend that could be made by Crusader to Unico without prior regulatory approval in 2020 is $ 4,649,896.

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 March 31, 2020, were $8,005,181 compared to $7,135,474 for the three months ended March 31, 2019, an increase of $869,707 (12%). The Company had net loss of $1,043,826 for the three months ended March 31, 2020, compared to net loss of $671,074 for the three months ended March 31, 2019, an increase in net loss of $372,752.

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 2019 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

As a result of the spread of the recent coronavirus outbreak, economic uncertainties have arisen which impacted and may continue to impact the fair value of investments, day to day administration of the Company’s business and the Company’s revenue.  The effects of that outbreak were a major contributor to the decrease in fair value of the Company’s fixed income and equity investments during the three months ended March 31, 2020, due primarily to the volatility and economic uncertainty caused by the outbreak, affecting various sectors of the Company’s investment portfolio.  Although the outbreak did not have a significant impact on Crusader’s direct written premium during the three months ended March 31, 2020, it experienced, in the second half of March 2020, a decrease in new business submissions and renewals, particularly in its Bar/Taverns market sector niche, as a result of government regulations, such as shelter-in-place orders, which the Company believes may adversely impact its direct written premium in future periods.  The Company’s financial results for the three months ended March 31, 2020, do not fully reflect the potential adverse impacts that the coronavirus outbreak has had or will have on its business as the Company’s business first experienced the impact of the resulting economic slowdown at the end of the three months ended March 31, 2020.  While the Company does not believe it is exposed to substantial risk from coronavirus related claims under the insurance policies written by Crusader, it is possible that the fair value of its investment portfolio will be further adversely affected by the severe disruption and volatility in the capital markets, as well as general economic conditions as a result of the coronavirus and governmental responses to the outbreak.  Additionally, related disruptions to the business of the Company’s subsidiaries and their customers could further adversely affect the demand for the Company’s subsidiaries’ insurance products and otherwise adversely impact the Company’s results of operations or financial condition.  The financial impact of these uncertainties is unknown at this time but could result in a material adverse effect on the Company’s business, results of operations, financial condition and prospects.

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While the coronavirus outbreak is also affecting the Company’s internal operations, the Company has a plan in place to help its operations continue effectively during the outbreak, including processes to limit the spread of the virus between employees. For example, the Company modified its business practices in accordance with social distancing and safety guidelines, allowing many work-from-home arrangements, flexible work schedules, and restricted business travel. The Company’s employees are following the guidelines and approximately 75% are working from their homes. While the coronavirus outbreak has created new challenges for the Company, the Company’s ability to maintain its operations, internal controls and relationships has not been adversely affected.

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

In light of the challenges faced and operational results, the Company has taken several steps to improve. To improve Crusader's loss ratios, beginning in January 2017, the Company made significant changes in its staffing and in its pricing and risk selection practices. To improve revenues the Company is working to improve its sales in the markets that it has historically served, to gain access to markets that it has not previously served, and to generate new sources of revenue on a fee-for-service basis. For example, Unifax is seeking opportunities to transact admitted and non-admitted business with non-affiliated insurers, where Crusader will not be underwriting the risk, providing Unifax with a wider range of products and services. The Company also re-activated its US Risk Managers, Inc. subsidiary so that it can provide claims adjustment services to non-affiliated insurers and to self-insurers on a fee-for-service basis (i.e., where Crusader will not be underwriting the risk), providing the potential for an alternative revenue source to the Company. In addition, on April 6, 2020, the Company executed an agreement with a non-admitted, non-affiliated insurer that is rated "A" by A.M. Best Company, thereby providing Unifax and Crusader with a wider range of possibilities for their products and services.

In 2018, the Company determined that the cost to replace its legacy IT system would be between $4,000,000 and $8,000,000, and the installation of such a system would take between two to four years. After weighing the time and expense involved against the anticipated benefit from such an investment, the Company opted for what it then perceived to be a less expensive upgrade to its legacy system, an upgrade that then seemed to offer more incremental benefits in a shorter timeframe. While initially expected to be completed by the end of 2019, at a cost of approximately $300,000, excluding costs of Unico’s employees involved in the upgrade, the system upgrade is now expected to be completed by the end of 2020, at a cost of approximately $1,300,000, excluding costs of Unico’s employees involved in the upgrade, due to unexpected technical challenges. In light of the significant delays and increases in cost associated with its legacy upgrade project, the Company has deployed additional resources toward the management of this project and has renegotiated the relationship that it has with the non-affiliated vendor working on this project.

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Revenue and Income Generation

The Company receives its revenues primarily from earned premium derived from the insurance company operations, commission and fee income generated from the insurance agency operations, finance charges and fee income from the premium finance operations, and investment income from cash generated primarily from the insurance company operation. The insurance company operation generated approximately 93% and 91% of consolidated revenues for the three months ended March 31, 2020 and 2019, respectively. None of the Company’s other operations is individually material to consolidated revenues.

Insurance Company Operation

As of March 31, 2020, Crusader was licensed as an admitted insurance carrier in the states of Arizona, California, Nevada, Oregon, and Washington. From 2004 until September 2014, all of Crusader’s business was written in the state of California. Crusader’s business remains concentrated in California (99.9% and 99.8% of direct written premium (before reinsurance ceded) during the three months ended March 31, 2020 and 2019, respectively). During the three months ended March 31, 2020 and 2019, 98% of Crusader’s business was commercial multiple peril (“CMP”) policies.

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

	Three Months Ended March 31
	2020		2019			Change
California	$	9,195,864	$	8,515,555		$	680,309
Arizona		11,022		14,775			(3,753	)
Washington		—		(1,149	)		1,149
Total direct written premium	$	9,206,886	$	8,529,181		$	677,705

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.

While the recent coronavirus outbreak did not have a significant impact on Crusader’s direct written premium during the three months ended March 31, 2020, in the second half of March 2020, it experienced a decrease in new business submissions and renewals, particularly in its Bar/Taverns market sector niche, as a result of government regulations, such as shelter-in-place orders, which the Company believes may adversely impact Crusader’s direct written premium in future periods.

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

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

	Three Months Ended March 31
	2020			2019
Direct written premium	$	9,206,886		$	8,529,181
Less: written premium ceded to reinsurers		(1,979,127	)		(1,683,690	)
Net written premium		7,227,759			6,845,491
Change in direct unearned premium		(297,061	)		(561,777	)
Change in ceded unearned premium		(19,564	)		(19,564	)
Net earned premium	$	6,911,134		$	6,264,150

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

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

	Three Months Ended March 31
	2020			2019			Change
Net written premium	$	7,227,759		$	6,845,491		$	382,268
Change in net unearned premium		(316,625	)		(581,341	)		264,716
Net earned premium		6,911,134			6,264,150			646,984
Less:
Losses and loss adjustment expenses		5,877,385			5,154,443			722,942
Policy acquisition costs		1,144,425			1,086,713			57,712
Total underwriting expenses		7,021,810			6,241,156			780,654
Underwriting gain (loss) before income taxes	$	(110,676	)	$	22,994		$	(133,670	)

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

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

	Three Months Ended March 31
	2020			2019
Underwriting gain (loss) before income taxes	$	(110,676	)	$	22,994
Insurance company operation revenues:
Investment income		520,692			532,630
Net realized investment losses		(43,686	)		(8,149	)
Other income (loss)		80,937			(260,700	)
Other insurance operations revenues:
Gross commissions and fees		469,069			547,445
Investment income		2			7
Finance charges and fees earned		67,019			49,373
Other income		14			10,718
Less expenses:
Salaries and employee benefits		1,122,499			1,027,849
Commissions to agents/brokers		25,955			50,121
Other operating expenses		980,415			628,080
Loss before taxes	$	(1,145,498	)	$	(811,732	)

Unearned premiums represent premium applicable to the unexpired terms of policies in force. The Company evaluates its unearned premiums periodically for premium deficiencies by comparing the sum of expected claim costs, unamortized deferred policy acquisition costs, and maintenance costs partially offset by net investment income to related unearned premiums. To the extent that any of the Company’s programs become unprofitable, a premium deficiency reserve may be required. The Company did not carry a premium deficiency reserve as of March 31, 2020 and 2019.

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

	Three Months Ended March 31
	2020		2019		Change
Losses and loss adjustment expenses:
Provision for insured events of current year	$	5,161,176	$	4,550,888	$	610,288
Development of insured events of prior years		716,209		603,555		112,654
Total losses and loss adjustment expenses	$	5,877,385	$	5,154,443	$	722,942

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Losses and loss adjustment expenses were 85% of net earned premium for the three months ended March 31, 2020, compared to 82% of net earned premium for the three months ended March 31, 2019. For further analysis, refer to “Results of Operations.”

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

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

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

Some of Crusader’s policyholders, or the lenders, landlords or clients of Crusader’s policyholders, require insurance from a company that has an A.M. Best Company Financial Strength Rating of “A-” or higher, and the A.M. Best Company’s changed ratings of Crusader may also have a negative impact on Crusader’s reputation. Therefore, Crusader’s and Unico’s changed ratings may have a negative impact on the Company’s revenue and results of operations. The Company cannot quantify the impact that the rating changes have had or will have on its revenue and results of operations, and the Company cannot determine if or when Crusader might regain the “A-” Financial Strength Rating from the A.M. Best Company. The Company does not expect Crusader to regain the A.M. Best Company “A-” Financial Strength Rating prior to January of 2021 at the earliest.

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% of total revenues in the three months ended March 31, 2020 and 2019.

Investments

The Company generated revenues from its total invested assets of $85,312,889 (fixed maturities at amortized cost and equity securities at cost) and $87,431,950 (fixed maturities at amortized cost) as of March 31, 2020 and 2019, respectively.

Investment income (net of investment expenses) included in insurance company operation and other insurance operations revenue decreased $11,943 (2%) to $520,694 for the three months ended March 31, 2020, compared to $532,637 for the three months ended March 31, 2019.This decrease in investment income was due primarily to a decrease in the average invested assets.

Due to the current interest rate environment, the current target effective duration for the Company’s investment portfolio is between 2.0 and 4.0 years. As of March 31, 2020, all of the Company’s investments are in U.S. Treasury securities, corporate fixed maturity securities, agency mortgage-backed securities, common stock, Federal Deposit Insurance Corporation (“FDIC”) insured certificates of deposit, money market funds, and a savings account. The Company’s investments in U.S treasury securities, corporate fixed maturity securities, agency mortgage-backed securities, common stock and money market funds are readily marketable. As of March 31, 2020, the weighted average maturity of the Company’s investments was approximately 7.9 years, and the effective duration for available-for-sale investments (investments managed under the investment guidelines) was 2.6 years.

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LIQUIDITY AND CAPITAL RESOURCES

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

Crusader has a significant amount of cash, cash equivalents, and investments as a result of its holdings of unearned premium reserves, its reserves for loss and loss adjustment expense payments, 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 March 31, 2020, were $90,588,914 compared to $90,778,865 at December 31, 2019. Crusader's cash, cash equivalents, and investments were 98% and 99% of the total cash and investments (at amortized cost) held by the Company as of March 31, 2020, and December 31, 2019, respectively.

As of March 31, 2020 all of the Company’s investments are in U.S. Treasury securities, FDIC insured certificates of deposit, corporate fixed maturity securities, agency mortgage-backed securities, common stock and short-term investments. All of the Company’s investments, except for the certificates of deposit, are readily marketable.

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

	March 31		December 31
	2020		2019
Fixed maturities:
U.S. Treasury securities	$	14,519,461	$	15,105,795
Corporate securities		42,936,116		41,953,378
Agency mortgage-backed securities		24,358,811		24,943,238
Certificates of deposit		798,000		798,000
Total fixed maturities		82,612,388		82,800,411
Common Stock		502,484		—
Short-term investments		2,198,017		2,196,815
Total investments	$	85,312,889	$	84,997,226

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 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.

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

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

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

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

• Options and futures contracts.

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

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

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 March 31, 2020, and December 31, 2019, the Company had remaining authority under the 2008 program to repurchase up to an aggregate of 187,264 and 188,242 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 978 shares of stock during the three months ended March 31, 2020, in unsolicited transactions at a cost of $6,240 of which $480 was allocated to capital and $5,760 was allocated to retained earnings. The Company did not repurchase any stock during the three months ended March 31, 2019. The Company has retired or will retire all stock repurchased.

The Company reported $6,884 net cash used by operating activities for the three months ended March 31, 2020, compared to $3,722,670 net cash used by operating activities for the three months ended March 31, 2019. Fluctuations in cash flows from operating activities relate to changes in loss and loss adjustment expense payments, unearned premium holdings, and the timing of the collection and the payment of insurance-related receivables and payables.  The decrease in net cash used by operating activities during the three months ended March 31, 2020, was due primarily to increase in unpaid losses and loss adjustment expenses.  The variability of the Company’s losses and loss adjustment expenses is due primarily to its small population of claims which may result in greater fluctuations in claim frequency and/or severity. Although the Condensed Consolidated Statements of Cash Flows reflect net cash used by operating activities, the Company does not anticipate future liquidity problems, and the Company believes it continues to be well capitalized and adequately reserved. 

While material capital expenditures may be funded through borrowings, the Company believes that its cash and short-term investments at March 31, 2020,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 months ended March 31, 2020, to the three months ended March 31, 2019, unless otherwise indicated.

For the three months ended March 31, 2020, total revenues were $8,005,181, an increase of $869,707 (12%) compared to total revenues of $7,135,474 for the three months ended March 31, 2019. For the three months ended March 31, 2020, the Company had loss before taxes of $1,145,498 compared to loss before taxes of $811,732 for the three months ended March 31, 2019. For the three months ended March 31, 2020, the Company had net loss of $1,043,826 compared to net loss of $671,074 for the three months ended March 31, 2019.

The increase in revenues of $869,707 for the three months ended March 31, 2020, when compared to March 31, 2019, was primarily due to an increase in net earned premium of $646,984 (10%).

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The loss before tax of $333,766 for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, was due primarily to an increase in losses and loss adjustment expenses of $722,942 (14%), an increase in other operating expenses of $352,335 (56%), and an increase in salaries and employee benefits of $94,650 (9%), offset by the increase in revenues of $869,707 (12%).

Written premium

Written premium is a required statutory measure. Direct written premium (written premium before reinsurance) reported on Crusader’s statutory financial statements increased $677,705 (8%) to $9,206,886 for the three months ended March 31, 2020, compared to $8,529,181 for the three months ended March 31, 2019.

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. The Company 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 increase in direct written premium for the three months ended March 31, 2020 is due to growth in the Company’s Transportation underwriting vertical partially offset by declines in the other three underwriting verticals.

While the recent coronavirus outbreak did not have a significant impact on Crusader’s direct written premium during the three months ended March 31, 2020, in the second half of March 2020, the Company experienced a decrease in new business submissions and renewals, particularly in its Bars/Taverns market sector niche.

Crusader’s primary line of business is CMP policies. This line of business represented approximately 98% of Crusader’s total written premium for the three months ended March 31, 2020 and 2019.

Direct earned premium

Direct earned premium (earned premium before reinsurance) increased $942,421 (12%) to $8,909,825 for the three months ended March 31, 2020, compared to $7,967,404 for the three months ended March 31, 2019. Crusader 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 increase in direct earned premium was due primarily to an increase in direct written premium in 2019.

Ceded earned premium

Ceded earned premium (premium ceded to reinsurers under reinsurance treaties) increased $295,437 (17%) to $1,998,691 for the three months ended March 31, 2020, compared to $1,703,254 for the three months ended March 31, 2019. Ceded earned premium as a percentage of direct earned premium was 22% and 21% for the three months ended March 31, 2020 and 2019, respectively. The increase in the ceded earned premium for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, was due primarily to higher direct earned premium subject to reinsurance treaties.

Reinsurance treaties are generally structured in layers, with different negotiated economic terms and retention of participation, or liability, in each layer. In calendar years 2020 and 2019, Crusader retained participation in its excess of loss reinsurance treaties of 0% in its 1^st layer (reinsured losses between $500,000 and $1,000,000), 0% in its 2^nd layer (reinsured losses between $1,000,000 and $4,000,000), and 0% in its property and casualty clash treaty.

Crusader also has catastrophe reinsurance treaties from various highly rated California authorized and California unauthorized reinsurance companies. These reinsurance treaties help protect Crusader against losses in excess of certain retentions from catastrophic events that may occur on property risks which Crusader insures. In calendar years 2020 and 2019, Crusader retained a participation in its catastrophe excess of loss reinsurance treaties of 5% in its 1^st layer (reinsured losses between $1,000,000 and $10,000,000) and 0% in its 2^nd layer (reinsured losses between $10,000,000 and $46,000,000).

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

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

Investment income decreased $11,943 (2%) to $520,694 for the three months ended March 31, 2020, compared to $532,637 for the three months ended March 31, 2019. This decrease in investment income was due primarily to decrease in average invested assets. The Company had net realized investment gains of $1,114 for the three months ended March 31, 2020, compared to net realized investment losses of $8,159 for the three months ended March 31, 2019. The Company had net unrealized investment losses on equity securities of $44,800 for the three months ended March 31, 2020 compared to none for the three months ended March 31, 2019. The net unrealized investment losses on equity securities for the three months ended March 31, 2020 were due primarily to the decrease in fair value of equity securities of $44,800.

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

	Three Months Ended March 31
	2020			2019
Average invested assets (1) - at amortized cost	$	85,155,058		$	88,770,746
Net investment income from:
Invested Assets (2)	$	517,180		$	519,971
Cash Equivalents		3,514			12,666
Total	$	520,694		$	532,637
Annualized yield on average invested assets (3)		2.4	%		2.3	%

(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 $34,879 of investment expense for the three months ended March 31, 2020, compared to $37,619 of investment expense for the three months ended March 31, 2019.

(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 March 31, 2020
Due in one year	$	12,210,000	$	12,210,952	$	12,263,119		2.4	%
Due after one year through five years		40,435,426		40,453,326		40,621,251		2.6	%
Due after five years through ten years		9,953,186		9,966,391		10,468,483		3.3	%
Due after ten years and beyond		19,532,167		19,981,719		20,377,096		2.7	%
Total	$	82,130,779	$	82,612,388	$	83,729,949		2.7	%

	ParValue		Amortized Cost		Fair Value		Weighted Average Yield
Maturities by Year at December 31, 2019
Due in one year	$	10,070,000	$	10,063,975	$	10,087,478		2.3	%
Due after one year through five years		42,936,754		42,944,463		43,654,657		2.6	%
Due after five years through ten years		9,982,374		9,996,830		10,529,528		3.3	%
Due after ten years and beyond		19,336,385		19,795,143		20,026,047		2.8	%
Total	$	82,325,513	$	82,800,411	$	84,297,710		2.7	%

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

The weighted average maturity of the Company’s fixed maturity investments was 7.9 years as of March 31, 2020, and 6.7 years as of March 31, 2019.

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:

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	Less than 12 Months							12 Months or Longer
	EstimatedFair Value		Gross UnrealizedLosses			Number ofSecurities		EstimatedFair Value		Gross UnrealizedLosses		Number ofSecurities
March 31, 2020
Corporate securities		8,840,514		(553,522	)		16		—		—		—
Agency mortgage-backed securities		3,758,080		(173,067	)		7		—		—		—
Total	$	12,598,594	$	(726,589			23	$	—	$	—		—

	Less than 12 Months							12 Months or Longer
	EstimatedFair Value		Gross UnrealizedLosses			Number ofSecurities		EstimatedFair Value		Gross UnrealizedLosses			Number ofSecurities
December 31, 2019
U.S. Treasury securities	$	1,996,562	$	(253	)		1	$	1,002,031	$	(775	)		1
Corporate securities		999,818		(56	)		1		—		—			—
Agency mortgage-backed securities		750,058		(1,950	)		2		—		—			—
Total	$	3,746,438	$	(2,259	)		4	$	1,002,031	$	(775	)		1

The effects of the recent coronavirus outbreak were a major contributor to the decrease in fair value of the Company’s fixed income and equity investments and resulting increase in gross unrealized losses during the three months ended March 31, 2020, due primarily to the volatility and economic uncertainty caused by the outbreak, affecting various sectors of the Company’s investment portfolio.

The Company closely monitors its investments. If an unrealized loss is determined to be other-than-temporary, it is written off as a realized loss through the Condensed Consolidated Statements of Operations. The Company’s methodology of assessing other-than-temporary impairments is based on security-specific analysis as of the balance sheet date and considers various factors including the length of time to maturity and the extent to which the fair value has been less than the cost, the financial condition and the near-term prospects of the issuer, and whether the debtor is current on its contractually obligated interest and principal payments. During the three months ended March 31, 2020, one fixed maturity corporate security experienced a significant decline in market value; the market and book value of that security at March 31, 2020, was $459,000 and $912,681, respectively. The unrealized losses on all securities as of March 31, 2020, and December 31, 2019, were determined to be temporary.

Although the Company does not intend to sell its fixed maturity investments prior to maturity, the Company may sell investment securities from time to time in response to cash flow requirements, economic, regulatory, and/or market conditions or investment securities may be called by their issuers prior to the securities’ maturity. The Company sold one security prior to maturity during the three months ended March 31, 2020. This security had amortized cost of $601,316. The Company realized a net investment gain of $1,114 on this sale for the three months ended March 31, 2020. The Company sold one security prior to maturity during the three months ended March 31, 2019. This security had amortized cost of $498,994. The Company realized a net investment loss of $8,149 on this sale for the three months ended March 31, 2019. 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 was $80,951 for the three months ended March 31, 2020, compared to a loss of $(249,982) for the three months ended March 31, 2019. The other income was comprised primarily of $53,290 rental income and $27,661 increase in Crusader’s share of California FAIR Plan equity during the three months ended March 31, 2020, compared to $42,230 rental income and $299,320 decrease in Crusader’s share of California FAIR Plan equity during the three months ended March 31, 2019.

Gross commissions and fees

Gross commissions and fees decreased $78,376 (14%) to $469,069 for the three months ended March 31, 2020, compared to gross commissions and fees of $547,445 for the three months ended March 31, 2019.

The changes in gross commission and fee income for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, are as follows:

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	Three Months Ended March 31
	2020		2019		Change
Policy fee income	$	261,043	$	298,701	$	(37,658	)
Health insurance program		185,184		223,982		(38,798	)
Membership and fee income		22,842		24,762		(1,920	)
Total	$	469,069	$	547,445	$	(78,376	)

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 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 $37,658 (13%) in the three months ended March 31, 2020, compared to the three months ended March 31, 2019, 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 $38,798 (17%) in the three months ended March 31, 2020, compared to the three months ended March 31, 2019. The fluctuation in commission income reported in the three months ended March 31, 2020, when compared to the prior year period, is primarily a result of the loss of a large group account.

AAQHC is a third party administrator for contracted insurance companies and is a membership association that provides various consumer benefits to its members, including participation in group health care insurance policies that AAQHC negotiates for the association. For these services, AAQHC receives membership and fee income from its members. Membership and fee income decreased $1,920 (8%) for the three months ended March 31, 2020, compared to the three months ended March 31, 2019. This decrease is primarily a result of a decrease in administration fees.

Finance charges and fees earned

Finance charges and fees earned consist of finance charges, late fees, returned check fees and payment processing fees. These charges and fees earned by AAC increased $17,646 (36%) to $67,019 for the three months ended March 31, 2020, compared to $49,373 in fees earned during the three months ended March 31, 2019, due primarily to the increase in earned finance charges as a result of the change in annual percentage rate charged on AAC new loans from a single fixed interest rate to a tiered interest rate structure effective April 1, 2019. AAC issued 345 loans and had 1,092 loans outstanding during the three months ended March 31, 2020, compared to 473 loans issued and 1,445 loans outstanding during the three months ended March 31, 2019. AAC provides premium financing only for Crusader policies produced by Unifax in California.

Losses and loss adjustment expenses

Loss ratio, which is calculated by dividing losses and loss adjustment expenses by net earned premium, was 85% for the three months ended March 31, 2020, compared to 82% for the three months ended March 31, 2019.

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

	Three Months Ended March 31
	2020		2020 LossRatio			2019		2019 LossRatio			Change
Net earned premium	$	6,911,134				$	6,264,150				$	646,984
Losses and loss adjustment expenses:
Provision for insured events of current year		5,161,176		75	%		4,550,888		72	%		610,288
Development of insured events of prior years		716,209		10	%		603,555		10	%		112,654
Total losses and loss adjustment expenses	$	5,877,385		85	%	$	5,154,443		82	%	$	722,942

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.

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The $5,161,176 provision for insured events of current year for the three months ended March 31, 2020, was $610,288 higher than the $4,550,888 provision for insured events of current year for the three months ended March 31, 2019, due primarily to higher claims costs related to Crusader’s underwriting activities in the Transportation vertical, associated with an increase in net earned premium for that vertical during the three months ended March 31, 2020.

The $716,209 development of insured events of prior years for the three months ended March 31, 2020, was $112,654 higher than the $603,555 for the three months ended March 31, 2019, due primarily to higher claims costs related to Crusader’s underwriting activities in the Transportation vertical, associated with an increase in ultimate expected number of claims for that vertical during the three months ended March 31, 2020.

The following table breaks out adverse (favorable) development from total losses and loss adjustment expenses quarterly since March 31, 2018:

		Provision for Insured Events of Current Year		Adverse (Favorable) Development of InsuredEvents of Prior Years			Total Losses and LossAdjustment Expenses
Three Months Ended:
March31, 2020	$	5,161,176	$	716,209		$	5,877,385
December 31, 2019		5,400,410		1,824,349			7,224,759
September 30, 2019		4,299,018		838,956			5,137,974
June 30, 2019		5,134,626		(75,675	)		5,058,951
March 31, 2019		4,550,888		603,555			5,154,443
December 31, 2018		5,134,166		53,997			5,188,163
September 30, 2018		4,840,242		798,378			5,638,620
June 30, 2018		4,652,240		276,963			4,929,203
March 31, 2018		6,009,138		1,792,619			7,801,757

Crusader attributes much of its adverse loss development to “social inflation.” Used here, social inflation is a term that encompasses a new adverse trend related to society’s application of the law when it comes to insurance.  In this context, social inflation is generally described by the rising costs of insurance claims due to societal trends which has resulted in increased litigation, broader definitions of liability and contractual interpretations, plaintiff friendly legal decisions, larger compensatory jury awards, and larger awards for non-economic damages  Crusader has experienced increased costs due to social inflation in all three of its largest market sector niches, Long-haul Transportation, Residential Apartment Buildings, and Bars/Taverns, resulting in higher-than-expected frequency and severity of third-party liability claims which contributed to adverse loss development of 2017 accident year.

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

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

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

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

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

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 March 31
	2020			2019			Change
Policy acquisition costs	$	1,144,425		$	1,086,713		$	57,712
Ratio to net earned premium (GAAP ratio)		17	%		17	%

Policy acquisition costs increased during the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, due primarily to the increase in net earned premium.

Salaries and employee benefits

Salaries and employee benefits increased $94,650 (9%) to $1,122,499 for the three months ended March 31, 2020, compared to $1,027,849 for the three months ended March 31, 2019.

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

	Three Months Ended March 31
	2020			2019			Change
Total salaries and employee benefits incurred	$	2,006,757		$	1,877,418		$	129,339
Less: charged to losses and loss adjustment expenses		(516,384	)		(495,028	)		(21,356	)
Less: capitalized to policy acquisition costs		(320,048	)		(308,983	)		(11,065	)
Less: capitalized to IT system upgrade		(47,826	)		(45,558	)		(2,268	)
Net amount charged to operating expenses	$	1,122,499		$	1,027,849		$	94,650

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The increase in the total salaries and employee benefits incurred for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, was due primarily to an increase in the accrual for anticipated employee absences related to the recent coronavirus outbreak.

Commissions to agents/brokers

Commissions to agents/brokers decreased $24,166 (48%) to $25,955 for the three months ended March 31, 2020, compared to $50,121 for the three months ended March 31, 2019. The decrease in commissions to agents/brokers for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, was due primarily to lower commissions associated with loss of a large group account.

Other operating expenses

Other operating expenses increased $352,335 (56%) to $980,415 for the three months ended March 31, 2020, compared to $628,080 for the three months ended March 31, 2019. The increase in other operating expenses for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, was due to an increase in legal expense, an increase in depreciation expense, and timing of expenses.

Income tax benefit

Income tax benefit was $101,672 (9% of pre-tax loss) for the three months ended March 31, 2020 and income tax benefit was $140,658 (17% of pre-tax loss) for the three months ended March 31, 2019. The fluctuation in the income tax rate as a percentage of pre-tax loss for the three months ended March 31, 2020, when compared to the three months ended March 31, 2019, is primarily due to an increase in the valuation allowance related to deferred tax assets on federal net operating losses.

As of March 31, 2020, the Company had deferred tax assets of $4,359,087 generated from $20,757,567 of federal net operating loss carryforwards that will begin to expire in 2035. In light of the net losses that were generated in recent years, the Company periodically performs an analysis of future income projections to determine the adequacy of the valuation allowance. For the three months ended March 31, 2020 and for the year ended December 31, 2019, the Company carried a valuation allowance on deferred tax assets generated from federal net operating losses in the amount of $750,000 and $600,000, respectively as the Company does not expect to realize that portion of the tax benefit from its federal net operating losses in the future.

As of March 31, 2020, the Company had deferred tax assets of $1,982,257 generated from state net operating loss carryforwards. For the three months ended March 31, 2020 and December 31, 2019 the amount of state net operating losses that expired were $0. The remaining $1,982,257 of state tax carryforwards expire between 2028 and 2040. For the three months ended March 31, 2020, and December 31, 2019, a valuation allowance on deferred tax assets generated from state net operating loss carryforwards was established in the amount of $1,982,257 and $1,931,665, respectively as the Company does not expect to realize a tax benefit from its state net operating losses in the future.

As a result of the Company’s analysis at March 31, 2020, the Company believes it is more likely than not that it will be able to utilize the net operating loss carryforwards, net of the valuation allowance, before they expire. Additionally, $4,698,047 of the net operating losses generated in 2020, 2019 and 2018 is subject to an indefinite carryforward period.

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 March 31, 2020, as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of March 31, 2019.

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

Except as described below, there were no material changes from risk factors as previously disclosed in the Company’s Form 10-K for the year ended December 31, 2019, in response to Item 1A to Part I of Form 10-K.

The Company’s business may be adversely affected by the recent coronavirus outbreak.

In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. As of May 2020, the novel coronavirus had spread globally, including to the United States, and was declared to be a pandemic by the World Health Organization. Efforts to mitigate the spread of the coronavirus have intensified, including severe restrictions on travel, public gatherings and non-essential business operations. The outbreak and any preventative or protective actions that the Company, its clients, their respective suppliers, or governments may take in respect of this coronavirus may disrupt the Company’s business and the business of others. The Company is diligently working to ensure that it can operate with minimal disruption, and to mitigate the impact of the outbreak on its employees’ health and safety. However, given the interconnectivity of the global economy and the possible rate of future global transmission, the full extent to which the coronavirus pandemic could affect the global economy is unknown and its impact may extend beyond the areas which are currently known to be impacted. Any resulting financial impact will depend on future developments and cannot be reasonably estimated at this time, but may materially affect the business, financial condition and results of operations of the Company.

Additionally, the continued spread of the coronavirus has led to severe disruption and volatility in the global capital markets, which could increase the Company’s cost of capital, and adversely affect the Company’s ability to access the capital and debt markets, and adversely affect the value of the Company’s investment portfolio. The U.S. federal government has responded to the coronavirus pandemic with economic stimulus programs, but the Company cannot provide any assurance if these or any other governmental responses or actions will provide any intended economic benefits to the Company or will improve the Company’s access to additional capital in the public or private markets. The effects of the continued COVID-19 pandemic and related responses could include extended disruptions to supply chains and capital markets, further reduced labor availability and productivity, and a prolonged reduction in economic activity, resulting in a recession (which could adversely affect the demand for the Company’s subsidiaries’ insurance products and increase delinquencies and defaults by its customers) or other unpredictable events, each of which could adversely affect the business, results of operations or financial condition of the Company.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

10.1# Quota share agreement among United Specialty Insurance Company and Crusader Insurance Company and Unifax Insurance Systems, Inc., effective April 1, 2020.

10.2# General agency agreement by and among United Specialty Insurance Company, Crusader Insurance Company and Unifax Insurance Systems, Inc., effective April 1, 2020.

10.3# Reinsurance trust agreement entered into by and among Crusader Insurance Company and United Specialty Insurance Company held by Comerica Bank & Trust, National Association Trustee, effective April 1, 2020.

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 March 31, 2020, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive Loss; (iv) the Condensed Consolidated Statements of Cash Flows; and (v) the Condensed Notes to Unaudited Condensed Consolidated Financial Statements.*

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

# Certain portions of the exhibits that are not material and would be competitively harmful if publicly disclosed have been redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K. Copies of the unredacted exhibits will be furnished to the Securities and Exchange Commission upon request.

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: May 15, 2020 By:/s/ CARY L. CHELDIN

Cary L. Cheldin

Chairman of the Board, President and Chief

Executive Officer, (Principal Executive Officer)

Date: May 15, 2020 By:/s/ MICHAEL BUDNITSKY

Michael Budnitsky

Treasurer, Chief Financial Officer and Secretary, (Principal

Accounting and Principal Financial Officer)

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