On September 26, 2013, Crusader purchased land and a two-story building located at 26050 Mureau Road, Calabasas, California (the “Headquarters”). The Company moved its home office to this location on October 9, 2015, and has been occupying the building through the present time. On February 12, 2021, Crusader sold the Headquarters, the leasehold improvements and substantially all existing furniture, fixtures and equipment to a third party for a sale price of $12,695,000, and leased back a portion of the Headquarters for continued use as the Company’s home office.
Unico American Corporation 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, an Administrator (“AAQHC”) provides membership association services.
Total revenues for the year ended December 31, 2020, were $32,560,111 compared to $31,372,814 for the year ended December 31, 2019, an increase of $1,187,297. The Company’s net loss for the year ended December 31, 2020 was $21,491,113 compared to net loss of $3,115,703 for the year ended December 31, 2019.
As a result of the ongoing coronavirus (“COVID-19”) pandemic, economic uncertainties have arisen, which negatively impacted and may continue to negatively impact the fair value of investments, day to day administration of the Company’s business and the Company’s results of operations, financial condition and prospects.
Crusader has received a number of coronavirus-related business interruption claims. While the Company does not believe it is exposed to substantial risk from those claims under the insurance policies written by Crusader, the individual circumstances of each such claim are reviewed to fulfill Crusader’s obligation to its policyholders if coverage applies. Further, there may be impacts to the timing of loss emergence and ultimate loss ratios for certain of Crusader’s products due to postponements of civil court cases, extensions of various statutes of limitations, changes in settlement trends and other new legislative, regulatory or judicial developments, which could result in loss reserve deficiencies and negative impact on results of operations.
On April 1, 2020, Crusader and Unifax, entered into a reinsurance arrangement with United Specialty Insurance Company (“USIC”), pursuant to which USIC would underwrite property and casualty insurance policies by and through Unifax and such policies would be reinsured by Crusader. On September 2, 2020, the Company placed a moratorium on placing any new risks with USIC by Unifax pending negotiations among Crusader, Unifax, and USIC pursuant to the issues raised by the DOI regarding the structure of the reinsurance arrangement and its compliance with the California Insurance Holding Company System Act (the “Insurance Act”).
Crusader’s total gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties), as reported on Crusader’s statutory financial statements, was produced geographically as follows:
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 gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties) to net earned premium (after premium ceded to reinsurers under reinsurance treaties):
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 profit 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 Consolidated Statements of Operations but is not subtotaled.
Unearned premiums represent premium applicable to the unexpired terms of policies in force. The Company evaluates its unearned premiums periodically for premium deficiencies by comparing the sum of expected claim costs, unamortized deferred policy acquisition costs, and maintenance costs partially offset by net investment income to related unearned premiums. To the extent that any of the Company’s programs become unprofitable, a premium deficiency reserve may be required. The Company recognized a premium deficiency of $150,000 as of December 31, 2020. The Company did not carry a premium deficiency reserve as of December 31, 2019. The premium deficiency was recorded as a reduction in deferred policy acquisition costs.
The following table shows the loss ratios, expense ratios, and combined ratios of Crusader:
(3) Combined ratio is defined as a sum of loss ratio and expense ratio.
The following table provides an analysis of losses and loss adjustment expenses:
The Long-Term ICRs reflect Crusader’s balance sheet strength, which A.M. Best categorizes as very strong, as well as its marginal operating performance, limited business profile and marginal enterprise risk management.
Some of Crusader’s policyholders, or the lenders, landlords or clients of Crusader’s policyholders, require insurance from a company that has an A.M. Best FSR of “A-” or higher, and the A.M. Best’s changed ratings of Crusader may also have a negative impact on Crusader’s reputation. Therefore, Crusader’s and Unico’s changed ratings may have a negative impact on the Company’s revenue and results of operations. The Company cannot quantify the impact that the rating changes have had or will have on its revenue and results of operations, and the Company cannot determine if or when Crusader might regain the “A-” FSR from A.M. Best.
The reinsurance arrangement with USIC allows Unifax to offer its customers policies written on USIC paper, which has A.M. Best FSR of “A,” when such rating is required.
Net investment income (net of investment expenses) decreased $109,699 (5%) for the year ended December 31, 2020, as compared to the year ended December 31, 2019. This decrease in net investment income was due primarily to decrease in the average invested assets.
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 December 31, 2020, were $87,575,700 compared to $90,778,865 at December 31, 2019. Crusader's cash, cash equivalents, and investments were 98% and 99% of the total cash, cash equivalents, and investments (at amortized cost) held by the Company as of December 31, 2020 and 2019, respectively.
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. Primarily all investments continue to be held by Crusader’s current custodian, Union Bank Global Custody Services.
As of December 31, 2020, one corporate security, included in available-for-sale fixed maturities, was held as collateral with Comerica Bank & Trust, N. A. (“Comerica”), pursuant to the reinsurance trust agreement among Crusader, USIC and Comerica to secure payment of Crusader’s liabilities and performance of its obligations under the reinsurance arrangement with USIC. The estimated fair value and amortized cost of that security was $824,500 and $787,653 on December 31, 2020, respectively.
The Company reported net cash used by operating activities for each of the years ended December 31, 2020 and 2019. Cash used by operating activities in 2020 was $2,436,399 compared to $3,163,210 in 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. Although the 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.
Crusader's statutory capital and surplus as of December 31, 2020, was $26,893,515, a decrease of $19,605,445 (42%) from December 31, 2019. On each of September 14, 2020, and May 20, 2020, Crusader paid cash dividends of $2,000,000 to Unico, its parent and sole shareholder. These two dividends totaling $4,000,000 were used primarily for general corporate purposes. During the year ended December 31, 2019, Crusader issued cash dividends of $2,000,000 to Unico, its parent and sole shareholder. Based on Crusader’s statutory surplus for the year ended December 31, 2020, the maximum aggregate dividend that could be made by Crusader to Unico without prior regulatory approval in 2021 is $2,689,352.
Total revenues for the year ended December 31, 2020, were $32,560,111, an increase of $1,187,297 (4%) compared to $31,372,814 for the year ended December 31, 2019. For the year ended December 31, 2020, the Company had loss before taxes of $17,943,515 compared to loss before taxes of $3,249,890 for the year ended December 31, 2019. For the year ended December 31, 2020, the Company had net loss of $21,491,113 compared to net loss of $3,115,703 for the year ended December 31, 2019.
The increase in net loss for the year ended December 31, 2020, compared to the year ended December 31, 2019, was due primarily to an increase in losses and loss adjustment expenses of $12,066,793 (53%), increase in salaries and employee benefits of $2,296,318 (56%), an increase in other operating expenses of $1,658,331 (58%), and an increase in income tax expense of $3,681,785 (2744%), partially offset by the increase in net earned premium.
During the twelve months ended December 31, 2020, the Company reevaluated certain assumptions used in its process for estimating loss and loss adjustment reserves due to its experiences in Crusader’s Apartments & Commercial Buildings and Transportation verticals as well as changes in market conditions. This reevaluation resulted in a $9,399,547 increase in Crusader’s IBNR reserves, net of reinsurance, which was a primary contributor to the increase of $12,066,793 in losses and loss adjustment expenses from $22,576,127 recognized for the twelve months ended December 31, 2019 to $34,642,920 recognized for the twelve months ended December 31, 2020.
The increase in salaries and employee benefits during the twelve months ended December 31, 2020 of $2,296,318 was due primarily to costs associated with a termination of an employment agreement with an executive, increases in executive compensation, increases in employee benefits due to higher medical insurance rates, and vacation accruals due to less vacation taken by the employees as a result of the ongoing coronavirus pandemic.
The increase in other operating expenses of $1,658,331 during the twelve months ended December 31, 2020, was due primarily to increases in legal, depreciation and communication expenses, fees associated with the reinsurance arrangement with USIC, and higher board of director fees.
Crusader’s primary lines of business are written on Commercial Multi Peril policies. These policies represented approximately 99.6% and 98.3% of Crusader’s total written premium for the years ended December 31, 2020 and 2019, respectively.
Gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties) reported on Crusader’s statutory financial statements increased $838,880 (2%) to $36,642,830 for the year ended December 31, 2020, compared to $35,803,950 for the year ended December 31, 2019.
Written premium is a required statutory measure. Written premium is a non-GAAP financial measure that is defined, under SAP, as the contractually determined amount charged by the insurance company to the policyholder for the effective period of the contract based on the expectation of risk, policy benefits, and expenses associated with the coverage provided by the terms of the policies.
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 December 31, 2020, all such ceded contracts are accounted for as risk transfer reinsurance.
A tabular presentation of Crusader’s direct, assumed, ceded and net earned premium is as follows:
(2) Investment income from invested assets included $133,679 of investment expense for the year ended December 31, 2020, compared to $129,842 for the year ended December 31, 2019.
As of December 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, equity securities and short-term investments. The investments in the certificates of deposit are classified as held-to-maturity investments, and all other fixed maturity investments are classified as available-for-sale. All of the Company’s investments, except for the certificates of deposit, are readily marketable. The following table sets forth the composition of the investment portfolio of the Company at the dates indicated:
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 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 year ended December 31, 2020, one fixed maturity corporate security experienced a significant decline in market value; the market and book value of that security at December 31, 2020, was $867,375 and $910,893, respectively. The unrealized losses on all securities as of December 31, 2020 and December 31, 2019, were determined to be temporary.
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.
Gross commissions and fees decreased $349,395 (16%) to $1,827,263 for the year ended December 31, 2020, compared to $2,176,658 for the year ended December 31, 2019.
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 for the year ended December 31, 2020, increased $2,694 (3%) compared to the year ended December 31, 2019. The increase is a result of an increase in administration fees.
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 $1,065 (0%) to $240,589 for the year ended December 31, 2020, compared to $239,524 for the year ended December 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 offset by a decrease in number of polices financed. During the year ended December 31, 2020, AAC issued 1,111 loans and had 821 loans outstanding as of December 31, 2020. During the year ended December 31, 2019, AAC issued 1,547 loans and had 1,173 loans outstanding as of December 31, 2019. AAC provides premium financing only for Crusader and USIC policies produced by Unifax in California. The number of loans issued decreased by 436 (28%) during 2020 when compared to 2019. The average premium financed by AAC was $6,477 and $5,672 in 2020 and 2019, respectively. During 2020, 48% of all Unifax generated policies were financed and 43% of those policies were financed by AAC. During 2019, 44% of all Unifax generated policies were financed and 56% of those policies were financed by AAC.
The following table breaks out adverse (favorable) development from total losses and loss adjustment expenses by accident year is as follows:
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.
The Company‘s consolidated financial statements include estimated reserves for both reported and unreported claims. The Company sets these reserves at each quarterly balance sheet date based upon management’s best estimate of the ultimate loss and loss adjustment expense payments that it anticipates will be made to settle all reported and unreported claims.
The following table is a roll forward of Crusader’s loss and loss adjustment expense reserves, including a reconciliation of the beginning and ending balance sheet liability for the periods indicated:
Policy acquisition costs decreased $62,039 (1%) to $4,898,807 for the year ended December 31, 2020, compared to $4,960,846 for the year ended December 31, 2019. 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 ceded premium associated with property facultative excess of loss or catastrophe excess of loss reinsurance treaties. 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.
The increase in the total salaries and employee benefits incurred for the year ended December 31, 2020, compared to the year ended December 31, 2019, was due primarily to costs associated with a termination of an employment agreement with an executive, increases in executive compensation, increases in employee benefits due to higher medical insurance rates, and vacation accruals due to less vacation taken by the employees as a result of the ongoing coronavirus pandemic.
Commissions to agents/brokers (not including commissions on Crusader and USIC policies that are reflected in policy acquisition costs) are generally related to gross commission income from the health insurance program. Commissions to agents and brokers decreased $78,481 (45%) to $95,315 for the year ended December 31, 2020, as compared to $173,796 for the year ended December 31, 2019. This fluctuation in commissions to agents/brokers was due primarily to lower commissions associated with loss of a large group account.
As of December 31, 2020, the Company had deferred tax assets of $7,769,603 generated from $36,998,110 of federal net operating loss carryforwards that will begin to expire in 2035 and deferred tax assets of $2,402,438 generated from state net operating loss carryforwards which expire between 2028 and 2040. In connection with preparation of its consolidated financial statements, the Company periodically performs an analysis of future income projections to determine the adequacy of the valuation allowance. In light of the net losses that were generated in recent years, for the twelve months ended December 31, 2020, the Company has established a valuation allowance for the aggregate amount of the federal and state net operating losses and other deferred tax assets in the amount of $10,557,080 that, in management’s judgment, are not more-likely-than-not to be realized. For the year ended December 31, 2019, the Company carried a valuation allowance on deferred tax assets generated from federal and state net operating losses in the amount of $600,000 and $1,931,665, respectively.
The preparation of the Company’s consolidated financial statements requires estimation of certain liabilities, most significantly the liability for unpaid losses and loss adjustment expenses. Management makes its best estimate of the liability for these unpaid claims costs as of the end of each fiscal quarter. Due to the inherent uncertainties in estimating the Company’s unpaid claims costs, actual loss and loss adjustment expense payments are expected to vary, perhaps significantly, from any estimate made prior to the settling of all claims. Variability is inherent in establishing loss and loss adjustment expense reserves, especially for a small insurer such as Crusader. For any given line of insurance, accident year, or other group of claims, there is a continuum of possible loss and loss adjustment expense reserve estimates, each having its own unique degree of propriety or reasonableness. Due to the complexity and nature of the insurance claims process, there are potentially an infinite number of reasonably likely scenarios. Management draws on its collective experience to judgmentally determine its best estimate. In addition to applying a variety of standard actuarial methods to the data, extensive series of diagnostic tests are applied to the resultant loss and loss adjustment expense reserve estimates to determine management’s best estimate of the unpaid claims liability. Among the statistics reviewed for each accident year are: loss and loss adjustment expense development patterns; frequencies; severities; and ratios of loss to premium, loss adjustment expense to premium, and loss adjustment expense to loss.
When there is clear evidence that the actual claims costs emerged are different than expected for any prior accident year, the claims cost estimates for that year are revised accordingly. If the claims costs that emerge are less favorable than initially anticipated, generally, the Company increases its loss and loss adjustment expense reserves immediately. However, if the claims costs that emerge are more favorable than initially anticipated, generally, the Company reduces its loss and loss adjustment expense reserves over time while it continues to assess the validity of the observed trends based on the subsequent emerged claims costs.
The changes in estimates of prior accident year incurred losses and loss adjustment expenses was due primarily to increases in IBNR reserves associated with the Apartments & Commercial Buildings and Transportation verticals resulting from higher estimates for expected claims frequency, claims severity and ultimate incurred losses and loss adjustment expenses during the re-evaluation of the loss and loss adjustment expense reserves.
The Company’s fixed maturity investments are classified either as held-to-maturity or available-for-sale and are stated at fair value. Although part of the Company's investments is classified as available-for-sale and the Company may sell investment securities from time to time in response to economic and market conditions, or investment securities may be called by their issuers prior to the securities’ maturity, its investment guidelines place primary emphasis on buying and holding high-quality investments to maturity. Short-term investments are carried at cost, which approximates fair value. The Company started investing in common stock equity securities during the year ended December 31, 2020. The Company’s equity securities allocation is intended to enhance the return of and provide diversification for the total investment portfolio. The unrealized gains or losses from fixed maturities are reported as “Accumulated other comprehensive income,” which is a separate component of stockholders’ equity, net of any deferred tax effect. The net unrealized investment gains on equity securities is reported in the Consolidated Statements of Operations. When a decline in the value of a fixed maturity is considered other-than-temporary, a loss is recognized in the Consolidated Statements of Operations. Realized gains and losses are included in the Consolidated Statements of Operations based on the specific identification method.
We have audited the accompanying consolidated balance sheets of Unico American Corporation and Subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows, for each of the years in the two-year period ended December 31, 2020, and the related notes and Schedules II and III (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
As of December 31, 2020, unpaid losses and loss adjustment expenses (“loss reserves”), were $74,893,509. As described in Notes 1 and 8 to the consolidated financial statements, loss reserves are management’s best estimate of the ultimate net cost of all reported and unreported losses and loss adjustment expenses incurred, less payments made. There are significant judgments involved in calculating this estimate as well as inherent uncertainties of the ultimate loss settlement cost.
The Company’s fixed maturity investments are classified either as held-to-maturity or available-for-sale and are stated at fair value. Although part of the Company's investments is classified as available-for-sale and the Company may sell investment securities from time to time in response to economic and market conditions, or investment securities may be called by their issuers prior to the securities’ maturity, its investment guidelines place primary emphasis on buying and holding high-quality investments to maturity. Short-term investments are carried at cost, which approximates fair value. Equity securities are reported at fair value. The Company’s equity securities allocation is intended to enhance the return of and provide diversification for the total investment portfolio. The unrealized gains or losses from fixed maturities are reported as “Accumulated other comprehensive income (loss),” which is a separate component of stockholders’ equity, net of any deferred tax effect. The net unrealized investment gains on equity securities are reported in the Consolidated Statements of Operations. When a decline in the value of a fixed maturity is considered other-than-temporary, a loss is recognized in the Consolidated Statements of Operations. Realized gains and losses are included in the Consolidated Statements of Operations based on the specific identification method.
Cash and cash equivalents - The carrying amounts reported in the Consolidated Balance Sheets approximate their fair values given the short-term nature of these instruments.
All property and equipment held for use is stated at cost less accumulated depreciation and amortization on the Consolidated Balance Sheets.
(2) $510,000 included in fixed maturity investments as of December 31, 2020 and 2019, and $200,000 included in short-term investments as of December 31, 2020 and 2019, are statutory deposits 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 in states other than California.
(3) Funds held as collateral by Comerica Bank & Trust, N. A. (“Comerica”) included in available-for-sale fixed maturities pursuant to the reinsurance trust agreement among Crusader, United Specialty Insurance Company (“USIC”) and Comerica to secure payment of Crusader’s liabilities and performance of its obligations under the reinsurance arrangement with USIC.
Crusader employs reinsurance to provide greater diversification of business allowing management to control exposure to potential losses arising from large risks by reinsuring certain levels of risk in various areas of exposure, to reduce the loss that may arise from catastrophes, and to provide additional capacity for growth. Prepaid reinsurance premium and reinsurance receivables are reported as assets and represent ceded unearned premium and reinsurance recoverable on both paid and unpaid losses and loss adjustment expenses, respectively. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. Crusader evaluates each of its ceded reinsurance contracts at its inception to determine if there is sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting literature. As of December 31, 2020, all such ceded contracts are accounted for as risk transfer reinsurance.
Crusader evaluates and monitors the financial condition of its reinsurers and factors such as collection periods, disputes, applicable coverage defenses and other factors to assess the need for any allowance against anticipated reinsurance recoveries. No such allowance was considered necessary at December 31, 2020 or 2019.
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.
The following table provides a reconciliation of cash and cash equivalents reported within the Consolidated Balance Sheets to the amounts shown in the Consolidated Statements of Cash Flows:
The insurance company operation records an advance premium liability that represents the deposits on written premium on policies that have been submitted to the Company and are bound, billed, and recorded prior to their effective date of coverage. The advance premium is not included in written premium or in the liability for unearned premium.
The Company monitors its investments closely. If an unrealized loss is determined to be other-than-temporary, it is written off as a realized loss through the Consolidated Statements of Operations. The Company’s methodology of assessing other-than-temporary impairments is based on security-specific analysis as of the balance sheet date and considers various factors including the length of time to maturity and the extent to which the fair value has been less than the cost, the financial condition and the near-term prospects of the issuer, and whether the debtor is current on its contractually obligated interest and principal payments. The unrealized losses as of December 31, 2020, and December 31, 2019, were determined to be temporary.
The following table presents information about the Company’s financial instruments and their estimated fair values, which are measured on a recurring basis, allocated among the three levels within the fair value hierarchy as of December 31, 2020 and 2019:
As a result of the spread of the ongoing coronavirus (“COVID-19”) pandemic, economic uncertainties have arisen which are likely to impact the fair value of investments, day to day administration of the business and premium volume. While the Company does not believe it is exposed to substantial risk from coronavirus-related claims under the insurance policies written by Crusader, it is likely that the fair value of its investment portfolio will be adversely affected by the volatility in the capital markets, as well as general economic conditions as a result of the coronavirus and governmental responses to the pandemic. The financial impact of these uncertainties is unknown at this time.
Real estate held for sale, owned by Crusader, includes land, building, and leasehold improvements. On September 29, 2020, the real estate was listed for sale at a price of $12,999,000. Upon the listing, the Company stopped recording the depreciation expense on the Calabasas building and the leasehold improvements in the Calabasas building. On October 23, 2020, Crusader entered into an agreement to sell the building, the leasehold improvements and substantially all existing furniture, fixtures and equipment for a sale price of $12,695,000. The building was sold on February 12, 2021.
Through the date of the real estate listing, depreciation on the Calabasas building was computed using the straight line method over 39 years. Depreciation on furniture, fixtures, and equipment in the Calabasas building is computed using the straight line method over 3 to 15 years. Through the date of the real estate listing, amortization of leasehold improvements in the Calabasas building was computed using the shorter of the useful life of the leasehold improvements or the remaining years of the lease. Depreciation and amortization expense on all property and equipment for the years ended December 31, 2020 and 2019 were $673,895 and $565,876, respectively.
For the years ended December 31, 2020 and 2019, the Calabasas building has generated rental revenue from non-affiliated tenants in the amount of $150,319 and $177,596, and incurred operating expenses in the amount of $677,930 and $669,359, which included depreciation, respectively. These amounts are included in “Other income” from insurance company operation and other operating expenses, respectively, in the Company’s Consolidated Statements of Operations.
The total square footage of the Calabasas building is 46,884, including common areas. As of December 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.
Bad debt expense was $6,450 and $7,881 for the years ended December 31, 2020 and 2019, respectively.
The following table presents loss development information by accident year, including cumulative incurred and paid losses and allocated loss adjustment expenses (“ALAE”), net of reinsurance, as well as cumulative claim frequency and the total of incurred but not reported liabilities plus expected development on reported claims as of December 31, 2020:
Crusader’s primary excess of loss reinsurance agreements during the years ended December 31, 2020 and 2019 are as follows:
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 a participation in its excess of loss reinsurance treaties of 0% in its 1st layer (reinsured losses between $500,000 and $1,000,000), 0% in its 2nd layer (reinsured losses between $1,000,000 and $4,000,000), and 0% in its property and casualty clash treaty.
On April 1, 2020, Crusader and Unifax Insurance Systems, Inc. (“Unifax”), a subsidiary of the Company, entered into a reinsurance arrangement with United Specialty Insurance Company (“USIC”), pursuant to which USIC would underwrite property and casualty insurance policies by and through Unifax and such policies would be reinsured by Crusader. On September 2, 2020, the Company placed a moratorium on placing any new risks with USIC by Unifax pending negotiations among Crusader, Unifax, and USIC pursuant to the issues raised by the DOI regarding the structure of the reinsurance arrangement and its compliance with the California Insurance Holding Company System Act (the “Insurance Act”).
On November 24, 2020, USIC and Crusader entered into a new Quota Share Reinsurance Agreement, effective April 1, 2020, (the “New Reinsurance Agreement”), pursuant to which Crusader will reinsure all of USIC’s liability for policies issued by USIC and produced by Unifax for property, general liability, CMP property, CMP liability and other miscellaneous coverages, subject to certain maximum policy limits. Policies placed with USIC by Unifax and reinsured with Crusader prior to November 24, 2020 remain in place without interruption or change and are subject to the New Reinsurance Agreement.
On November 24, 2020, USIC and U.S. Risk Managers, Inc. (“U.S. Risk”), a subsidiary of the Company, entered into a Claims Administration Agreement, effective as of April 1, 2020 (the “Claims Administration Agreement”). Pursuant to the Claims Administration Agreement, USIC appointed U.S. Risk, which is a licensed claims adjuster in the state of California, to adjust and settle claims on its behalf in connection with the surplus lines policies issued by USIC in connection with the New Reinsurance Agreement. U.S. Risk will be paid a fee by Unifax on behalf of USIC based on a percentage of earned premium. U.S. Risk will establish an account for payment of claims by U.S. Risk (the “Loss Fund Account”) pursuant to the Claims Administration Agreement. Pursuant to the terms of the New Reinsurance Agreement, Crusader will fund the Loss Fund Account provided for in the Claims Administration Agreement on behalf of USIC.U.S. Risk has agreed to indemnify and hold USIC harmless from any losses relating to the Claims Administration Agreement. The Claims Administration Agreement may be terminated in specified events, including by any party upon 90 days written notice to the other parties and automatically upon cancellation or termination of the Broker Agreement.
On most of the premium that Crusader cedes to the reinsurer, the reinsurer pays a commission to Crusader that includes a reimbursement of the cost of acquiring the portion of the premium that is ceded. Crusader intends to continue obtaining reinsurance although the availability and cost may vary from time to time. The unpaid losses and loss adjustment expenses ceded to the reinsurer are recorded as an asset on the Consolidated Balance Sheets.
The Unico American Corporation Profit Sharing Plan (“Plan”) covers Company’s employees who are at least 21 years of age and have met certain service and eligibility requirements. Unico American Corporation is the Plan sponsor and the Plan administrator. Fidelity Management Trust Company is the Plan trustee. The Plan is intended to be a qualified retirement plan under the Internal Revenue Code. As required by the Plan, on an annual basis, the Company must contribute 3% of participants’ eligible compensation to the account of each participant. In addition, pursuant to the terms of the Plan, the Company may contribute to participants an amount determined by the Board. Under the Plan, participants have the option to make 401(k) and/or Roth 401(k) deferral contributions which are not matched by the Company. Participants must be employed by the Company on the last day of the Plan year and must have met certain service and eligibility requirements to be eligible for a contribution. Participants are eligible to request a distribution of their vested account balance upon death, retirement, minimum required distributions and termination of employment.
No options were granted to employees or non-employees during the years ended December 31, 2020 and 2019. As of December 31, 2020 and 2019, there was no unrecognized compensation cost. There were no stock options outstanding at December 31, 2020 and 2019. As of December 31, 2020, 100,000 share of the Company’s common stock were available under the 2011 Plan.
The Company and its subsidiaries file consolidated federal and state income tax returns. Pursuant to the tax allocation agreement, Crusader and AAC are allocated taxes, or tax credits in the case of losses, at current corporate rates based on their own taxable income or loss. The Company files income tax returns under U.S. federal and various state jurisdictions. The Company is subject to examination by U.S. federal income tax authorities for tax returns filed starting at taxable year 2017 and California state income tax authorities for tax returns filed starting at taxable year 2016. There are no ongoing examinations of income tax returns by federal or state tax authorities.
On August 10, 2020, the Board authorized a share repurchase program (the “2020 Program”) for up to $5,000,000 of the currently outstanding shares of the Company’s common stock. The 2020 Program is effective immediately and replaces the Company’s existing share repurchase program that was adopted by the Board on December 19, 2008 (the “2008 Program”) to acquire from time to time up to an aggregate of 500,000 shares of the Company’s common stock. The purchases under the 2020 Program may be made from time to time in the open market, through block trades, 10b5-1 trading plans, privately negotiated transactions or otherwise and in accordance with applicable laws, rules and regulations. The timing and actual number of the shares repurchased under the 2020 Program will depend on a variety of factors including price, market conditions and corporate and regulatory requirements. The Company intends to fund the share repurchases under the 2020 Program from cash on hand. The 2020 Program does not commit the Company to repurchase shares of its common stock and it may be amended, suspended or discontinued at any time. The Company repurchased its shares under the 2020 Program and 2008 Program in unsolicited transactions as follows:
The Company has remaining authority under the 2020 Program to repurchase up to $4,995,507 of the currently outstanding shares of the Company’s common stock as of December 31, 2020. The Company has retired or will retire all stock repurchased under the 2020 Program and 2008 Program.
Altonji Consulting, LLC, owned by Gerard Altonji, a member of the Company’s Board of Directors, was engaged to provide consulting services for a $20,000 fee of which $15,000 was paid during the year ended December 31, 2020.
The Company evaluated subsequent events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued. Except as disclosed below and elsewhere, no events have occurred subsequent to December 31, 2020 requiring disclosure or recording in the consolidated financial statements.
Summarized unaudited quarterly financial data for each of the calendar years 2020 and 2019 is as follows:
(1) The information for the years 2011 through 2019 is presented as unaudited required supplementary information.
The following table presents average annual percentage payout of incurred claims by age, net of reinsurance, as of December 31, 2020: