UNICO AMERICAN CORP – 10-Q – MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS – InsuranceNewsNet

OVERVIEW


This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to provide an understanding of the Company's
financial condition and results of operations by focusing on changes in certain
key measures quarter over quarter.  This MD&A should be read in conjunction with
the Company's 2021 Form 10-K, plus the condensed consolidated financial
statements and notes thereto.  This discussion contains forward-looking
statements that involve risks and uncertainties.  The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those discussed elsewhere
in this Form 10-Q. The results for the three months ended March 31, 2022 are not
necessarily indicative of the results expected for the year ending December
31,
2022.



General



Unico American Corporation is an insurance holding company.  Crusader, Unico's
insurance company subsidiary underwrote commercial property and casualty
insurance.  The Company's subsidiaries Unifax Insurance Systems, Inc. ("Unifax")
and American Insurance Brokers, Inc. ("AIB") provided marketing and continue to
provide various underwriting support services related to property, casualty,
health and life insurance. The Company's subsidiary AAC provided insurance
premium financing, and the Company's subsidiary Insurance Club, Inc., dba AAQHC,
an Administrator ("AAQHC") provides membership association services.  The
Company's subsidiary U.S. Risk Manager's Inc. ("U.S. Risk") provides claims
adjustment services.  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.



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
MD&A, the Company's condensed consolidated financial statements and notes
thereto, and all other items contained within the Company's 2021 Form 10-K.



Total revenues for the three months ended March 31, 2022, were $6,070,735
compared to $11,471,654 for the three months ended March 31, 2021, a decrease of
$5,400,919 (-47%). The decrease in revenue was attributable to a decrease in the
net earned premium as Crusader's operations are now in runoff and $3,693,858
gain realized in February 2021 on the sale of the building previously owned by
Crusader.  The Company had a net loss of $4,010,762 for the three months ended
March 31, 2022, compared to net income of $2,267,703 for the three months ended
March 31, 2021, a decrease in net income of $6,278,465 (-277%). The increase in
net loss is mostly attributable to an approximately $10.1 million decrease
in
direct written premium.



In connection with the Company's previously announced review of strategic
alternatives, during the quarter ended September 2021, Unico took actions to
cause Crusader to enter into runoff. In connection with its runoff, Crusader
began to cease writing new and renewal business and to wind down operations that
support the writing of insurance policies. Effective September 30, 2021,
Crusader ceased writing any new insurance policies and no longer renewed
policies subsequent to December 8, 2021. Crusader has issued notices in
accordance with the CA DOI rules and regulations of non-renewal for its existing
in-force policies to terminate such policies at the expiration of the current
policy periods. Crusader continues to provide services to existing insurance
policyholders and claimants during its runoff. Actions to wind down operations
that support the writing of new insurance policies and the issuance of renewal
insurance policies began immediately, and the servicing operations will be
adjusted over time to support business requirements including the retention of
the necessary staff. In August 2021, Unico also discontinued its premium
financing operations formerly conducted through AAC, which activity is reflected
on the Statement of Operations under "Other insurance operations."




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Going Concern



Based on Unico's current cash and short­term investments at March 31, 2022, as
well as the other factors described herein, there is substantial doubt that
Unico will have sufficient cash to meet its operating and other liquidity
requirements when they become due during the next twelve months from the date of
issuance of the accompanying consolidated financial statements.



Unico has a history of recurring losses from operations, negative cash flows
from its operating activities which may continue in the future, and as an
insurance holding company, Unico does not independently generate significant
revenue, and is dependent on dividends and other cash distributions from
Crusader and its other subsidiaries to fund its operations and expenses.
Historically, Unico received dividends periodically from Crusader, but does not
expect to receive any such dividends for the foreseeable future due to
prohibitions on dividends imposed by the CA DOI pursuant to the Administration
Supervision Agreement (the "Supervision Agreement"), dated as of September 7,
2021, by and between Crusader and the CA DOI and other actions by the CA DOI in
its review of the financial statements of Crusader. The CA DOI advised in April
2021, that Crusader was prohibited from paying dividends during the year 2021
and for the years 2022 through 2025. Any continued financial support from
Crusader will be at the discretion of the Special Examiner appointed pursuant to
the Supervision Agreement ("Special Examiner").  If the Special Examiner does
not permit Crusader to continue to provide financial support to Unico, Unico
will be unable to continue to fund its continued operations and expenses. The
Special Examiner has recently informed Crusader that the CA DOI does not intend
to continue to permit Crusader to fund certain expenses attributable to Unico's
status as a public company, including certain legal and accounting expenses
without an undertaking by the Company to repay payments made on its behalf by
Crusader. The Company will have an account payable to Crusader and Crusader will
have an intercompany account receivable due from the Company for such payments
made by Crusader and authorized by the Special Examiner.  The inability of
Crusader to pay certain expenses of the Company will exacerbate Unico's lack of
liquidity. Additionally, many of the potential strategic alternatives that the
Unico Board of Directors is considering will also depend on continued financial
support from Crusader to fund transaction expenses and other costs.  If Crusader
is not permitted to do so, Unico would be unable to pursue such alternatives,
which may otherwise be in the best interests of its stockholders. These
circumstances raise substantial doubt about Unico's ability to continue as a
going concern. The accompanying consolidated financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classifications of liabilities that
may result from the outcome of the uncertainty of our ability to remain a going
concern.



Unico needs to improve its consolidated operating results, continue to receive
financial support from Crusader, and/or raise substantial additional capital to
continue to fund its operations.  Unico has taken actions to cause Crusader to
enter into runoff and to wind down operations that support the writing of
insurance policies. To address its liquidity concerns and meet its capital
obligations, Unico has announced a review of strategic alternatives and, with
the assistance of a financial advisor, is considering multiple alternatives,
including, but not limited to, strategic financing, further scaling back, or
eliminating some or all of its remaining business operations, expense
reductions, reorganization, merger with another entity, filing for bankruptcy or
cessation of operations.  There can be no assurances that capital will be
available when needed or that, if available, it will be obtained on terms
favorable to the Company and its stockholders, particularly in light of the
effects that the coronavirus COVID-19 pandemic and general economic conditions
have  had on the capital markets and investor sentiment. In addition, equity or
debt financings may have a dilutive effect on the holdings of Unico's existing
stockholders, and debt financings may subject Unico to restrictive covenants,
operational restrictions, and security interests in Unico's assets.  Many of
these potential alternatives will also depend on continued financial support
from Crusader to fund transaction expenses and other costs. If Unico becomes
unable to continue as a going concern, Unico may have to dispose of or liquidate
its assets and might realize significantly less than the values at which they
are carried on its consolidated financial statements. Additionally, Unico may
have to write down some or all of its capitalized assets or liquidate some or
all of its investments in a gross unrealized loss position.  These actions may
cause Unico's stockholders to lose all or part of their investment in Unico's
common stock. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.




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Supervision Agreement


On September 10, 2021, Crusader and the CA DOI entered into "a Supervision
Agreement", dated as of September 7, 2021, at the request of the CA DOI. The
Supervision Agreement was requested by the CA DOI because of the CA DOI's
concerns regarding the financial stability of Crusader and the potential effects
on Crusader and Crusader's California policyholders of any potential bankruptcy
of Unico. The Supervision Agreement among other things, provides for the
appointment by the CA DOI of a Special Examiner to provide supervision and
regulatory oversight of Crusader. The Supervision Agreement imposes limitations
on Crusader's ability to take certain actions without the prior written consent
of the California Insurance Commissioner (the "Commissioner"), the Special
Examiner, or the Special Examiner's appointed representative. Among the actions
that Crusader is prohibited from making without such prior written consent are
the following: (i) making payments, engaging in any transaction with or entering
into any agreement with, any affiliated or otherwise related person or entity if
the cost to Crusader is an individual payment of more than $5,000 or aggregate
payments of more than $20,000; (ii) making payments, engaging in any transaction
with or entering into any agreement with, any non-affiliated or otherwise
unrelated person or entity if the cost to Crusader is an individual payment of
more than $5,000 or aggregate payments of more than $20,000; (iii) paying any
dividend of any amount; (iv) except as provided in (i) and (ii), making any
payments to or on behalf of the Company in connection with any agreement entered
into between Crusader and the Company; (v) making any loans to affiliates,
officers, directors, stockholders or third parties; (vi) incurring any debt,
obligation or liability greater than $5,000; (vii) entering into any new
reinsurance contract or treaty or amending any existing reinsurance contract or
treaty; (viii) making any material changes in management and essential staffing;
(ix) increasing salaries or benefits of officers or directors or making any
preferential payment of bonuses or other payments considered legally
preferential; and (x) making any other material changes in its normal course of
operations, including but not limited to, entering into new lines of business,
making major corporate reorganizations, or redomesticating from California. The
Supervision Agreement provides that the Special Examiner will meet with Crusader
to develop a list of recurring payments under items (i) and (ii) that may not
require prior written approval. To date, the Special Examiner has permitted
Crusader to provide significant financial support to Unico in the form of
reimbursement and/or direct payment of certain operating and other expenses, but
there can be no assurance that the Special Examiner will continue to permit
Crusader to do so under the Supervision Agreement. If the Special Examiner does
not continue to permit Crusader to financially support Unico in the future,
Unico will be unable to continue to fund its ongoing operations.



On September 13, 2021, the Special Examiner advised Crusader, through its
counsel, that a deficiency existed in certain funds that Unifax is required to
maintain, in a fiduciary capacity, for Crusader's benefit. Pursuant to the
provisions of California Insurance Code ("CIC") Sections 1733 and 1734, Unifax
is required to hold premium payment funds received from policyholders as
fiduciary funds in trust maintained for the benefit of Crusader. The Special
Examiner informed Crusader that the CA DOI believed that the deficiency in such
fiduciary funds was approximately $3,100,000 as of September 13, 2021. In
January 2022, Unico, Crusader, and Unifax agreed, with the pre-approval of the
Special Examiner, to transfer a computer system, owned by Unico, to Crusader.
Unico contributed the computer system at its book value of $1,991,956 to Unifax,
and Unifax in turn contributed the computer system to Crusader at its book value
of $1,991,956 as a direct reduction in the amount due to Crusader which resulted
in a dollar-for-dollar reduction in the premium trust deficiency. The amount of
such deficiency was $275,901 as of March 31, 2022, and $435,619 as of June
30,
2022.



Independent Investigation


In October 2021, the Audit Committee of Unico's Board of Directors retained
independent outside counsel, who in turn engaged forensic accountants to work at
their direction, to conduct an independent investigation and provide legal
advice to the Audit Committee (the "Independent Investigation"), regarding the
facts and circumstances relating to, and resulting in, the observed fiduciary
funds deficiency. As a result of the Independent Investigation, the Company has
determined that, over a period of multiple years, (i) Unifax did not comply with
the requirements of the CIC to hold premium trust funds in separate accounts or
segregate such funds in accordance with the CIC; (ii) the funds in question were
improperly transferred to an operating account of Unifax and were subsequently
transferred to a Unico operating account, and (iii) the funds in question were
utilized by Unico and its consolidated subsidiaries for general corporate
purposes. The independent investigation did not find any evidence that any of
such funds had been stolen or used for non-corporate purposes.




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Work Force Reduction



In connection with the runoff of Crusader, on October 7 and October 8, 2021, the
Company informed thirteen employees of the Company's determination to terminate
their employment, effective as of October 8, 2021 (the "October 2021 Work Force
Reduction"). Additionally, on December 16, 2021, and December 17, 2021, the
Company informed an additional twelve employees of the Company's determination
to terminate their employment, effective as of December 17, 2021 (the "December
2021 Work Force Reduction"). The terminated employees were primarily employed in
the Company's underwriting and marketing groups. In connection with the October
2021 Work Force Reduction and the December 2021 Work Force Reduction, the
Company expects to incur total pretax costs of $968,139, consisting of severance
payments under the Company's existing policy. In addition, the Company has
offered retention bonuses to certain of the Company's employees that were not
subject to the October 2021 Work Force Reduction and the December 2021 Work
Force Reduction, in connection with which, depending on employee participation,
the Company expects to incur total pretax costs of $62,269. The Company
implemented another retention bonus plan to certain employees and expects to
incur total pretax costs of $193,731 related to the plan, which will be
recognized ratably over the last three quarters of 2022. The Company may incur
additional costs in connection with the runoff of Crusader, including additional
costs associated with workforce reductions. In 2021, the Company paid $331,331
in severance payments and $0 in retention bonus payments.



In 2022, the Company paid $270,705 in severance pay and $284,810 in
retention bonus payments.

COVID-19


As a result, of the ongoing COVID-19 pandemic, economic uncertainties have
arisen which can 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 possible that the Company's results of
operations, financial condition and the fair value of its investment portfolio
may be adversely affected by the general economic conditions as a result of
the
pandemic.



The effects of the ongoing COVID-19 pandemic were a major contributor to the
variability in fair value of the Company's fixed income and equity investments
during the first half of 2020, which rebounded in 2021 and has been impacted
once again in 2022 by the economic environment. The overall response to the
pandemic contributed to the recent decline in investment yields, compared to
previous years, which will cap the Company's investment portfolio's ability to
generate higher levels of investment income, absent a larger invested asset base
or a change in investment philosophy.




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Crusader has received a number of coronavirus-related business interruption
claims. With the exception of one claim for which an investigation is still
ongoing, all such claims were denied after the individual circumstances of each
claim were reviewed to determine whether insurance coverage applied. Like many
companies in the property casualty insurance industry, Crusader was named as
defendant in lawsuits seeking insurance coverage under the policies issued by
Crusader for alleged economic losses resulting from the shutdown or suspension
of their businesses due to the COVID-19 pandemic. Although the allegations vary,
the plaintiffs generally seek a declaration of insurance coverage, damages for
breach of contract in unspecified amounts for claim denials, interest, and
attorney fees. Some of the lawsuits also allege that the insurance claims were
denied in bad faith or otherwise in violation of state laws and seek
extra-contractual or punitive damages.



Crusader denies the allegations in these lawsuits and intends to continue to
vigorously defend them. Although the policy terms vary in general, the claims at
issue in these lawsuits were denied because the policyholder identified no
direct physical loss, such as fire or water damage, to property at the insured
premises, and the governmental orders that led to the complete or partial
shutdown of the business were not due to the existence of any direct physical
loss or damage to property in the immediate vicinity of the insured premises and
did not prohibit access to the insured premises, as required by the terms of the
insurance policies. Depending on the individual policy, additional policy terms
and conditions may also prohibit coverage, such as exclusions for pollutants,
ordinance or law, loss of use, and acts or decisions. Most of Crusader's
policies also contain an exclusion for losses caused directly or indirectly
by
"virus or bacteria."



In addition to the inherent difficulty in predicting litigation outcomes, the
COVID-19 pandemic business income coverage lawsuits present a number of
uncertainties and contingencies that are not yet known, including how many
policyholders will ultimately file claims, the number of lawsuits that will be
filed, the extent to which any class may be certified, and the size and scope of
any such classes. The legal theories advanced by plaintiffs vary by case. These
lawsuits are in the early stages of litigation; many complaints continue to be
amended; several have been dismissed voluntarily and may be refiled; and others
have been dismissed by trial courts. Some early decisions on motion filings
have
been appealed.



On March 23, 2021, ten policyholders sued Crusader in a putative class action
entitled Anchors & Whales LLC et al. v. Crusader Insurance Company, Superior
Court of the State of California for the County of San Francisco
(CGC-21-590999). The action alleges that Crusader wrongly denied claims for
business interruption coverage made by bars and restaurants related to the
COVID-19 pandemic and related government orders that limited or halted
operations of bars and restaurants. The action further alleges that Crusader
acted unreasonably in denying the claims, and it seeks as damages the amounts
allegedly due as contract benefits under the insurance policies, attorneys' fees
and costs, punitive damages, and other unspecified damages. The lawsuit alleges
a putative class of all bars and restaurants in California that were insured by
Crusader for loss of business income, who made such a claim as a result of "one
or more Governmental Orders and the presence of the COVID-19 virus on the
property," and whose claim was denied by Crusader. On October 1, 2021, Crusader
was granted its motions on the pleadings without leave to amend and the lawsuit
was dismissed. On December 15, 2021, Anchors & Whales LLC filed a notice of
appeal with California Court of Appeals, 1st Appellate District, Division 2
(A164412). The opening brief of Anchors & Whales LLC was filed August 12, 2022,
and the Company has 90 days to respond. The Company cannot predict the actions
of the Court of Appeals.



While the coronavirus pandemic is also affecting the Company's internal
operations, the Company implemented a plan at the onset of the COVID-19 pandemic
to help its operations continue effectively during the ongoing pandemic,
including processes to limit the spread of COVID-19 among employees. For
example, the Company modified its business practices in accordance with social
distancing and safety guidelines, allowing many work-from-home arrangements,
flexible work schedules, and restricted business travel. The Company's employees
are following the guidelines and approximately 75% are working from their homes.
The Company follows governmental safety guidelines in determining when to remove
the coronavirus-related business restrictions and where and when to request the
employees working from their homes return to their workplaces for a few days per
week. While the pandemic has created new challenges for the Company, the
Company's ability to maintain its operations, internal controls and
relationships has not been adversely affected.



Termination of reinsurance agreement


On August 31, 2021, Crusader and United Specialty Insurance Company ("USIC"),
terminated the Quota Share Reinsurance Agreement (the "Reinsurance Agreement"),
effective April 1, 2020, by and between Crusader and USIC. Pursuant to the
Reinsurance Agreement, Crusader agreed to reinsure all of USIC's liability for
policies issued by USIC and produced by Unifax, for property, general liability,
commercial multiple peril ("CMP"), liability and other miscellaneous coverages,
subject to certain maximum policy limits. Crusader's obligations under the
Reinsurance Agreement continue after termination for business in force at the
time of termination, for policies with effective dates prior to the termination
but issued after the termination date, and for policies that must be issued or
renewed as a matter of law until the expiration of the policies.




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On August 31, 2021, as a result of the termination of the Reinsurance Agreement,
the Surplus Line Broker Agreement (the "Broker Agreement"), effective April 1,
2020, by and between Unifax and USIC, automatically terminated. Pursuant to the
Broker Agreement, USIC authorized Unifax to act as its broker for the purpose of
producing and administering certain specified classes of insurance policies,
which are the subject of the Reinsurance Agreement. Unifax's obligations under
the Broker Agreement continue after termination for insurance business reinsured
under the Broker Agreement. Unifax's obligations include handling and servicing
of all policies until their expiration.



On August 31, 2021, as a result of the termination of the Broker Agreement, the
Claims Administration Agreement (the "Claims Administration Agreement"),
effective April 1, 2020, by and between U.S. Risk and USIC, automatically
terminated. Pursuant to the Claims Administration Agreement, USIC appointed U.S.
Risk to adjust and settle claims on its behalf in connection with the surplus
lines policies issued by USIC in connection with the Reinsurance Agreement. Upon
termination of the Claims Administration Agreement, U.S. Risk is obligated
(unless revoked by USIC) to continue to manage claims during the runoff of
the
business reinsured.



The Reinsurance Agreement was mutually terminated by Crusader and USIC. There
were no early termination penalties incurred as a result of the termination. The
Reinsurance Agreement provides for a minimum ceding fee, and, upon termination
of the Reinsurance Agreement, the minimum ceding fee was pro-rated to the date
of termination unless there were policies issued after the termination of the
Reinsurance Agreement. In such case, the minimum ceding fee will continue past
the termination of the Reinsurance Agreement until such time as no further
policies are issued. USIC waived any additional ceding fees payable under the
Reinsurance Agreement under the agreement to terminate that agreement.



Under the Reinsurance Agreement, Crusader was required to secure its obligations
to USIC for unearned premium reserves, if any, and loss reserves (losses
incurred and not reported and loss reported but unpaid) in a security fund,
trust agreement or letter of credit to permit USIC to receive credit for the
reinsurance ceded to Crusader by USIC. Such security was required because
Crusader is not authorized to transact insurance in Delaware, the domiciliary
state of USIC.  Initially, the security required to be provided by Crusader was
150% of the unearned premium and loss reserves.  USIC was permitted to request
additional security for the unearned premium and loss reserves in the event (i)
the A.M. Best rating of Crusader is at any time reduced; or (ii) the A.M. Best
rating of Crusader is at any time removed or withdrawn; or (iii) there is a
reduction the capital and policyholder surplus of Crusader by 10% or more in any
rolling 12-month period or (iv) Crusader fails to maintain its Cat excess of
loss reinsurance coverage at certain levels.  As of December 31, 2021, six
securities were 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 those securities was $8,243,758 and $8,162,053 on
December 31, 2021, respectively.  The estimated aggregate fair value and
amortized cost of these securities was $7,944,916 and $7,836,756, on March
31,
2022 respectively.


Outsourcing complaints handling to an experienced third-party administrator


In January 2022, Crusader engaged a Third-Party Administrator ("TPA") outside of
the Unico Group of Companies to assist in the claims adjudication and settlement
process.  This outside TPA will supplement U.S. Risk as Crusader is in runoff
and is expected increased claims activity will be outsourced to the TPA through
the remainder of 2022 to manage open claims inventory.  The U.S. Risk staff
adjust claims and oversee all outside claim services such as attorneys,
independent or outside claim adjusters, and experts as necessary.  Engagement of
this TPA should allow for increased control over paid allocated loss adjustment
expenses and reduction of the open claims inventory.  Administration fees paid
to the TPA are recoverable by our third-party reinsurers as an allocated loss
adjustment expense to the extent the billed activities are allocated to a
specific claim.



IT System Upgrade



In 2018 the Company determined it needed to upgrade or replace its legacy IT
system, which it opted to upgrade because the cost was substantially less. The
upgrade was completed in first quarter of 2021 at a cost of approximately
$1,500,000, excluding costs of Unico's employees involved in the upgrade, due to
unexpected technical challenges. The Company started depreciating the associated
capitalized costs, including the costs of Unico's employees involved in the
upgrade, during the second quarter of 2021.



Revenue and Income Generation



The Company historically received 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. However, in light of the runoff
of Crusader, and the cessation of the premium finance operations provided by
AAC, the Company's revenues from these sources will decline significantly in the
future. The insurance company operation, generated approximately 95% of
consolidated revenues for the three months ended March 31, 2022, compared to 96%
of consolidated revenues for the three months ended March 31, 2021 (94% of
consolidated revenues for the three months ended March 31, 2021, excluding the
gain on real estate). None of the Company's other operations is individually
material to consolidated revenues.



Insurance Company Operation


As of March 31, 2022, the Company's subsidiary Crusader was licensed as an
admitted insurance carrier in the states of Arizona, California, Nevada, Oregon,
and Washington. Crusader's business remains concentrated in California (100% of
gross written premium during the three months ended March 31, 2022, and 2021
originated in California).  During the three months ended March 31, 2022,
approximately 99.8% of Crusader's business was CMP policies. During the three
months ended March 31, 2021, approximately 99.5% of Crusader's business was
comprised of CMP policies.




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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:



                                          Three Months Ended
                                                March 31
                                2022           2021             Change

California                    $ 55,043     $ 10,482,545     $ (10,427,502 )
Total gross written premium   $ 55,043     $ 10,482,545     $ (10,427,502 )



Crusader previously focused its business in three underwriting businesses: (1)
Transportation, (2) Mainstreet, and (3) Buildings. The Company reorganized its
underwriting businesses for proper staffing and business focus during the first
quarter of 2021. The former Food, Beverage and Entertainment and Garage and
Mercantile businesses became Mainstreet, and the former Apartments & Commercial
Buildings business was renamed Buildings.



Written premium is a non-GAAP financial measure that is defined, under statutory
accounting principles ("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):



                                                 Three Months Ended
                                                       March 31
                                                2022             2021

Direct written premium                      $     14,636     $ 10,176,863
Assumed written premium                           40,407          305,682

Less: written premiums ceded to reinsurers (2,122,828 ) (2,779,992 )
Net written premium

                           (2,067,785 )      7,702,553
Change in direct unearned premium              6,797,489         (883,694 )
Change in assumed unearned premium               753,973         (211,216 )
Change in ceded unearned premiums                (34,625 )         (3,883 )
Net earned premium                          $  5,449,052     $  6,603,760




The Company's insurance operational underwriting profitability is defined by
pre-tax underwriting gain (loss), which is calculated as net earned premium less
losses and loss adjustment expenses and policy acquisition costs.




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Crusader’s technical loss before income taxes is as follows:

                                                      Three Months Ended
                                                           March 31
                                            2022             2021            Change

Net written premium                     $ (2,067,785 )   $  7,702,553     $ (9,770,338 )
Change in net unearned premium             7,516,837       (1,098,793 )    

8,615,630

Net earned premium                         5,449,052        6,603,760       (1,154,708 )
Less:
Losses and loss adjustment expenses        6,831,504        5,585,213      
 1,246,291
Policy acquisition costs                     285,641        1,021,965         (736,324 )
Total underwriting expenses                7,117,145        6,607,178          509,967

Technical loss before income tax ($1,668,093) ($3,418) $(1,664,675)



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 Crusader's 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 loss before income
taxes to profit (loss) before taxes of the Company:

                                                               Three Months Ended
                                                                    March 31
                                                              2022            2021
Underwriting loss before income taxes                     $ (1,668,093 )   $    (3,418 )
Insurance company operation revenues:
Net investment income                                          328,782     

514,723

Net realized investment gains                                   61,733     

55,399

Net realized gains on real estate sale                               -     

3,693,858

Net unrealized investment gains (losses) on equity
securities                                                    (180,069 )   

151,667

Other income (loss)                                             89,740         (26,752 )
Other insurance operations revenues:
Gross commissions and fees                                     313,650     

433 461

Finance charges and fees earned                                  6,298     

44,998

Other income                                                     1,549     

540

Less expenses:
Salaries and employee benefits                                 858,404     

1,128,090

Commissions to agents/brokers                                   19,187     

20,568

Other operating expenses                                     1,539,460     

1,173,479

Income (loss) before income taxes                         $ (3,463,461 )  
$ 2,542,339





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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 has not recognized a premium deficiency reserve for  the
three months ended March 31, 2022 and March 31, 2021 respectively.



The following table shows the loss ratios, expense ratios, and combined ratios
of Crusader:



                        Three Months Ended
                              March 31
                       2022            2021

Loss ratio (1)             125 %            85 %
Expense ratio (2)           50 %            31 %
Combined ratio (3)         175 %           116 %



(1) Loss ratio is defined as claims and claims adjustment expenses divided by

premium earned.

(2) The expense ratio is defined as the sum of policy acquisition costs and

indirect salaries and benefits and other operating expenses

allocation to the operation of insurance companies, less the allocation of

gross commissions and fees and other income, divided by net premiums earned.

The calculation of this expense ratio is different from that used for

calculation of the combined ratio of the legal accounting basis.

(3) The combined ratio is defined as the sum of the loss ratio and the expense ratio. This

the combined ratio is different from the combined accounting framework

    ratio.




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



                                                           Three Months Ended
                                                                March 31
                                                 2022             2021           Change

Losses and loss adjustment expenses:
Provision for insured events of current
year                                          $ 6,121,111     $  6,757,564     $  (636,453 )
Development of insured events of prior
years                                             710,393       (1,172,351 )     1,882,744
Total losses and loss adjustment expenses     $ 6,831,504     $  5,585,213 
   $ 1,246,291



For a more in-depth analysis of claims and claims adjustment expenses, refer to the “Results” section.
operations”.


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Income from other insurance operations


The Company's revenues from other insurance operations consist of commissions,
fees, investment, and other income. These operations accounted for approximately
5% of total revenues for the three months ended March 31, 2022, compared to
approximately 4% of total revenues in the three months ended March 31, 2021 (6%
of total revenues for the three months ended March 31, 2021, excluding the
gain
on real estate sale).



Investments



The Company generated revenues from its total invested assets of $72,220,146 and
$93,101,712 (fixed maturities at amortized cost, equity securities at cost and
short-term investments at fair value) as of March 31, 2022 and 2021,
respectively. Investment income (net of investment expenses) decreased $185,941
(-36%) to $328,782 for the three months ended March 31, 2022, compared to
$514,723 for the three months ended March 31, 2021. This decrease is the result
of having less investments than in the past, as Crusader is in runoff and will
be using the investments to satisfy future claims and operational needs.



As of March 31, 2022, 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, 2022, the weighted average
maturity of the Company's investments was approximately 7.0 years, and the
effective duration for available-for-sale investments (investments managed under
the investment guidelines) was 2.6 years.



CASH AND CAPITAL RESOURCES


The Company prepared the condensed consolidated financial statements included
elsewhere in this Form 10-Q on a going concern basis, which assumes that it will
realize its assets and satisfy its liabilities in the normal course of business.
Unico has a history of recurring losses from operations, negative cash flows
from its operating activities which may continue in the future, and, as a
holding company, does not independently generate significant revenue and is
dependent on dividends and other cash distributions from Crusader and its other
subsidiaries to fund its operations and expenses. Historically, Unico received
dividends periodically from Crusader, but does not expect to receive any such
dividends for the foreseeable future due to prohibitions on dividends imposed by
the CA DOI pursuant to the Supervision Agreement, and other actions by the CA
DOI in its review of the financial statements of Crusader.  The CA DOI advised
in April 2021 that Crusader was prohibited from paying dividends during the year
2021 and for the years 2022 through 2025. Any continued financial support from
Crusader will be at the discretion of the Special Examiner appointed pursuant to
the Supervision Agreement. If the Special Examiner does not permit Crusader to
continue to provide financial support to Unico, Unico will be unable to continue
to fund its continued operations and expenses. The Special Examiner has recently
informed Crusader that the CA DOI does not intend to permit Crusader to fund
certain expenses attributable to Unico's status as a public company, including
certain legal and accounting expenses, without an undertaking by the Company to
repay payments made on its behalf by Crusader.  The Company will have an account
payable to Crusader and Crusader will have an intercompany account receivable
due from the Company for such payments made by Crusader and authorized by the
Special Examiner.  The inability of Crusader to pay certain expenses of the
Company will exacerbate Unico's lack of liquidity.  Additionally, many of the
potential strategic alternatives that the Board of Directors of Unico is
considering will also depend on continued financial support from Crusader to
fund transaction expenses and other costs. If Crusader is not permitted to do
so, Unico would be unable to pursue such alternatives, which may otherwise be in
the best interests of its stockholders. These circumstances raise substantial
doubt about Unico's ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classifications of liabilities that may result from the outcome
of the uncertainty of our ability to remain a going concern.



No assurance can be given that the Company's estimate of ultimate loss and loss
adjustment expense reserves will be sufficient but 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 constraints for
Crusader. However, as an insurance holding company, the Company does not
independently generate significant revenue and is dependent on dividends and
other cash distributions from Crusader and its other subsidiaries to fund its
operations and expenses. As discussed below, the Company does not expect to
receive any dividends from Crusader for the foreseeable future, and accordingly,
its financial position and ability to pay operating expenses will be adversely
impacted.




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As a result of Crusader being placed into runoff, Crusader is no longer able to
generate any significant amounts of premium and the holdings of unearned premium
reserves will be depleted over time. As a result, Crusader will need to
liquidate some of its investment holdings to support its operations.
Accordingly, the size of Crusader's investment portfolio and investment income
are expected to decrease.



As of December 31, 2021, and December 31, 2020, Crusader's RBC Level was less
than 300% of its Authorized Control Level RBC, and its statutory accounting
basis combined ratio was in excess of 120% for the years then ended.  The RBC
Level when coupled with the statutory accounting basis combined ratio triggered
Company Action Level Events under the RBC for the years then ended.  On March
24, 2021  Crusader submitted to the CA DOI a comprehensive Risk Based Capital
Plan (the "RBC Plan") to increase the adjusted capital above 300% and to address
the actions that Crusader would take to correct the conditions that resulted in
the Company Action Level Event. The CA DOI found the RBC Plan to be deficient
and requested that a revised RBC Plan be submitted.  On July 2, 2021, the
Company submitted a revised RBC Plan, which addressed issues raised by the CA
DOI (the "2021 Revised RBC Plan"). No action was taken by the CA DOI regarding
the 2021 Revised RBC Plan. As of December 31, 2021, a second Company Action
Event occurred.  At December 31, 2021, Crusader's RBC Level was less than 300%,
with a combined ratio greater than 130%, which resulted in another Company
Action Level event (the "2022 Company Action Level Event"). As a result of the
2022 Company Action Level Event, Crusader was required to submit another
comprehensive Risk Based Capital Plan ("2022 RBC Plan") to the CA DOI. Crusader
submitted its 2022 RBC Plan on May 15, 2022.  On June 9, 2022, the CA DOI
requested additional information regarding the 2022 RBC Plan, which information
is to be submitted by July 24, August 24, 2022. The CA DOI may accept Crusader's
revised 2022 RBC Plan to correct the conditions that lead to the 2022 Company
Action Event,  or it may request that an additional revised plan be submitted,
or it may take no action with respect to the 2022 RBC Plan. After the Plans are
submitted, the CA DOI may request additional changes to the revised RBC Plan to
address various corrective actions that Crusader and/or the Company will take,
including, without limitation, increasing the capital of Crusader.  Depending on
the scope and nature of any such requests from the CA DOI, regarding the 2022
RBC Plan the Company and Crusader may not be able to implement certain
corrective actions, including the potential infusion of capital to Crusader. The
Company continues to be engaged in discussions with the CA DOI on various
strategic alternatives to address the RBC issues.



Another liquidity risk faced by the Company is adverse development of Crusader'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 Crusader's loss and loss adjustment expense reserves are adequate
to address anticipated claims.  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, restricted 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. Cash, restricted cash, and investments (at amortized
cost) of Crusader at March 31, 2022, were $81,690,787 compared to $91,831,832 at
December 31, 2021.


From March 31, 2022all of the Company’s investments are in WE Treasury
securities, FDIC insured certificates of deposit, corporate with fixed maturity
securities, agency mortgage-backed securities, common stocks and short-term securities
investments. All of the Company’s investments, with the exception of certificates of
deposit, are easily marketable.

The composition of the Company’s investment portfolio is as follows:

                                      March 31, 2022                   December 31, 2021
                                Amortized           Fair          Amortized           Fair
                                   Cost            Value             Cost            Value

Fixed maturities:
U.S. Treasury securities       $  5,785,095     $  5,692,831     $  6,278,764     $  6,309,805
Corporate securities             42,463,486       41,620,142       44,370,193       45,249,973
Agency mortgage-backed
securities                       19,007,275       18,531,691       20,569,448       20,853,627
Certificates of deposit             300,000          300,000          300,000          300,000
Total fixed maturity
investments                      67,555,856       66,144,664       71,518,405       72,713,405
Equity securities                 3,613,060        4,030,888        3,532,026        4,131,153
Short-term investments            1,050,000        1,051,230        1,154,750        1,154,750
Total investments              $ 72,218,916     $ 71,226,782     $ 76,205,181     $ 77,999,308



The short­term 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.




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The Company is required to classify its investment securities into one of three
categories: held­to­maturity, available­for­sale, or trading securities.
Historically, the Company's investment guidelines placed primary emphasis on
buying and holding high­quality investments to maturity. It is expected the
Company will sell securities to support its operations.



The Company’s Board of Directors has approved investment guidelines that reflect
the Company’s risk, balance sheet and profile.


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.



Unless Crusader agrees in advance in writing, 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 comprising only interest, principal

single and inverse floating rate securities.

? All fixed-maturity real estate securities, except mortgage-backed securities

securities (including title deeds and secured mortgages

        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. Through July 31, 2021, the investments were held by Crusader's previous
custodian, Union Bank Global Custody Services ("Union Bank"). Effective August
2, 2021, the investments were held by Crusader's current custodian, U.S Bank,
Institutional Trust and Custody ("U.S. Bank") as a result of sale of the
custodial business by Union Bank to U.S. Bank.



As of March 31, 2022, six securities were held as collateral with 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 Trust Agreement with USIC. The estimated fair value and
amortized cost of these securities was $7,944,916 and $7,836,756 on March 31,
2022, respectively. As of December 31, 2021, six securities, were held as
collateral with 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

the estimated fair value and amortized cost of these securities have been $8,243,758 and
$8,162,053 on December 31, 2021respectively.


On August 10, 2020, the Board authorized a share repurchase program (the "2020
Program") for the repurchase of up to $5,000,000 of the currently outstanding
shares of the Company's common stock. The 2020 Program was effective immediately
and replaced the Company's existing share repurchase program that was adopted by
the Board of Directors 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.




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The Company has remaining authority under the 2020 Program to repurchase up to
$4,995,406 of the currently outstanding shares of the Company's common stock as
of March 31, 2022. The Company has retired or will retire all stock repurchased
under the 2020 Program and 2008 Program.  Effective January 2022, the Company
suspended its 2020 Program and ceased any further repurchases of its shares
from
stockholders of the Company.


The Company reported $10,138,678 net cash used by operating activities for the
three months ended March 31, 2022, compared to $1,135,389 net cash provided by
operating activities for the three months ended March 31, 2021. Fluctuations in
cash flows from operating activities relate to changes in loss and loss
adjustment expense payments, unearned premium holdings, and the timing of the
collection and the payment of insurance-related receivables and payables. The
variability of the Company's losses and loss adjustment expenses is due
primarily to its small population of claims which may result in greater
fluctuations in claim frequency and/or severity.



Crusader's statutory capital and surplus as of March 2022 was $20,156,823.
Crusader's statutory capital and surplus as of December 31, 2021, was
$22,494,454, a decrease of $4,399,061 (-16%) from December 31, 2020 surplus of
$26,893,515. The decrease is a result of Crusader being put into runoff and the
cessation of writing new policies in September 2021 and renewal policies on
December 8, 2021.



No dividend was paid by Crusader to Unico in 2021 following the
Supervision Agreement and other CA DOI actions. CA DOI advised
Crusader that no dividends can be paid by Crusader via December 31, 2025.


During the years ended December 31, 2021 and 2020, no cash dividends were
declared or issued by the Company to its stockholders.  Declaration of future
cash dividends, if any, will be subject to the Company's profitability, cash
requirements, capital requirements, and general business conditions, among other
factors.  Because of the inability of Crusader to pay dividends to the Company
for the foreseeable future, it is highly unlikely that the Company can declare
and pay dividends to its stockholders for the foreseeable future.



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



RESULTS OF OPERATIONS



All comparisons made in this discussion compare the three months ended March 31,
2022, to the three months ended March 31, 2021, unless otherwise indicated.
Because Crusader has been placed into runoff, some of the financial metrics will
not be comparable now or in the future.



For the three months ended March 31, 2022, total revenues were $6,070,735, a
decrease of $5,400,919 (-47%) compared to total revenues of $11,471,654 for the
three months ended March 31, 2021.  For the three months ended March 31, 2022,
the Company had a loss before taxes of $3,463,461 compared to income before
taxes of $2,542,339 for the three months ended March 31, 2021.  For the three
months ended March 31, 2022, the Company had a net loss of $4,010,762 compared
to net income of $2,267,703 for the three months ended March 31, 2021.



The decrease in revenues of $5,400,919 for the three months ended March 31,
2022, when compared to the three months ended March 31, 2021, was primarily due
to a $1,154,708 (-17%) decrease in the net earned premium as Crusader's
operations are now in runoff, $3,693,858 gain realized in February 2021 on the
sale of the building previously owned by Crusader, and $180,069 net unrealized
investment losses on equity securities during the quarter ended March 31, 2022
compared to $151,667 net unrealized investment gains on equity securities during
the quarter ended March 31, 2022.



The loss before tax of $3,463,461 for the three months ended March 31, 2022,
compared to income before taxes of $2,542,339 for the three months ended March
31, 2021, was due primarily to the $1,154,708 (-17%) decrease in the net earned
premium, increase in incurred losses and loss adjustment expenses, the
$3,693,858 gain realized in February 2021 on the sale of the building previously
owned by Crusader, and $365,981 (31%) increase in other operating expenses, and
$180,069 net unrealized investment losses on equity securities during the
quarter ended March 31, 2022 compared to $151,667 net unrealized investment
gains on equity securities during the quarter ended March 31, 2022, partially
offset by $736,324 (-72%) decrease in the policy acquisition costs and $269,686
(-24%) decrease in employee salaries and employee benefits.



Following the Crusader run-off, revenues and losses in future periods
will not be comparable to past periods because Crusader has stopped writing new
policies in September 2021 and ceased renewing the policies as of December 8, 2021.

The effect of inflation on the Company for the three months ended March 31, 2022
was significant.  As our Company's portfolio securities are primarily comprised
of fixed income instruments, the fair value of these fixed income instruments
will typically decrease in an inflationary environment as yields increase.
Also, employee salary and employee benefits expense increases tend to be higher
than normal than in inflationary times.



Crusader premium


Crusader’s main business areas are CMP fonts. These policies
represented approximately 99.8% and 99.5% of Crusader’s total written premium
for the three months ended March 31, 2022and 2021, respectively.


Gross written premium (direct and assumed written premium before cessions to
reinsurers under reinsurance treaties) reported on Crusader's statutory
financial statements decreased $10,427,502 to $55,043, compared to $10,482,545
for the three months ended March 31, 2021.  The decrease in gross written
premium was attributable to Crusader's operations now currently being in runoff.




As a result of the runoff of Crusader, Crusader will not generate significant
levels of written premium in the future. Crusader ceased writing new policies in
September 2021 and ceased renewing policies as of December 8, 2021 as Crusader
was obligated by regulatory requirements to offer renewal policies through
that
date.




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Written premium



Written premium is a non-GAAP financial measure that is defined, under statutory
accounting principles ("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.



Gross earned premium



Gross earned premium decreased $1,781,129 (-19%) to $7,606,505 for the three
months ended March 31, 2022, compared to $9,387,634 for the three months ended
March 31, 2021.  Historically, and prior to Crusader being placed into runoff,
all policies were written on an annual basis. Earned premium represents a
portion of written premium that is recognized as income in the condensed
consolidated financial statements for the period presented and earned daily on a
pro-rata basis over the terms of the policies, and, therefore, premiums earned
in the current year are related to policies written during both the current year
and immediately preceding year. The decrease in gross earned premium was due
primarily to decrease in the gross written premium as a result of the Crusader
runoff.


As a result of the runoff of Crusader, the gross earned premium is expected to
gradually decrease over time. Crusader does not expect any gross earned premium
in 2023.



Ceded earned premium



Ceded earned premium (premium ceded to reinsurers under reinsurance treaties)
decreased $626,421 (-23%) to $2,157,453 for the three months ended March 31,
2022, compared to $2,783,874 for the three months ended March 31, 2021. Ceded
earned premium as a percentage of gross earned premium was 28% and 30% for the
three months ended March 31, 2022 and 2021, respectively. The decrease in the
ceded earned premium as a percentage of gross earned premium for the three
months ended March 31, 2022, compared to the three months ended March 31, 2021,
was due primarily to a reduction of premiums ceded to reinsurers related to the
Company excess of loss treaties.



Ceded earned premium is based on gross earned premium. Following the runoff
of Crusader, the premium earned ceded will gradually decrease over time.
Crusader expects no earned premium ceded in 2023.


Reinsurance treaties are generally structured in layers, with different
negotiated economic terms and retention of participation, or liability, in each
layer.  In calendar years 2022 and 2021, 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.



Crusader also has catastrophe reinsurance (“CAT”) treaties from various highly
assessed 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 2021 and 2020, Crusader retained a
participation in its catastrophe excess of loss reinsurance treaties of 5% in
its 1st layer (reinsured losses between $1,000,000 and $10,000,000) and 0% in
its 2nd layer (reinsured losses between $10,000,000 and $46,000,000).  In 2022
the catastrophe excess of loss reinsurance treaties were reduced to $16,000,000
with a $1,000,000 retention. Also, Crusader has not had a single CAT claim
since
1992.



Crusader also has facultative reinsurance treaties from a highly rated
California authorized reinsurance company.  Unlike the excess of loss treaties
which cover all risks underwritten by Crusader, the facultative reinsurance
treaties cover specific risks for properties with total insured values in excess
of $4,000,000, or property coverage limit of the excess of loss treaties.  In
calendar year 2020 and during the first five months of 2021, the facultative
reinsurance treaties provided coverage for reinsured losses between $4,000,000
and $8,000,000.  From June 2021 through 2022, the facultative reinsurance
treaties had two sections which provide coverage for reinsured losses between
$4,000,000 and $9,000,000 (Section A) and $4,000,000 and $15,000,000 (Section B)
depending on location of the insured risk.



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, 2022, all such ceded contracts are accounted for as risk transfer
reinsurance.




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A tabular presentation of Crusader's direct, assumed, ceded and net earned
premium is as follows:



                                                              Three Months Ended
                                                                   March 31
                                                             2022             2021

Direct earned premium                                    $  6,812,125     $  9,293,168
Assumed earned premium                                        794,380           94,466
Ceded earned premium                                       (2,157,453 )     (2,783,874 )
Net earned premium                                       $  5,449,052     $  6,603,760

Ratio between the earned premium ceded and the gross earned premium
(direct and presumed earned premium)

                                28 %             30 %



Net investment income, net realized investment gains and losses and net income
Unrealized investment losses on Equity securities


Investment income decreased $185,941 (-36%) to $328,782 for the three months
ended March 31, 2022, compared to $514,723 for the three months ended March 31,
2021. This decrease in investment income was due primarily to a smaller overall
portfolio than in 2021 as investments were sold to pay claims and for
operational uses.  In 2022, our third-party investment advisor was instructed by
management not to invest in matured bonds so the portfolio remains relatively
liquid, which will limit net investment income.  The Company had $61,733 in net
realized investment gains for the three months ended March 31, 2022, compared to
net realized investment gains of $55,399 for the three months ended March 31,
2021. The Company had net unrealized investment losses on equity securities of
$180,069 for the three months ended March 31, 2022, compared to net unrealized
gains of $151,667 for the three months ended March 31, 2021.



Average 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
                                                      2022             2021

Average invested assets (1) - at amortized cost   $ 74,212,049     $ 88,417,672
Net investment income from:
Invested assets (2)                               $    328,760     $    514,392
Invested Cash                                               22              331
Total investment income                           $    328,782     $    514,723
Average yield on average invested assets (3)               1.8 %           
2.3 %



(1) The average is based on the opening and closing balances of depreciated assets

cost of invested assets for each respective period.

(2) Investment income from the operation of insurance companies included $74,626 of

investment expense for the three months ended March 31, 2022compared to

$34,581 investment expenses for the three months ended March 31, 2021.

(3) Average return on average invested assets does not include investment

    income from cash equivalents.





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As Crusader entered into runoff, it will need to liquidate some of its
investment holdings to support its operations. Accordingly, the size of
Crusader's investment portfolio and investment income are expected to decrease.
Investment expenses are expected to decrease as the portfolio's invested assets
decrease.


The amortized cost, estimated fair value (adjusted for YTD unrealized gains and
losses) and weighted average yield of fixed maturity investments by contractual
maturity are as follows:



                                          Amortized                           Weighted

Maturities per year to March 31, 2022 Cost Fair value Average return

Due in one year                          $ 17,978,044     $ 17,974,935                1.83 %
Due after one year through five years      15,417,501       15,283,963                2.11 %
Due after five years through ten years     19,091,698       18,372,496                2.43 %
Due after ten years and beyond             15,068,613       14,513,270     
          2.36 %
Total                                    $ 67,555,856     $ 66,144,664                2.18 %



Maturities by Year at December 31,        Amortized                        
  Weighted
2021                                         Cost          Fair Value       Average Yield

Due in one year                          $ 15,758,755     $ 15,875,423                2.21

Due between one and five years 19,349,200 19,681,599

1.80

Due after five years up to ten years 19,335,034 19,832,093

2.39

Due after ten years and beyond             17,075,416       17,324,290     
          2.35
Total                                    $ 71,518,405     $ 72,713,405                2.18



Scheduled 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-term investments was
7.0 years from March 31, 2022and 6.7 years from December 31, 2021.

A summary of the estimated fair value, gross unrealized losses and number of
securities in a gross unrealized loss position by the period during which
securities have continuously been in this position is shown below:


                          Less than 12 Months                               

12 months or more

                                                                                                Gross
                   Estimated        Gross Unrealized        Number of         Estimated      Unrealized         Number of
                   Fair Value            Losses             Securities       Fair Value        Losses          Securities
March 31, 2022
U.S. Treasury
securities        $          -     $                -                  -     $   896,328     $   (98,208 )                 2
Corporate
securities          21,182,647               (755,757 )               29       1,806,455        (252,497 )                 4
Agency
mortgage-backed
securities          15,248,602               (394,717 )               37         860,650         (91,755 )                 2
Total debt
securities          36,431,249             (1,150,474 )               66       3,563,433        (442,460 )                 8
Equity
securities           1,162,916               (103,530 )              100          84,921         (11,312 )                11
Total             $ 37,594,165     $       (1,254,004 )              166     $ 3,648,354     $  (453,772 )                19





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                      Less than 12 Months                                     12 Months or Longer
                                      Gross                                               Gross
                   Estimated       Unrealized         Number of         Estimated      Unrealized
                   Fair Value        Losses          Securities        Fair Value        Losses        Number of Securities
December 31,
2021
U.S. Treasury
securities        $    481,875     $   (15,785 )                 1     $   476,016     $   (20,690 )                       1
Corporate
securities          13,152,240        (128,502 )                15       1,179,235         (68,006 )                       1
Agency
mortgage-backed
securities           5,086,187         (43,019 )                 8         471,479         (25,268 )                       1
Total debt
securities          18,720,302        (187,306 )                24       2,126,730        (113,964 )                       3
Equity
securities             665,100         (55,156 )                18          76,454          (4,703 )                       3
Total             $ 19,385,402     $  (242,462 )                42     $ 2,203,184     $  (118,667 )                       6



The fair value of the Company's investment portfolio at March 31, 2022 was
significantly impacted by higher market interest rates caused by the tightening
of monetary policy by the Federal Reserve and the economic impact of Russia's
invasion of Ukraine.



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. The unrealized losses
on all securities as of March 31, 2022, and December 31, 2021, were determined
to be temporary.


Fixed-maturity securities previously held by the Company were sold and
called before the deadline as follows:

                                         Three Months Ended
                                              March 31
                                        2022           2021

Fixed maturities securities sold
Number of securities sold                     -               1

Amortized cost of securities sold – $ $249,995
Earnings on sales

               $       -     $         2

Fixed maturities securities called
Number of securities called                   1               2

Amortized cost of securities called $524,987 $1,374,901
Gains (losses) made on calls $13 $99

Unrealized capital gains or losses on fixed maturities are accounted for as
“Accumulated other comprehensive income”, which is a separate component
equity, net of any deferred tax effect.

Other income



Other income included in Insurance Company Revenues and Other Insurance
Operations was $91,289 for the three months ended March 31, 2022, compared to
other loss of $26,212 for the three months ended March 31, 2021.  The increase
in other income during the three months ended March 31, 2022, is primarily
attributable to an increase in Crusader's share of California FAIR Plan Equity
of $134,598 offset by a decrease in rental income of $13,806 from the Mureau
building that was sold.




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Gross commissions and fees



Gross commissions and fees decreased $119,811 (-28%) to $313,650 for the three
months ended March 31, 2022, compared to gross commissions and fees of $433,461
for the three months ended March 31, 2021.



The comparison in gross commission and fee income for the three months ended
March 31, 2022, as compared to the three months ended March 31, 2021, are as
follows:



                                       Three Months Ended
                                            March 31
                               2022          2021          Change

Brokerage fee income $120,465 $235,895 ($115,430)
Health insurance program 185,941 178,975 6,966
Income from subscriptions and contributions 7,244 18,591 (11,347 )
Gross commissions and fees $313,650 $433,461 ($119,811)



Unifax sold insurance policies for Crusader until it was put into runoff and for
USIC until its contract with USIC ended on August 31, 2021. Unifax continues to
service the Crusader and USIC insurance policies.  For these brokerage services,
Unifax received commissions from insurance companies and fees from
policyholders. The commissions paid by Crusader to Unifax are eliminated as
intercompany transactions and are not reflected as income in the condensed
consolidated financial statements. Policy fee income received by Unifax is
related to the Crusader policies and service fee income received by Unifax is
related to the USIC policies. For financial statement reporting purposes,
brokerage fees are earned ratably over the life of the related insurance policy.
The unearned portion of the brokerage fees is recorded as a liability on the
Condensed Consolidated Balance Sheets under "Accrued expenses and other
liabilities." The earned portion of the brokerage fees charged to the
policyholder by Unifax is recognized as income in the condensed consolidated
financial statements. Brokerage fee income decreased $115,430 (-49%) in the
three months ended March 31, 2022, compared to the three months ended March 31,
2021, due primarily to reduction in policy counts. As a result of Crusader's
entering into runoff, the brokerage fee income, which is generated from
production of Crusader and USIC insurance policies, is expected to gradually
decrease over time. The Company does not expect any brokerage fee income in
2023.



AIB markets health insurance in California through non-affiliated insurance
companies for individuals and groups. For these services, AIB receives
commissions based on the premiums that it writes. Commission income increased
$6,966 (4%) in the three months ended March 31, 2022, compared to the three
months ended March 31, 2021. The increase in the commissions during the three
months ended March 31, 2022, is due to increase in override commissions for
health and life business, offset by decreases in commission income from
individual, group, and other health and life policies.



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 $11,347
(-61%) for the three months ended March 31, 2022, compared to the three months
ended March 31, 2021. The decrease in the membership and fee income during the
three months ended March 31, 2022, are due primarily to a decrease the
cancellation of a few large groups.



Finance charges and fees earned

Effective August 8, 2021, the Company decided to discontinue loan issuance
through AAC. 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 decreased $38,700 (-86%) to $6,298 for the three months ended
March 31, 2022, compared to $44,998 in fees earned during the three months ended
March 31, 2021, due primarily to the discontinuation of loan issuance through
AAC in August 2021. During the three months ended March 31, 2022, AAC issued 0
loans, and had 182 loans outstanding as of March 31, 2022.  During the three
months ended March 31, 2021, AAC issued 231 loans and had 745 loans outstanding
as of March 31, 2021.  AAC provided premium financing for Crusader and USIC
policies produced by Unifax in California. The Company will continue servicing
existing loans through their expiration in June 2022.




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Claims and claims adjustment expenses


Loss and loss adjustment expenses are the Company's largest expense item. The
loss ratio, which is calculated by dividing losses and loss adjustment expenses
by net earned premium, was 125% for the three months ended March 31, 2022,
compared to 85% for the three months ended March 31, 2021.  The loss ratio is
expected to increase as the Company settles additional claims and net earned
premium continues to decrease.



Claims and claims adjustment expenses and loss ratios are as follows:

                                              Three Months Ended March 31
                                         Loss                            Loss
                         2022            Ratio           2021            Ratio           Change
Net earned premium    $ 5,449,052                    $  6,603,760                     $ (1,154,708 )
Losses and loss
adjustment
expenses:
Provision for
insured events of
current year            6,121,111            112 %      6,757,564          
 102 %        (636,453 )
Development of
insured events of
prior years               710,393             13 %     (1,172,351 )          (17 )%      1,882,744
Total losses and
loss adjustment
expenses              $ 6,831,504            125 %   $  5,585,213             85 %       1,246,291




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



The $6,121,111 provision for insured events of current year for the three months
ended March 31, 2022, was $636,453 less than the $6,757,564 provision for
insured events of current year for the three months ended March 31, 2021, due
primarily to decreases in the IBNR reserves associated with the Apartments
business during the three months ended March 31, 2022.



The $710,393 unfavorable development of insured events of prior years for the
three months ended March 31, 2022, was $1,882,744 higher compared to the
$1,172,351 favorable development for the three months ended March 31, 2021, due
primarily to increases in direct IBNR associated with the Transportation
business.



Crusader has received a number of COVID-19-related business interruption claims.
With the exception of one claim for which the investigation is still ongoing,
all claims were denied after the individual circumstances of each claim were
reviewed to determine whether insurance coverage applied. Like many companies in
the property casualty insurance industry, Crusader was named as defendant in
lawsuits seeking insurance coverage under the policies issued by Crusader for
alleged economic losses resulting from the shutdown or suspension of their
businesses due to COVID-19. Although the allegations vary, the plaintiffs
generally seek a declaration of insurance coverage, damages for breach of
contract in unspecified amounts for claim denials, interest and attorney fees.
Some of the lawsuits also allege that the insurance claims were denied in bad
faith or otherwise in violation of state laws and seek extra-contractual or
punitive damages.




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



Crusader received seven civil unrest claims per August 1,
2022
. A claim remains open to possible subrogation. losses and losses
the settlement costs associated with this claim will not exceed Crusader’s costs
$500,000 retention of excess of loss reinsurance treaties.

The following table breaks down the unfavorable (favorable) development of total losses
and quarterly claims adjustment expenses since March 31, 2020:


                                            Adverse (Favorable)
             Provision for Insured        Development of Insured         

Total losses and losses

             Events of Current Year        Events of Prior Years          Adjustment Expenses

Three
Months
Ended:
March 31,
2022        $              6,121,111     $                 710,393     $               6,831,504
December
31, 2021                   6,290,918                     1,160,104                     7,451,022
September
30, 2021                   8,017,701                    (1,165,803 )                   6,851,898
June 30,
2021                       5,754,482                       330,225                     6,084,707
March 31,
2021                       6,757,564                    (1,172,351 )                   5,585,213
December
31, 2020                   6,758,848                      (202,270 )                   6,556,578
September
30, 2020                   9,385,389                     7,934,662                    17,320,051
June 30,
2020                       5,378,459                      (489,553 )                   4,888,906
March 31,
2020                       5,161,176                       716,209                     5,877,385




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.



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.




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The preparation of the Company's condensed consolidated financial statements
requires that management makes an 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. The
statistics reviewed for each accident year include: 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, 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
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
considered.



Policy acquisition costs


Policy acquisition costs consist of commissions, premium taxes, inspection fees,
and certain other underwriting costs that are directly related to the 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
                                             2022           2021           Change
Policy acquisition costs                   $ 285,641     $ 1,021,965     $ (736,324 )
Ratio to net earned premium (GAAP ratio)           5 %            15 %




Policy acquisition costs decreased due to discontinuation of underwriting
operations, which led to an overall decline in the ratio for three months
ended March 31, 2022compared to the three months ended March 31, 2021.

As a result of the runoff of Crusader, policy acquisition costs, which are
related to production of Crusader insurance policies, are expected to gradually
decrease over time. The Company does not expect any policy acquisition costs in
2023.


Salaries and benefits


Salaries and employee benefits decreased $269,686 (-24%) to $858,404 for the
three months ended March 31, 2022, compared to $1,128,090 for the three months
ended March 31, 2021.




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



                                                            Three Months Ended
                                                                 March 31
                                                   2022            2021           Change

Total salaries and benefits incurred $1,832,635 $2,173,440

     $ (340,805 )
Less: charged to losses and loss adjustment
expenses                                           (974,231 )      (567,338 )     (406,893 )
Less: capitalized to policy acquisition costs             -        (309,695 )      309,695
Less: charged to IT system upgrade                        -        (168,317 )      168,317
Net amount charged to operating expenses        $   858,404     $ 1,128,090
    $ (269,686 )




The decrease in the total salaries and employee benefits incurred for the three
months ended March 31, 2022, compared to the three months ended March 31, 2021,
was due primarily to reductions in headcount of non-claims personnel, partially
offset by increases in employee benefits costs as a result of higher medical
insurance rates.



As a result of the runoff of Crusader, salaries and employee benefits are
expected to decrease over time as the Company reduces its employee headcount to
adequately support the diminished operations. The decrease in the salaries and
employee benefits is expected to be partially offset by costs of severance paid
to terminated employees and retention bonuses paid to remaining employees.

Commissions to agents/brokers


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/brokers on the health insurance program decreased $1,381 (-7%) to $19,187
for the three months ended March 31, 2022, compared to $20,568 for the three
months ended March 31, 2021.  These decreases in commissions to agents/brokers
were due primarily to lower commissions associated with the loss of a large
group account.



Other operating expenses



Other operating expenses increased $365,981 (31%) to $1,539,460 for the three
months ended March 31, 2022, compared to $1,173,479 for the three months ended
March 31, 2021.  The increases in other operating expenses for the three months
ended March 31, 2022, compared to the three months ended March 31, 2021, were
primarily due to increases in legal fees to attorneys and examination fees paid
to California, offset by expense savings from no longer having a rental
property.



Income tax expense


Income tax expense was $547,301 (16% of pre-tax loss) for the three months ended
March 31, 2022 and income tax expense was $274,636 (-11% of pre-tax income) for
the three months ended March 31, 2021.



As of March 31, 2022, the Company had deferred tax assets of $9,529,432
generated from $45,378,251 of federal net operating loss carryforwards that will
begin to expire in 2035 and deferred tax assets of $2,458,655 generated from
state net operating loss carryforwards which begin to expire in 2028. 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 periods ended March 31, 2022 and
December 31, 2021, the Company has established a full valuation allowance
against all deferred tax assets in the amount of $13,049,316 and $11,939,459,
respectively, as in management's judgement they will not more-likely-than-not be
realized.




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Significant Accounting Policies and Estimates

The consolidated condensed financial statements included elsewhere in this
report have been prepared in accordance with accounting principles generally
accepted in the United States which require us to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
consolidated condensed financial statements and revenues and expenses during the
periods reported.  Actual results could differ from those estimates.
 Information with respect to our critical accounting policies and estimates
which we believe could have the most significant effect on our reported results
and require subjective or complex judgments by Management is contained in Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of our Annual Report on Form 10-K for the year ended December 31,
2021.  There have been no significant changes from the information discussed
therein.


OFF-BALANCE SHEET ARRANGEMENTS

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

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