UNAM Unico American Corp

Item 1.  Business.

OVERVIEW

General   

Unico American Corporation is an insurance holding company. Unico’s insurance company subsidiary Crusader Insurance Company (“Crusader”) has historically underwritten commercial property and casualty insurance. The Company’s subsidiaries Unifax Insurance Systems, Inc. (“Unifax”) and American Insurance Brokers, Inc. (“AIB”) provides marketing (except for Crusader) and continues to provide various underwriting support services related to property, casualty, health and life insurance. The Company’s subsidiary American Acceptance Company (“AAC”) provided insurance premium financing through August 2021, the Company’s subsidiary Insurance Club, Inc., dba AAQHC, an Administrator (“AAQHC”) provides membership association services. The Company’s subsidiary U.S. Risk Managers, 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.

In connection with the Company’s previously announced review of strategic alternatives, during the quarter ended September 30, 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 California Department of Insurance (“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 its subsidiary AAC, which activity is reflected on the Statements of Operations under “Other insurance operations.” 

Going Concern 

Based on Unico’s current cash and short‑term investments at December 31, 2021, 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 the foreseeable future.  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 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 has 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.

Supervision Agreement  

Crusader and the CA DOI entered into the “Supervision Agreement,” dated 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 expressed 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 provided that the Special Examiner meet with Crusader and develop a list of recurring payments under items (i) and (ii) that may not require prior written approval, which occurred. 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. The Special Examiner has recently informed Crusader that it 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. 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. The Company believes that as of September 30, 2021, the amount of such deficiency was $2,452,835. 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 $432,900 as of May 31, 2022. 

Independent Investigation 

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.

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 pre-tax 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 pre-tax costs of $62,269. The Company implemented another retention bonus plan to certain employees and expects to incur total pre-tax 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 has paid $270,705 in severance payments 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 and day-to-day administration of the business. 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, however, the investment portfolio recovered in value in subsequent quarters. 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.

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, 1^st Appellate District, Division 2 (A164412). The opening brief of Anchors & Whales LLC is due to be filed by August 12, 2022. 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 Arrangement

On August 31, 2021, Crusader and United Specialty Insurance Company (“ USIC”), terminated the Quota Share Reinsurance Agreement (the “New Reinsurance Agreement”), effective April 1, 2020, by and between Crusader and USIC. Pursuant to the New 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 New 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.

On August 31, 2021, as a result of the termination of the New 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 New 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 New 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 New Reinsurance Agreement was mutually terminated by Crusader and USIC. There were no early termination penalties incurred as a result of the termination. The New Reinsurance Agreement provides for a minimum ceding fee, and, upon termination of the New Reinsurance Agreement, the minimum ceding fee was pro-rated to the date of termination unless there were policies issued after the termination of the New Reinsurance Agreement. In such case, the minimum ceding fee will continue past the termination of the New Reinsurance Agreement until such time as no further policies are issued. USIC waived any additional ceding fees payable under the New Reinsurance Agreement under the agreement to terminate that agreement.

Under the New 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. As of April 30, 2022, the estimated market value decreased to $7,663,701. Such market values are used in the trust fund calculation by USIC. Because of Crusader’s loss of the AM Best rating and the decline in policyholder surplus, along with a decline in the market value of the securities there is an increase in the security requested by USIC to 325%.. If Crusader fails to provide the additional security requested by USIC, USIC may draw down the full amount of the funds in the reinsurance trust agreement. Crusader is reviewing the request of USIC. Any increase to the reinsurance trust account by Crusader will require the consent of the Special Examiner. Any drawdown of the reinsurance trust account by USIC may have a materially adverse effect on the financial condition of Unico. As of December 31, 2020, one corporate security, included in available-for-sale fixed maturities, was 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. On December 31, 2020, the estimated fair value and amortized cost of that security was $824,500 and $787,653, respectively.

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 have and will continue to decline significantly in the future. The insurance company operation revenues generated approximately 95.2% of consolidated revenues for the fiscal year ended December 31, 2021, compared to 93.6% of consolidated revenues for the fiscal year ended December 31, 2020. None of the Company’s other operations is individually material to consolidated revenues.

Description of Operations—General 

Descriptions of the Company’s operations in the following paragraphs are categorized between the Company’s primary segment, the insurance company operation, and “Other insurance operations.” The insurance company operation is conducted through Crusader, Unico’s property and casualty insurance company. Revenues from insurance company operation and other insurance operations for the years ended December 31, 2021 and 2020 were as follows:

INSURANCE COMPANY OPERATION

General

The Company’s insurance company operation is conducted through Crusader.  Crusader is a multiple line property and casualty insurance company that began transacting business on January 1, 1985.  From 2004 until June 2014, all of Crusader’s business was written in the state of California. Crusader’s business remains concentrated in California which was 100%, and 99.9%, in 2021, and 2020, respectively, of gross written premium before reinsurance ceded under reinsurance treaties.  Crusader underwrote three statutory annual statement lines of business: (1) CMP, (2) liability other than automobile commercial auto, and (3) fire. During the years ended December 31, 2021 and 2020, CMP policies comprised 99.7% and 99.6% of Crusader’s gross written premium, respectively.  CMP policies include both property and liability coverages.  Commercial property coverage insures against loss or damage to buildings, inventory, and equipment from natural disasters, including hurricanes, windstorms, hail, water, explosions, severe winter weather, and other events such as theft and vandalism, fires, storms, and financial loss due to business interruption resulting from covered property damage.  However, Crusader does not write earthquake coverage.  Commercial liability coverage insures against third-party liability from accidents occurring on the insured’s premises or arising out of its operation.  In addition to CMP policies, Crusader also writes separate policies to insure commercial property and commercial liability risks on a mono-line basis which provides either commercial property or commercial liability coverage, but not both.  Crusader is domiciled in California; and, as of December 31, 2021, Crusader is licensed as an admitted insurance carrier in the states of Arizona, California, Nevada, Oregon, and Washington.

Production and Servicing of Policies

Prior to being placed into runoff, Crusader historically sold its insurance policies through Unifax, a subsidiary of the Company and Crusader’s sister corporation and exclusive general agent.  All policies were produced by a network of independent brokers and agents.  

Adjusting of Claims 

Effective April 2020, the management and adjustment of Crusader claims is managed by U.S. Risk, a subsidiary of the Company and sister corporation of Crusader. U.S. Risk currently manages all of the claims of Crusader with a staff of in-house claim adjusters. This staff adjusts claims and oversees all outside claim services such as attorneys, independent or outside claim adjusters, investigators, and experts, as necessary. On April 23, 2020, the CA DOI advised Crusader of its non-disapproval of the move from Crusader’s claims adjusting function to U.S. Risk. All claims services being provided by U.S. Risk to Crusader are subject to the ultimate control of Crusader. In January 2022, the Company engaged a third-party administrator to assist in the adjustment of claims.

Reinsurance

A reinsurance transaction occurs when an insurance company transfers (cedes) a portion of its exposure on policies written to a reinsurer that assumes that risk for a premium (ceded premium).  Reinsurance does not legally discharge Crusader from primary liability under its policies.  If the reinsurer fails to meet its obligations, Crusader must nonetheless pay its policy obligations.  Crusader’s primary excess of loss reinsurance agreements, or treaties, during the years ended December 31, 2021 and 2020, with Renaissance Reinsurance U.S. Inc. & Hannover Ruck SE which are both A+ rated.  Crusader’s retention on losses is $500,0000 under these contracts.  Reinsurance treaties are generally structured in layers, with different negotiated economic terms and retention of participation, or liability, in each layer. 

Crusader’s primary excess of loss reinsurance agreements, or treaties, during the years ended December 31, 2021 and 2020, are with Renaissance Reinsurance U.S. Inc. & Hannover Ruck SE, both A+ rated. In calendar years 2021 and 2020, Crusader retained a participation in its excess of loss reinsurance treaties of 0% in its 1^st layer (reinsured losses between $500,000 and $1,000,000), 0% in its 2^nd layer (reinsured losses between $1,000,000 and $4,000,000), and 0% in its clash layer (reinsured losses between $4,000,000 and $8,000,000).  Crusader’s retention on losses is $500,000 under these contracts.

Crusader also has catastrophe (“CAT”) reinsurance treaties from various highly rated California authorized and California unauthorized reinsurance companies. These reinsurance treaties help protect Crusader against losses in excess of certain retentions from catastrophic events that may occur on property risks which Crusader insures. In calendar years 2021 and 2020, Crusader retained a participation in its catastrophe excess of loss reinsurance treaties of 5% in its 1^st layer (reinsured losses between $1,000,000 and $10,000,000) and 0% in its 2^nd layer (reinsured losses between $10,000,000 and $46,000,000).  Crusader’s retention on losses is $1,000,000 under these contracts. In 2022 the catastrophe excess of loss reinsurance treaties was reduced to $16,000,000 with 0% participation and 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, (the 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, 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.

The following tables present coverage limits and terms of Crusader’s reinsurance treaties

Crusader has no reinsurance recoverable balances in dispute.

Crusader evaluates each of its ceded reinsurance treaties at its inception to determine if there is sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting literature.  As of December 31, 2021, and 2020, all such ceded contracts are accounted for as risk transfer reinsurance.

The aggregate amount of ceded earned premium to Crusader’s reinsurers was $11,693,756 and $8,096,701, for the years ended December 31, 2021 and, 2020 respectively

The reinsurer pays a commission to Crusader on the portion of the premium that is ceded.  The commission includes reimbursement of the costs to acquire the policy.  The unpaid losses ceded to the reinsurer are recorded as an asset on the balance sheet.

In 2020, Crusader entered into a 100% Quota Share Agreement with USIC in which Crusader produced by Unifax assumed reinsurance ceded to it by USIC for commercial property and liability insurance written by USIC on a surplus lines’ basis. The assumed premium ceded to Crusader was $3,395,010 and $304,030 for years ended December 31, 2021 and 2020, respectively. The assumed losses for the business ceded to Crusader by USIC were $836,622 and $89,204 for the years ended December 31, 2021 and 2020, respectively. As disclosed above, in August 2021, Crusader and USIC terminated their Reinsurance Agreement. As a result of the termination of the Reinsurance Agreement, the Broker Agreement by and between Unifax and USIC, automatically terminated. As a result of the termination of the Broker Agreement, the Claims Administration Agreement by and between U.S. Risk and USIC, automatically terminated. 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.

Unpaid Losses and Loss Adjustment Expenses

Crusader maintains reserves for losses and loss adjustment expenses with respect to both reported and unreported losses.  When a claim for loss is reported to Crusader, a reserve is established for the expected cost to settle the claim, including estimates of any related legal expense and other costs associated with resolving the claim.  These reserves are called “case” reserves.  In addition, Crusader also establishes reserves at the end of each reporting period for losses that have occurred but have not yet been reported to Crusader.  These incurred but not reported losses are referred to as “IBNR” reserves.

Crusader establishes reserves for reported losses based on historical experience, upon case‑by‑case evaluation of facts surrounding each known loss, and upon the related policy provisions.  The amount of reserves for unreported losses is estimated by analysis of historical and statistical information.  The ultimate liability of Crusader may be greater or less than estimated reserves.  Reserves are monitored and adjusted when appropriate and are reflected in the statement of operations in the period of adjustment.  Reserves for losses and loss adjustment expenses are estimated to cover the future amounts needed to pay claims and related expenses with respect to insured events that have occurred.

Crusader does not discount to a present value the portion of loss and loss adjustment expense reserves expected to be paid in future periods.  Federal tax law, however, requires Crusader to discount loss and loss adjustment expense reserves for federal income tax purposes.

In 2020, Crusader experienced a significant increase in loss and loss adjustment expense reserves due to a $9,399,547 strengthening of IBNR reserves.  In 2021, there was positive loss development in total direct IBNR in six accident years. 

Net Written Premium to Statutory Surplus Ratio

The following table shows, for the periods indicated, Crusader's statutory ratio of net written premium (after reinsurance ceded) to statutory surplus.  Since each property and casualty insurance company has different capital needs, an "acceptable" ratio of net written premium to statutory surplus for one company may be inapplicable to another.  While there is no statutory requirement applicable to Crusader that establishes a permissible net premium to surplus ratio, guidelines established by the National Association of Insurance Commissioners (“NAIC”) provide that such ratio should generally be no greater than 3 to 1.  The following is Crusader’s ratios: 

Crusader’s results herein are reported in accordance with U.S. generally accepted accounting principles (“GAAP”).  These results differ from Crusader’s financial results reported in accordance with Statutory Accounting Principles (“SAP”) as prescribed or permitted by insurance regulatory authorities.  Crusader is required to file financial statements with insurance regulatory authorities prepared on an SAP basis.

SAP differs in certain respects from GAAP.  The more significant of these differences that apply to Crusader are:

Primary State Regulator

Crusader is regulated by the CA DOI and by the insurance departments of other states in which Crusader is authorized to transact insurance.  The insurance departments have broad regulatory, supervisory, and administrative powers over insurers that transact business in their states.  These powers relate primarily to the standards of solvency which must be met and maintained; the licensing of insurers and their agents; the nature and limitation of insurers' investments; the prior approval of rates, rules, and forms; the issuance of securities by insurers; periodic financial and market conduct examinations of the affairs of insurers; the annual and other reports required to be filed on the financial condition and results of operations of such insurers or for other purposes; and the establishment of reserves required to be maintained for unearned premium, losses, and other purposes.  The regulations and supervision by the insurance departments are designed principally for the benefit and protection of policyholders of insurance companies and not for the stockholders of the insurance companies or stockholders of the Company.  The insurance departments may perform market conduct examinations of Crusader to ensure compliance with applicable laws and regulations with respect to rating, underwriting and claims handling practices. A market conduct examination was last performed, and a report was adopted by the CA DOI on January 9, 2017. All issues identified during the examination were resolved to the satisfaction of the CA DOI and Crusader. None of the issues identified during the examination had any material effect on Crusader.

The CA DOI also conducts periodic financial examinations of Crusader. The CA DOI recently completed an examination of the financial statements and financial condition as of December 31, 2020, and for the period January 1, 2016 through December 31, 2020. The draft report of examination received by Crusader on May 23, 2022 did not contain significant findings except those related to the premium trust deficiency, which is discussed elsewhere in this report.

As described above, on September 10, 2021, Crusader and the CA DOI entered into the Supervision Agreement, dated September 7, 2021, at the request of the CA DOI, and Crusader continues to operate subject to the provisions of the Supervision Agreement.

Crusader is subject to risk-based capital (“RBC”) requirements.  RBC is a method developed by the NAIC and adopted in the California Insurance Code to determine the minimum amount of statutory capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile.  

The RBC provides standards for calculating a variable regulatory capital requirement related to a company's current operations and its risk exposures (asset risk, underwriting risk, credit risk and off‑balance sheet risk). These standards are intended to serve as a diagnostic solvency tool for insurance regulators that establish uniform capital levels and specific authority levels for actions when an insurer falls below minimum capital levels. The RBC specifies four distinct action levels at which either the insurance company or its domiciliary regulator must take certain actions. Generally, if a company’s RBC is at the Company Action Level, a heightened level of regulatory supervision will occur. A regulator can intervene with increasing degrees of authority over a domestic insurer if its RBC is equal to or less than 200% of its computed authorized control level RBC. A company's RBC is required to be disclosed in its statutory annual statement. The RBC is not intended to be used as a rating or ranking tool nor is it to be used in premium rate making or approval. Crusader’s adjusted capital at December 31, 2021 and 2020, was 214% and 278%, respectively, of the authorized control level RBC.

On 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. The CA DOI may accept Crusader’s 2022 RBC Plan to correct the conditions that lead to the 2022 Company Action Event, or it may request that a revised plan be submitted, or it may take no action with respect to the 2022 RBC Plan. On June 9, 2022, the CA DOI requested additional information regarding the 2022 RBC Plan, which information is to be submitted by July 24, 2022. 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.

The following table sets forth the different levels of risk-based capital that may trigger regulatory involvement and the corresponding actions that may result.

Insurance Regulatory Information System (“IRIS”) was developed by a committee of state insurance regulators primarily to assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies.  IRIS helps those companies that merit highest priority in the allocation of the regulators’ resources on the basis of 13 financial ratios that are calculated annually.  The analytical phase is a review of statutory annual statements and the financial ratios.  The ratios and trends are valuable in pointing to companies likely to experience financial difficulties but are not themselves indicative of adverse financial condition.  The ratio and benchmark comparisons are mechanically produced and are not intended to replace the state insurance departments’ own in-depth financial analysis or on-site examinations.

An unusual range of ratio results has been established from studies of the ratios of companies that have become insolvent or have experienced financial difficulties.  In the analytical phase, companies that receive four or more financial ratio values outside the usual range are analyzed in order to identify those companies that appear to require immediate regulatory action.  Subsequently, a more comprehensive review of the ratio results and an insurer’s statutory annual statement is performed to confirm that an insurer’s situation calls for increased or close regulatory attention.  

For the year ended December 31, 2021, Crusader’s IRIS values were unusual values in four ratios.  Those unusual values were caused by the continuing losses which Crusader sustained in 2021 as well as factors such as its investment yield on its portfolio.

For the year ended December 31, 2020, Crusader was outside the usual value range on IRIS ratio 5, 7 and 8 due primarily to Crusader’s statutory net loss of $12,862,588.  Crusader’s statutory net loss during the year ended December 31, 2020, was due primarily to increases in IBNR reserves associated with the Apartments & Commercial Buildings and Transportation Business resulting from higher estimates for expected claims frequency, claims severity and ultimate incurred losses and loss adjustment expenses.

California Insurance Guarantee Association 

The California Insurance Guarantee Association (“CIGA”) was created to provide for payment of claims for which insolvent insurers of mostly casualty lines are liable because such insurers’ assets are insufficient to satisfy the claims.  The Company is subject to assessment by CIGA for its pro-rata share of such claims based on written premium in the specific lines of business in the year preceding the assessment by insurers writing that line of insurance in California.  Such assessments are based upon estimates of losses to be incurred in liquidating an insolvent insurer.  Assessments are recouped through a mandated surcharge to policyholders the year after the assessment.  No assessment was made by CIGA for the 2021 and 2020 calendar years.

Holding Company Act

In addition to the Supervision Agreement discussed above, Crusader is also subject to regulation by the CA DOI pursuant to the provisions of the California Insurance Holding Company System Regulatory Act (the “Holding Company Act”).  Pursuant to the Holding Company Act, the CA DOI may examine the affairs of Crusader at any time.  Certain transactions defined to be of an extraordinary type may not be implemented without the prior approval of the CA DOI.  Such transactions include, but are not limited to, sales, purchases, exchanges, loans and extensions of credit, and investments made within the immediately preceding 12 months involving the lesser of 3% of admitted assets or 25% of statutory surplus as of the preceding December 31.  An extraordinary transaction also includes a dividend which, together with other dividends or distributions made within the preceding 12 months, exceeds the greater of 10% of the insurance company's statutory surplus as of the preceding December 31 or the insurance company's net income for the preceding calendar year.  An insurance company is also required to notify the CA DOI of any dividend after declaration, but prior to payment.

The Holding Company Act also provides that the acquisition or change of control of a California domiciled insurance company or of any person who controls such an insurance company cannot be consummated without the prior approval of the insurance commissioner.  In general, a presumption of control arises from the ownership of voting securities and securities that are convertible into voting securities, which in the aggregate constitute 10% or more of the voting securities of a California insurance company or a person who controls a California insurance company, such as Crusader.  A person seeking to acquire control, directly or indirectly of the Company must generally file with the insurance commissioner an application for change of control containing certain information required by statute and published regulations and provide a copy of the application to the Company.  The Holding Company Act also effectively restricts the Company from consummating certain reorganizations or mergers without prior regulatory approval.  The Company is in compliance with the Holding Company Act.

Rating

Insurance companies are rated to provide both industry participants and insurance consumers with meaningful information on specific insurance companies.  Higher ratings generally indicate financial stability and a strong ability to pay claims.  These ratings are based upon factors relevant to policyholders and are not directed toward protection of investors.  Such ratings are neither a rating of securities nor a recommendation to buy, hold or sell any security and may be revised or withdrawn at any time.  Ratings focus primarily on the following factors:  capital resources, financial strength, demonstrated management expertise in the insurance business, credit analysis, systems development, market segment position and growth opportunities, marketing, sales conduct practices, investment operations, enterprise risk management, minimum statutory surplus requirements and capital sufficiency to meet projected growth, as well as access to such traditional capital as may be necessary to continue to meet standards for capital adequacy.  

The claims-paying abilities of insurers are rated to provide both insurance consumers and industry participants with comparative information on specific insurance companies.  Claims-paying ratings are important for the marketing of certain insurance products.  

On September 24, 2021, A.M. Best (“A.M. Best”) downgraded Crusader’s Financial Strength Rating to C++ (Marginal) from B (Fair) and its Long-Term Issuer Credit Rating (Long-Term ICR) to “b” (Marginal) from “bb+” (Fair).  A.M. Best also downgraded Unico’s Long-Term ICR to “ccc-” (Weak) from “b” (Marginal). In addition, A.M. Best maintained the “under review with negative implications” status for these Credit Ratings.  On September 24, 2021, A.M. Best’s ratings reflected concerns regarding Crusader’s balance sheet strength, which A.M. Best assessed as weak, as well as its weak operating performance, limited business profile and marginal enterprise risk management.  A.M. Best stated that, while Crusader maintains sufficient liquidity, and its risk-adjusted capital levels remain at the strongest level, as measured by A.M. Best’s Capital Adequacy Ratio, the downgrades reflect the lowered assessment of the balance sheet strength given the enterprise’s diminished financial flexibility and the constraints imposed on Crusader by the CA DOI under the Supervision Agreement.  The A.M Best rating was withdrawn by the Company on September 24, 2021.

Some of Crusader’s policyholders, or the lenders, landlords or clients of Crusader’s policyholders, require insurance from a company that has an A.M. Best FSR of “A-” or higher, and the A.M. Best’s changed ratings of Crusader may also have a negative impact on Crusader’s reputation. Therefore, Crusader’s and Unico’s changed ratings and the ultimate withdrawal of these ratings would have a negative impact on the Company’s revenue and results of operations if Crusader’s operations were not in runoff. In addition, certain policyholders of Crusader may have cancelled their policies because of the change in the rating and ultimate withdrawal of these ratings. The Company cannot quantify the impact that the rating changes or the withdrawal of the ratings have had or will have on its revenue and results of operations.

Terrorism Risk Insurance Act of 2002

The Terrorism Risk Insurance Act (“TRIA”) was enacted by Congress in 2002 following the attacks on September 11, 2001 to address coverage for terrorism that largely became unavailable or prohibitively expensive by creating a Federal program under which the Federal government would share monetarily losses with insurers on commercial property and casualty losses due to a terrorist attack.  TRIA was initially enacted for a three-year term.  It has been reauthorized four times in 2005, 2007, 2015 and 2019.  The current reauthorization of TRIA will expire in 2027 unless further extended by action of Congress.  TRIA requires insurers to make terrorism insurance available to commercial policyholders but does not require purchase of such insurance by those policyholders.

Federal participation will be triggered when the Secretary of the Treasury, in concurrence with the Secretary of State and the Attorney General of the United States, certifies an act to be an act of terrorism.  Acts of terrorism must result in total insurance losses for such acts to be at least $200,000,000 for an act of terrorism to be certified under the Federal program.  Insurers have a deductible of 20% of any terrorism loss with the Federal government paying the remaining 80% of such losses.   Payments under the Federal program are subject to an aggregate retention of all insurers participating in the program of $37.5 billion. Under TRIA, all losses in any one program year are capped for both insurers and the Federal government at $100 billion.

All property and casualty insurance companies are required to participate in the program to the extent that they must make available property and casualty insurance coverage for terrorism that does not differ materially from the terms, amounts and other coverage limitations applicable to losses arising from events other than acts of terrorism. Policyholders of commercial insurance may waive coverage for terrorism in whole or in part. If a policyholder accepts coverage for terrorism, the Company must clearly state the premium charges resulting from coverage for certified acts of terrorism.  If coverage is declined or waived; the Company may add terrorism exclusions to the policy of such commercial policyholder.

The Company believes that its exposure to acts of terrorism is not substantial.  The Company does not write policies on commercial properties considered targets of terrorist activities such as airports, large hotels, large office structures, amusement parks, landmark defined structures, or other large-scale public facilities. The Company does not offer terrorism coverage on personal lines of insurance since it does not write personal lines of insurance.

In addition, the Company does not have a concentration of policies in any one area within California where increased exposure to terrorist threats may exist. Crusader received $42,910 and $56,975, in terrorism coverage premium from approximately 5% of its policyholders during the years ended December 31, 2021 and 2020, respectively. Crusader’s terrorism deductible was $7,252,974 and $6,791,640 during the years ended December 31, 2021 and, 2020, respectively.

Coverage for acts of terrorism under TRIA by the Company will cease as the current policies of insurance expire without renewal as a result of the runoff described in this report.

Data Privacy and Security

The Company may be subject to a range of complicated, diverse, and expanding federal, state, and local laws and regulations governing the collection, use, storage, and transfer of personal information.  In California, where the Company is headquartered and conducts business, certain laws such as the California Consumer Privacy Act of 2018 (“CCPA”), the California Privacy Rights Act (“CPRA”), and California Insurance Information Privacy and Protection Act (“CIIPPA”) may directly impact the Company’s operations.  At the federal level, standards set forth by the Federal Trade Commission (“FTC”), the privacy and security rules under the Gramm-Leach Bliley Act (“GLBA”), and the privacy and security rules under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and their respective implementing regulations may, from time to time, impact the Company depending on the nature of the Company’s operations and the types of suppliers and vendors utilized by the Company.

OTHER INSURANCE OPERATIONS

General Agency Operations

Unifax primarily sold and services CMP business insurance policies for Crusader in California. As a general agent, this subsidiary marketed, rated, underwrote, inspected and issues policies, bills and collects insurance premiums, and maintains accounting and statistical data.  Unifax is the exclusive general agent for Crusader.  The Company’s marketing was conducted through advertising to independent insurance agents and brokers.  For its services, the general agent received a commission (based on the written premium) from the insurance company and, in some cases, a policy fee from the customer.  This subsidiary holds licenses issued by the CA DOI and other states where applicable.

Insurance Premium Finance Operation

American Acceptance Corporation (“AAC”), a subsidiary of the Company, is a licensed insurance premium finance company that provided insurance purchasers with the ability to pay their insurance premium on an installment basis.  The premium finance company pays the insurance premium to the insurance company in return for a premium finance note from the insured.  These notes are paid off by the insured in nine monthly installments and are secured by the unearned premium held by the insurance company.  AAC provided premium financing solely for Crusader and assumed USIC policies that were produced by Unifax in California.  In August 2021, Unico discontinued its premium financing operations formerly conducted through its subsidiary AAC, which activity is reflected on the Statements of Operations under “Other insurance operations”. AAC had an outstanding receivable balance of $753,426 as of December 31, 2021 related to the premium financing arranged prior to August 2021.

Association Operation

AAQHC, Unico’s wholly owned subsidiary, is a membership association and a third-party administrator.  AAQHC provides various consumer benefits to its members, including participation in group dental, vision, and life insurance policies that it negotiates.  AAQHC also provides services as a third-party administrator and is licensed by the CA DOI.  For these services, AAQHC receives membership and fee income from its members.

Health Insurance Operation

American Insurance Brokers, Inc. (“AIB”), a subsidiary of the Company, markets health insurance in California as a general agency and an independent broker through non-affiliated insurance companies for individuals and groups.  The services provided consist of marketing, sales, and customer service.  For these services AIB receives commissions from insurance companies.  AIB holds licenses issued by the CA DOI.

Claims Management

In March 2020, the Company re-activated its U.S. Risk subsidiary so that in addition to handling Crusader’s claims it can provide claims adjustment services to non-affiliated insurers and to self-insurers on a fee-for-service basis (i.e., where Crusader will not be underwriting the risk), providing the potential for an alternative revenue source to the Company.

INVESTMENTS

The Company’s Board of Directors approved investment guidelines which 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 agreed to in advance in writing by Crusader, investments in the following types of securities are prohibited:

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 the sale of the custodial business by Union Bank to U.S. Bank.  

COMPETITION

Insurance Company and General Agency Operations (Property and Casualty)

The property and casualty markets in which the Company operates are highly competitive.  Property and casualty insurers generally compete on many factors, including price, commission rates, consumer recognition, coverages offered, financial stability, customer service and geographic coverage.  Competition is also affected by the pace of technological developments.  An insurer’s ability to innovate, develop and implement new applications and other technology can affect its competitive position.  The Company invested in technology in order to compete more effectively in the insurance marketplace.  The marketplace is highly cyclical, characterized by periods of high premium rates and shortages of underwriting capacity followed by periods of severe price competition and excess underwriting capacity.

The profitability of insurers is affected by many factors including premium adequacy, the frequency and severity of claims, state regulations, interest rates, general business conditions, and court decisions redefining and expanding the extent of coverage.  One of the challenging and unique features of the property and casualty insurance business is the fact that since premiums are collected before losses are paid, its products are normally priced before its costs are known.

Additional information regarding competition in the insurance marketplace is discussed in Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Insurance Premium Financing Operation

AAC’s insurance premium financing operation financed policies produced only through its sister company, Unifax.  Consequently, AAC’s growth was primarily dependent on the growth of Crusader and Unifax business.  From July 2010 to March 1, 2018, AAC offered 0% financing on policies produced by Unifax for Crusader.  Effective March 1, 2018, the annual percentage rate charged on AAC new loans increased from 0% to a single fixed interest rate.  Effective April 1, 2019, the Company converted from the single fixed interest rate for all financed policies to a tiered interest rate structure under which different fixed interest rates are charged based on amount of underlying financed premium.  The Company believes the interest rates charged by AAC were competitive and did not have a negative impact on its business.  As discussed above premium financing was discontinued and stopped being offered to policyholders in September 2021.

Health Insurance Operation

The health insurance market is uncertain due to changes in healthcare insurance mandated by recent federal legislation.  AIB markets a variety of health and life insurance products to individuals and groups.  These same products are offered by most of the Company’s competitors; thus service, reliability and stability are important to obtain and retain customers.

Employees

As of December 31, 2021, the Company had 38 employees.  As of June 24, 2022, the Company employed 26 full-time employees at its facility located in Calabasas, California. The Company has no collective bargaining agreements and believes its relations with its employees are excellent.

CONCENTRATION OF RISKS

100% and 99.9% of Crusader’s gross written premium was derived from California during the years ended December 31, 2021 and 2020, respectively. In 2021, approximately 26% and 58% of the $732,852 commission income from the Company’s health insurance program was from Guardian Life Insurance Company of America dental and group life plan programs and Blue Shield Care Trust health and life insurance programs, respectively. In 2020, approximately 30% and 56% of the $727,515 commission income from the Company’s health insurance program was from Guardian Life Insurance Company of America dental and group life plan programs and Blue Shield Care Trust health and life insurance programs, respectively.