UNICO AMERICAN CORP – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW



General

Unico American Corporation, referred to herein as the "Company" or "Unico," is
an insurance holding company. The Company's 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") provided marketing and
still provides 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 ("AAQHC"), an Administrator provides membership association services.



This overview discusses some of the relevant factors that management considers
in evaluating the Company's performance, prospects, and risks. It is not
all-inclusive and is meant to be read in conjunction with the entirety of the
management discussion and analysis, the Company's consolidated financial
statements and notes thereto, and all other items contained within the Company's
2020 Annual Report on Form 10-K as filed with the Securities and Exchange
Commission.



Total revenues for the three months ended September 30, 2021, were $8,595,648
compared to $8,259,686 for the three months ended September 30, 2020, an
increase of $335,962 (4%). Total revenues for the nine months ended September
30, 2021, were $28,199,908 compared to $24,241,094 for the nine months ended
September 30, 2020, an increase of $3,958,814 (16%). The increase in revenues
was primarily due to an increase in policies written in the Transportation line
of business. The Company had a net loss of $2,510,198 for the three months ended
September 30, 2021, compared to a net loss of $17,940,488 for the three months
ended September 30, 2020, a decrease in net loss of $15,430,290 (91%). The
Company had a net loss of $1,649,305 for the nine months ended September 30,
2021, compared to a net loss of $19,419,128 for the nine months ended September
30, 2020, a decrease in net loss of $17,769,823 (85%). On February 12, 2021, the
Company, through Crusader, completed the sale of the Company's headquarters at
26050 Mureau Road, Calabasas, California 91302, for $12,695,000 which netted
$12,028,876 (the "Sale"). The Company recognized a gain of $3,693,858 on the
sale of the building in 2021. The large decrease in net loss from 2020 compared
to 2021 was due to the substantial increase in IBNR as described in the Form
10-K for the year ended December 31, 2020, which generated a majority of the
loss.



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 will no longer renew
policies after December 8, 2021. Crusader has issued notices of non-renewal for
its existing in-force policies to terminate such policies at the expiration of
the current policy periods. Such notices of non-renewal are sent to
policyholders in the time frame required by state insurance laws and
regulations. 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. During the quarter ended September 30, 2021, Unico also
discontinued its premium financing operations formerly conducted through AAC.



Going Concern

Based on Unico's current cash and short­term investments at September 30, 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 condensed consolidated financial statements.



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During the quarter ended September 30, 2021, Unico's liquidity position
continued to deteriorate. 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 generally 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
California Department of Insurance (the "CA DOI") pursuant to the Supervision
Agreement (the "Supervision Agreement"), dated as of September 7, 2021, by and
between Crusader and the CA DOI, Crusader's decreased policyholder surplus
caused by additional underwriting losses during 2021, and the need to preserve
policyholder surplus at Crusader. 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 significant financial support to Unico, Unico will be unable
to continue to fund its continued operations and expenses. Additionally, many of
the potential strategic alternatives that the Unico Board 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 condensed consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and reclassification 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 recently 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
condensed 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 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 condensed consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.



Work Force Reduction

In connection with the runoff of Crusader, on October 7, 2021, 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
approximately $901,000, consisting of severance payments under the Company's
existing policy. The Company recognized these costs during the fourth quarter of
2021. 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 approximately $438,000. The Company recognized these costs ratably over
the retention service periods during the fourth quarter of 2021 and the first
quarter of 2022. The Company implemented another retention bonus plan to certain
employees in the amount of $256,000 which will be recognized ratable 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.



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Supervision Agreement



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. 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
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 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
approximately $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 $1,779,140 to Unifax, and Unifax in turn contributed the computer
system to Crusader at its book value of $1,779,140 as a direct reduction in the
amount due to Crusader which resulted in a dollar-for-dollar reduction in the
premium trust deficiency. As of March 1, 2022, the premium trust deficiency

was
$390,567.



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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.



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, 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 the 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 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."



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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. Plaintiffs have appealed this ruling.



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 will follow governmental safety guidelines in determining on when to
remove the coronavirus-related business restrictions and on when to request the
employees working from their homes to return to their workplaces for several
days per week; the Company estimates this will occur in the fourth quarter of
2021. 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 "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,
CMP, 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.



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.



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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 Managers, Inc. 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
run-off of the business reinsured.



The parties agreed to mutually terminate the Reinsurance Agreement. There are 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 shall be pro-rated to the
date of termination unless there are policies issued after the termination of
the Reinsurance Agreement. In such case, the minimum ceding fee shall continue
past the termination of the Reinsurance Agreement until such time as no further
policies are issued. Accordingly, the Company estimates that Crusader may pay an
additional $276,000 to USIC for the minimum ceding fee in addition to the
$120,000 previously paid.



IT System Upgrade

In 2018 the Company determined it need 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 for a total cost of $2,326,811,
which included the capitalization of its employees involved in the upgrade. 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, excluding the realized gain on real
estate sale, generated approximately 95% and 82% of consolidated revenues for
the three and nine months ended September 30, 2021, respectively, compared to
94% and 93% of consolidated revenues for the three and nine months ended
September 30, 2020, respectively. None of the Company's other operations is
individually material to consolidated revenues.



Insurance Company Operation

As of September 30, 2021, the Company's subsidiary Crusader was licensed as an
admitted insurance carrier in the states of Arizona, California, Nevada, Oregon,
and Washington. From 2004 until September 2014, all of Crusader's business was
written in the state of California. Crusader's business remains concentrated in
California (100% of gross written premium during the three and nine months ended
September 30, 2021, and 99.9% of gross written premium during the three and nine
months ended September 30, 2020, originated in California). During the three and
nine months ended September 30, 2021, approximately 99.9% and 99.7%,
respectively of Crusader's business was Commercial Multiple Peril ("CMP")
policies. During the three and nine months ended September 30, 2020,
approximately 99.6% and 99.8%, respectively 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                                 Nine Months Ended
                            September 30                                       September 30
                 2021             2020           Change           2021             2020            Change

California   $ 12,680,108     $ 9,653,326     $ 3,026,782     $ 34,729,771     $ 27,619,957     $ 7,109,814
Arizona                 -           3,435          (3,435 )              -           24,817         (24,817 )
Total
gross
written
premium      $ 12,680,108     $ 9,656,761     $ 3,023,347     $ 34,729,771 

   $ 27,644,774     $ 7,084,997

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                 Nine Months Ended
                                        September 30                     September 30
                                   2021             2020             2021             2020

Direct written premium $ 10,321,267 $ 9,551,749 $ 31,279,667 $ 27,355,064
Assumed written premium

           2,358,840          105,012        3,450,104          289,710
Less: written premium ceded
to reinsurers                    (3,111,266 )     (2,021,261 )     (8,748,322 )     (6,003,698 )
Net written premium               9,568,841        7,635,500       25,981,449       21,641,076
Change in direct unearned
premium                            (136,817 )       (460,746 )     (2,129,893 )       (610,418 )
Change in assumed unearned
premium                          (1,657,746 )        (44,023 )     (2,452,217 )       (211,675 )
Change in ceded unearned
premiums                            (36,656 )         (6,459 )        (90,209 )        (13,466 )
Net earned premium             $  7,737,622     $  7,124,272     $ 21,309,130     $ 20,805,517




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

Crusader's underwriting loss before income taxes is as follows:

                              Three Months Ended                                   Nine Months Ended
                                 September 30                                         September 30
                   2021              2020            Change             2021              2020            Change

Net written
premium        $  9,568,841     $   7,635,500     $   1,933,341     $ 25,981,449     $  21,641,076     $   4,340,373
Change in
net unearned
premium          (1,831,219 )        (511,228 )      (1,319,991 )     (4,672,319 )        (835,559 )      (3,836,760 )
Net earned
premium           7,737,622         7,124,272           613,350       21,309,130        20,805,517           503,613
Less:
Losses and
loss
adjustment
expenses          6,851,898        17,320,051       (10,468,153 )     18,521,818        28,086,342        (9,564,524 )
Policy
acquisition
costs             1,951,053         1,279,703          (671,350 )      4,078,563         3,626,154          (452,409 )
Total
underwriting
expenses          8,802,951        18,599,754        (9,796,803 )     22,600,381        31,712,496       (10,016,933 )
Underwriting
gain (loss)
before
income taxes   $ (1,065,329 )   $ (11,475,482 )   $  10,410,153     $ (1,291,251 )   $ (10,906,979 )   $  10,520,546




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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 the Company's income (loss) before taxes:

                                   Three Months Ended                 Nine Months Ended
                                      September 30                       September 30
                                 2021             2020              2021             2020

Underwriting gain (loss)
before income taxes          $ (1,065,329 )   $ (11,475,482 )   $ (1,291,251 )   $ (10,906,979 )
Insurance company
operation revenues:
Net investment income             427,244           477,145        1,470,846         1,487,335
Net realized investment
gains                              57,173            38,214          218,982            39,789
Net realized gains on real
estate sale                             -                 -        3,693,858                 -
Net unrealized investment
gains (losses) on equity
securities                       (147,722 )          19,670           18,559            42,629
Other income                       95,330            74,784          123,044           278,544
Other insurance operations
revenues:
Gross commissions and fees        385,548           461,540        1,234,720         1,388,494
Finance charges and fees
earned                             40,458            56,985          130,228           191,690
Other income (loss)                    (5 )           7,076              541             7,096
Less expenses:
Salaries and employee
benefits                        1,171,944         2,584,478        3,505,665         4,958,900
Commissions to
agents/brokers                     20,022            23,235           61,024            73,190

Other operating expenses 1,051,350 1,398,135 3,371,952 3,372,483
Loss before income taxes $ (2,450,619 ) $ (14,345,916 ) $ (1,339,114 ) $ (15,875,975 )

Unearned premiums represent premium applicable to the unexpired terms of
policies in force. The Company evaluates its unearned premiums periodically for
premium deficiencies by comparing the sum of expected claim costs, unamortized
deferred policy acquisition costs, and maintenance costs partially offset by net
investment income to related unearned premiums. To the extent that any of the
Company's programs become unprofitable, a premium deficiency reserve may be
required. The Company did not carry a premium deficiency reserve as of September
30, 2020 and did book an a allowance against deferred acquisition costs of
$848,711 as of September 30, 2021.



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



                        Three Months Ended           Nine Months Ended
                            September 30                September 30
                       2021            2020          2021           2020

Loss ratio (1)              89 %           243 %          87 %        135 %
Expense ratio (2)           36 %            36 %          33 %         38 %
Combined ratio (3)         125 %           279 %         120 %        173 %

(1) Loss ratio is defined as losses and loss adjustment expenses divided by net

earned premium.

(2) Expense ratio is defined as a sum of policy acquisition costs and portions of

indirect salaries and employee benefits and other operating expenses

allocation to the insurance company operations, reduced by allocation of

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

The calculation of this expense ratio is different from the one used for

computing the statutory accounting basis combined ratio.

(3) Combined ratio is defined as a sum of loss ratio and expense ratio. This

combined ratio is different from the statutory accounting basis combined

    ratio.




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



                            Three Months Ended                                   Nine Months Ended
                               September 30                                         September 30
                  2021             2020            Change             2021             2020            Change

Losses and
loss
adjustment
expenses:
Provision
for insured
events of
current
year          $  8,017,701     $  9,385,389     $  (1,367,688 )   $ 20,529,747     $ 19,925,024     $     604,723
Development
of insured
events of
prior years     (1,165,803 )      7,934,662        (9,100,465 )     (2,007,929 )      8,161,318       (10,169,247 )
Total
losses and
loss
adjustment
expenses      $  6,851,898     $ 17,320,051     $ (10,468,153 )   $ 18,521,818     $ 28,086,342     $  (9,564,524 )

For further analysis of losses and loss adjustment expenses, refer to "Results
of Operations".

On September 24, 2021, A.M. Best Company ("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 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.



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Revenues from Other Insurance Operations

The Company's revenues from other insurance operations consist of commissions,
fees and other income. These operations accounted for approximately 5% and 6% of
total revenues, excluding the realized gain on real estate sale, in the three
and nine months ended September 30, 2021, respectively, compared to
approximately 7% of total revenues in both the three and nine months ended

September 30, 2020.



Investments



The Company generated revenues from its total invested assets of $85,602,034 and
$87,154,400 as of September 30, 2021, and 2020, respectively. Investment income
(net of investment expenses) decreased $49,901 (10%) and $16,489 (1%) to
$427,244 and $1,470,846 for the three and nine months ended September 30, 2021,
respectively, compared to $477,145 and $1,487,335 for the three and nine months
ended September 30, 2020, respectively. 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.



Due to the current interest rate environment, the current target effective
duration for the Company's investment portfolio is between 2.0 and 4.0 years. As
of September 30, 2021, 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 September 30, 2021, the weighted average
maturity of the Company's investments was approximately 6.9 years, and the
effective duration for available-for-sale investments (investments managed under
the investment guidelines) was 2.4 years.

LIQUIDITY AND CAPITAL RESOURCES

The Company prepared the accompanying condensed consolidated financial
statements 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 generally 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, Crusader's decreased
policyholder surplus caused by additional underwriting losses during 2021, and
the need to preserve policyholder surplus at Crusader. 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 significant financial support to
Unico, Unico will be unable to continue to fund its continued operations and
expenses. 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 condensed consolidated financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and reclassification 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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Crusader has a significant amount of cash 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
Crusader. Cash and investments (at amortized cost) of Crusader at September 30,
2021, were $99,314,669 compared to $87,575,700 at December 31, 2020.



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.

On December 31, 2020, and December 31, 2021, Crusader's Risk Based Capital
("RBC") total adjusted capital 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 a Company Action Level Event under the
RBC. 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 will take to correct the conditions that resulted in the
Company Action Level Event and on July 2, 2021, submitted a revised RBC Plan
which addressed questions raised by the CA DOI. As of the date of the filing of
this Quarterly Report on Form 10-Q, the CA DOI has not accepted the revised RBC
Plan. 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, the Company and
Crusader may not be able to take 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 Company has until April 15, 2022 to submit another RBC plan for
the year-ended December 31, 2021.

In 2021, the policyholder surplus of Crusader decreased because Crusader
experienced net losses for the quarters ended March 31, 2021, June 30, 2021, and
September 30, 2021.

As of September 30, 2021, all of the Company's investments are in U.S. Treasury
securities, FDIC insured certificates of deposit, corporate fixed maturity
securities, agency mortgage-backed securities, common stock and short-term
investments. All of the Company's investments, except for the certificates of
deposit, are readily marketable.

The composition of Company's investment portfolio is as follows:

                                    September 30, 2021                 December 31, 2020
                                Amortized           Fair          Amortized           Fair
                                   Cost            Value             Cost            Value

Fixed maturities:
U.S. Treasury securities       $  7,271,118     $  7,347,117     $ 10,596,808     $ 10,832,181
Corporate securities             46,124,041       47,469,519       44,159,926       46,451,905
Agency mortgage-backed
securities                       23,452,719       23,892,554       25,314,546       26,125,608
Certificates of deposit             548,000          548,000          798,000          798,000
Total fixed maturity
investments                      77,395,878       79,257,190       80,869,280       84,207,694
Equity securities                 3,466,331        3,683,154        2,548,440        2,746,706
Short-term investments            2,661,690        2,661,690          200,000          200,000
Total investments              $ 83,523,899     $ 85,602,034     $ 83,617,720     $ 87,154,400




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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.



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 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:

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

· Derivative mortgage-backed securities including interest only, principal

only and inverse floating rate securities.

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

securities (including pass through securities and collateralized mortgage

        obligations) that are backed by agency and non-agency collateral and
        commercial mortgage-backed securities.
    ·   Options and futures contracts.
    ·   All non-U.S. dollar denominated securities.
    ·   Any security that would not be in compliance with the regulations of
        Crusader's state of domicile.




An independent investment advisor manages Crusader's investments. The advisor's
role currently is limited to maintaining Crusader's portfolio within the
investment guidelines and providing investment accounting services to the
Company. 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 September 30, 2021, three U.S. Treasury securities and three agency
mortgage-back securities, included in available-for-sale fixed maturities, 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 estimated fair value and amortized cost of these securities was $8,584,173
and $8,446,981 on September 30, 2021, respectively.



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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 called the 2008 Program to acquire,
from time to time, up to an aggregate of 500,000 shares of the Company's common
stock. The purchases under the 2020 Program may be made, from time to time, in
the open market through block trades, 10b5-1 trading plans, privately negotiated
transactions or otherwise and in accordance with applicable laws, rules and
regulations. The timing and actual number of the shares repurchased under the
2020 Program will depend on a variety of factors including price, market
conditions and corporate and regulatory requirements. The Company intends to
fund the share repurchases under the 2020 Program from cash on hand. The 2020
Program does not commit the Company to repurchase shares of its common stock and
it may be amended, suspended, or discontinued at any time. The Company
repurchased its shares under the 2020 Program and 2008 Program in unsolicited
transactions as follows:



                                     Three Months Ended          Nine Months Ended
                                        September 30                September 30
                                     2021           2020         2021          2020

2020 Program

Number of shares repurchased             22            630           22    

630

Cost of shares repurchased
Allocated to retained earnings     $     92       $  2,969     $     92       $ 2,969
Allocated to capital                     10            310           10    

310

Total cost of shares repurchased $ 102 $ 3,279 $ 102

  $ 3,279

2008 Program
Number of shares repurchased              0             -0            0           978
Cost of shares repurchased

Allocated to retained earnings     $      0       $      0     $      0       $ 5,760
Allocated to capital                      0              0            0    

480

Total cost of shares repurchased $ 0 $ 0 $ 0

  $ 6,240

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 September 30, 2021. The Company has not retired or will retire all stock
repurchased under the 2020 Program and 2008 Program: it can retire all stock
repurchased under the 2020 Program and 2008 Program.



The Company reported $111,442 net cash used by operating activities for the nine
months ended September 30, 2021, compared to $3,634,617 net cash used by
operating activities for the nine months ended September 30, 2020. 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.



RESULTS OF OPERATIONS



All comparisons made in this discussion compare the three and nine months ended
September 30, 2021, to the three and nine months ended September 30, 2020,
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 and nine months ended September 30, 2021, total revenues were
$8,595,648, an increase of $335,962 (4%) and $28,199,908, an increase of
$3,958,814 (16%) compared to total revenues of $8,259,686 and $24,241,094 for
the three and nine months ended September 30, 2020, respectively. For the three
and nine months ended September 30, 2021, the Company had a loss before taxes of
$1,601,908 and $490,403, respectively, compared to a loss before taxes of
$14,345,916 and $15,875,975 for the three and nine months ended September 30,
2020, respectively. For the three and nine months ended September 30, 2021, the
Company had net loss of $2,510,198 and net loss of $1,649,305 , respectively,
compared to net loss of $17,940,488 and $19,419,128, for the three and nine
months ended September 30, 2020, respectively.



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The increase in revenues of $335,962 for the three months ended September 30,
2021, when compared to the three months ended September 30, 2020, was primarily
due to an increase in net earned premium of $613,350 (9%). The increase in
revenues of $3,958,814 for the nine months ended September 30, 2021, when
compared to the nine months ended September 30, 2020, was primarily due to the
realized gain of $3,693,858 on the sale of the Calabasas Building.



The loss before tax of $2,450,619 for the three months ended September 30, 2021,
compared to loss before taxes of $14,345,916 for the three months ended
September 30, 2020, was due primarily to a decrease in losses and loss
adjustment expenses of $10,468,153 (60%) and a decrease in salaries and employee
benefits of $1,412,534 (55%). The loss before tax of $1,339,114 for the nine
months ended September 30, 2021, compared to loss before taxes of $15,875,975
for the nine months ended September 30, 2020, was due primarily to the realized
gain of $3,693,858 on the sale of the Calabasas Building, an increase in policy
acquisition costs of $452,409 (12%), a decrease in losses and loss adjustment
expenses of $9,564,524 (34%) and a decrease in salaries and employee benefits of
$1,423,235 (29%). As a result of the runoff of Crusader, revenues and losses in
future periods will not be comparable to past periods because Crusader ceased
writing new policies in September 2021, and ceased renewing policies as of

December 8, 2021



Crusader premium

Crusader's primary lines of business are CMP policies. These policies
represented approximately 99.6% and 99.8% of Crusader's total written premium
for the years ended September 30, 2021, and 2020, respectively.

Gross written premium (direct and assumed written premium before cessions to
reinsurers under reinsurance treaties) reported on Crusader's statutory
financial statements increased $3,023,347 (31%) and $7,084,997 (26%) to
$12,680,108 and $34,729,771 for the three and nine months ended September 30,
2021, respectively, compared to $9,656,761 and $27,644,774 for the three and
nine months ended September 30, 2020, respectively.



The increase in gross written premium for the three and nine months ended
September 30, 2021, was due primarily to growth in the Company's Transportation
Business. The Transportation Business transacts insurance primarily for
long-haul trucking operations domiciled in California. The growth in the
Company's Transportation Business was partially offset by the decrease in the
Building's Business.



As a result of the runoff of Crusader, Crusader will not generate significant
levels of written premium in the future. Crusader was obligated by regulatory
requirements to offer renewal policies to those policyholders who could not be
issued non-renewal notices immediately after the commencement of the runoff of
Crusader, which are policies with policy renewal dates of 60 days or less from
the date Crusader went into runoff. Accordingly, Crusader ceased generating any
renewal premium on December 8, 2022.



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.



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Gross earned premium



Gross earned premium increased $1,733,552 (19%) to $10,885,544 and $3,324,981
(12%) to $30,147,662 for the three and nine months ended September 30, 2021,
respectively, compared to $9,151,992 and $26,822,681 for the three and nine
months ended September 30, 2020, respectively. All policies are written on
annual basis. Earned premium represents a portion of written premium that is
recognized as income in the 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
increase in gross earned premium was due primarily to an increase in gross
written premium in 2020 and 2021.



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)
increased $1,120,202 (55%) to $3,147,922 and $2,821,368 (47%) to $8,838,532 for
the three and nine months ended September 30, 2021, compared to $2,027,720 and
$6,017,164 for the three and nine months ended September 30, 2020, respectively.
Ceded earned premium as a percentage of gross earned premium was 29% for the
three and nine months ended September 30, 2021, respectively, and 22% for both
the three and nine months ended September 30, 2020. The increase in the ceded
earned premium as a percentage of gross earned premium for the three and nine
months ended September 30, 2021, compared to the three and nine months ended
September 30, 2020, was due primarily to higher rates on the excess of loss
reinsurance treaty.

Ceded earned premium is based on gross earned premium. As a result of the runoff
of Crusader, the ceded earned premium will gradually decrease over time.
Crusader does not expect any ceded earned premium 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 2021 and 2020, Crusader retained 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 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 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).



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
September 30, 2021, 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                 Nine Months Ended
                                       September 30                      September 30
                                   2021             2020             2021             2020

Direct earned premium          $ 10,184,451     $  9,091,002     $ 29,149,775     $ 26,744,646
Assumed earned premium              701,093           60,989          997,887           78,035
Ceded earned premium             (3,147,922 )     (2,027,720 )     (8,838,532 )     (6,017,164 )
Net earned premium             $  7,737,622     $  7,124,272     $ 21,309,130     $ 20,805,517
Ratio of ceded earned
premium to gross earned
premium (direct and assumed
earned premium)                          29 %             22 %             29 %             22 %

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

Investment income decreased $49,901 (10%) to $427,244 and $16,489 (1%) to
$1,470,846 for the three and nine months ended September 30, 2021, respectively,
compared to $477,145 and $1,487,335 for the three and nine months ended
September 30, 2020, respectively. This decrease in investment income was due
primarily to an increase in the lower yielding cash equivalents during the three
and nine months ended September 30, 2021, and a smaller overall portfolio than
in the 2020. The Company had net realized investment gains of $57,173 and
$218,982 for the three and nine months ended September 30, 2021, respectively,
compared to net realized investment gains of $38,214 and $39,789 for the three
and nine months ended September 30, 2020, respectively. The Company had net
unrealized investment losses on equity securities of $147,722 and gains of
$18,559 for the three and nine months ended September 30, 2021, compared to net
unrealized gains of $19,670 and $42,629 for the three and nine months ended
September 30, 2020, respectively.



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                Nine Months Ended
                                       September 30                       September 30
                                   2021             2020             2021             2020

Average invested assets (1)
- at amortized cost            $ 89,173,860     $ 82,652,749     $ 83,570,810     $ 82,931,005
Net investment income from:
Invested assets (2)            $    427,222     $    477,103     $  1,470,405     $  1,483,670
Invested Cash                            22               42              441            3,665
Total investment income        $    427,244     $    477,145     $  1,470,846     $  1,487,335
Average yield on average
invested assets (3)                     1.9 %            2.3 %            2.3 %            2.4 %

(1) The average is based on the beginning and ending balance of the amortized

cost of the invested assets for each respective period.

(2) Investment income from insurance company operation included $38,855 and

$110,887 of investment expense for the three and nine months ended September

30, 2021, respectively, compared to $32,974 and $100,761 of investment

expense for the three and nine months ended September 30, 2020, respectively.

(3) Average yield on average invested assets did not include the investment

    income from cash equivalents.

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.

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

Maturities by Year at            Par          Amortized                           Weighted
September 30, 2021              Value            Cost          Fair Value       Average Yield

Due in one year             $ 14,995,000     $ 15,011,137     $ 15,178,570                2.19 %
Due after one year
through five years            22,696,119       22,804,524       23,363,295                1.82 %
Due after five years
through ten years             18,717,649       18,793,070       19,502,697                2.41 %
Due after ten years and
beyond                        20,319,818       20,787,147       21,212,628                2.34 %
Total                       $ 76,728,586     $ 77,395,878     $ 79,257,190                2.17 %




Maturities by Year at            Par          Amortized                           Weighted
December 31, 2020               Value            Cost          Fair Value       Average Yield

Due in one year             $ 11,070,641     $ 11,064,202     $ 11,169,232                2.57 %
Due after one year
through five years            30,065,671       30,090,910       31,260,694                2.59 %
Due after five years
through ten years             18,363,570       18,476,051       19,806,444                2.51 %
Due after ten years and
beyond                        20,927,571       21,238,117       21,971,324                2.63 %
Total                       $ 80,427,453     $ 80,869,280     $ 84,207,694                2.58 %

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

The weighted average maturity of the Company's fixed maturity investments was
6.9 years as of September 30, 2021, and 8.0 years as of December 31, 2020.

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

                      Less than 12 Months                                        12 Months or Longer
                                      Gross
                   Estimated       Unrealized         Number of         Estimated      Gross Unrealized
                   Fair Value        Losses          Securities        Fair Value           Losses           Number of Securities

September 30,
2021
U.S. treasury
securities        $    960,235     $   (33,947 )                 2     $         -     $               -                         -
Corporate
securities          12,229,369         (67,056 )                14       1,186,701               (60,464 )                       1
Agency
mortgage-backed
securities           1,521,290         (15,100 )                 2         472,074               (24,583 )                       1
Total debt
securities          14,710,894        (116,103 )                18       1,658,775               (85,047 )                       2
Equity
securities           1,315,491        (109,566 )                32          84,903               (10,138 )                       4
Total             $ 16,026,385     $  (225,669 )                50     $ 1,743,678     $         (95,185 )                       6




                                 Less than 12 Months                                   12 Months or Longer
                                      Gross                                                  Gross
                   Estimated        Unrealized         Number of         Estimated        Unrealized          Number of
                   Fair Value         Losses          Securities        Fair Value          Losses           Securities
December 31,
2020
Corporate
securities        $  2,101,986     $    (55,847 )                 2     $         -       $         -                   -
Agency
mortgage-backed
securities           3,223,329          (22,274 )                12               -                 -                   -
Total debt
securities           5,325,315          (78,121 )                14               -                 -                   -
Equity
securities             723,346          (37,357 )                25               -                 -                   -
Total             $  6,048,661     $   (115,478 )                39     $         -       $         -                   -




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While the fair value of Company's investment portfolio at September 30, 2021 has
recovered from the declines recorded in the first half of 2020, the effects of
the coronavirus pandemic were a major contributor to the variability in fair
value of the Company's fixed income and equity investments during the nine
months ended September 30, 2021, and the economic uncertainty caused by the
pandemic may lead to further investment valuation volatility. In addition, the
recent decline in investment yields resulted in lower reinvestment rates,
compared to the 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. Additionally,
the Company has a smaller portfolio balance than in the past and will continue
to withdrawal funds from the investment portfolio to pay for claims and
operations of the business.



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 September 30, 2021, and December 31, 2020, were
determined to be temporary.

The fixed maturity securities previously held by the Company were sold and
called prior to maturity as follows:

                                       Three Months Ended               Nine Months Ended
                                          September 30                    September 30
                                      2021            2020            2021            2020

Fixed maturities securities sold
Number of securities sold                    -               6               3               7
Amortized cost of sold
securities                         $         -     $ 2,923,386     $ 2,193,393     $ 3,524,702
Realized gains on sales            $         -     $    30,057     $       710     $    31,171

Fixed maturities securities
called
Number of securities called                  4               1               7              -3
Amortized cost of called
securities                         $ 2,929,834     $   249,998     $

5,323,613 $ 1,949,536
Realized (losses) gains on calls $ 166 $ 2 $ (18,613 ) $ 464

The unrealized gains or losses from fixed maturities are reported as
"Accumulated other comprehensive income or loss," which is a separate component
of stockholders' equity, net of any deferred tax effect.

Other income



Other income included in Insurance Company Revenues and Other Insurance
Operations was $95,225 and $123,585 for the three and nine months ended
September 30, 2021, respectively, compared to $81,860 and $285,640 for the three
and nine months ended September 30, 2020, respectively. The decrease in other
income during the nine months ended September 30, 2021, is primarily
attributable to a decrease in rental income as a result of the sale of the
building owned by Crusader, while the increase in the three months ended
September 30, 2021, is due to a receipt of commission from a reinsurance
contract.



Gross commissions and fees

Gross commissions and fees decreased $75,992 (16%) to $385,548 and $153,774
(11%) to $1,234,720 for the three and nine months ended September 30, 2021,
respectively, compared to gross commissions and fees of $461,540 and $1,388,494
for the three and nine months ended September 30, 2020, respectively.

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The comparison in gross commission and fee income for the three and nine months
ended September 30, 2021, as compared to the three and nine months ended
September 30, 2020, are as follows:

                           Three Months Ended                            Nine Months Ended
                              September 30                                 September 30
                    2021          2020         Change          2021            2020           Change

Brokerage fee
income            $ 207,027     $ 233,818     $ (26,791 )   $   650,519     $   760,486     $ (109,967 )
Health
insurance
program             170,138       204,352       (34,214 )       547,600         557,634        (10,034 )
Membership and
fee income            8,383        23,370       (14,987 )        36,601          70,374        (33,773 )
Gross
commissions and
fees              $ 385,548     $ 461,540     $ (75,992 )   $ 1,234,720     $ 1,388,494     $ (153,774 )

Unifax sells and services insurance policies for Crusader and did the same for
USIC, until its contract with USIC ended on August 31, 2021. 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 $26,791 (11%) and $109,967
(14%) in the three and nine months ended September 30, 2021, respectively,
compared to the three and nine months ended September 30, 2020, 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 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 decreased
$34,214 (17%) and $10,034 (2%) in the three and nine months ended September 30,
2021, respectively, compared to the three and nine months ended September 30,
2020. The decreases in the commissions during the three and nine months ended
September 30, 2021, is due to the cancellation of a few large groups.



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 $14,987
(64%) and $33,773 (48%) for the three and nine months ended September 30, 2021,
respectively, compared to the three and nine months ended September 30, 2020.
The decreases in the membership and fee income during the three and nine months
ended September 30, 2021, are due primarily to a decrease the cancellation

of a
few large groups.

Finance charges and fees earned

Finance charges and fees earned consist of finance charges, late fees, returned
check fees and payment processing fees. These charges and fees earned by AAC
decreased $16,527 (29%) to $40,458 and $61,462 (32%) to $130,228 for the three
and nine months ended September 30, 2021, respectively, compared to $56,985 and
$191,690 in fees earned during the three and nine months ended September 30,
2020, respectively, due primarily to the decrease in the number of policies
financed. During the three and nine months ended September 30, 2021, AAC issued
131 and 563 loans, respectively, and had 572 loans outstanding as of September
30, 2021. During the three and nine months ended September 30, 2020, AAC issued
288 and 929 loans, respectively, and had 944 loans outstanding as of September
30, 2020. AAC provides premium financing for Crusader and USIC policies produced
by Unifax in California. Effective August 6, 2021, the Company decided to
discontinue loan issuance through AAC. The Company will continue servicing
existing loans but is no originating loans as per above.



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Losses and loss 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 89% and 87% for the three and nine months ended
September 30, 2021, compared to 243% and 135% for the three and nine months
ended September 30, 2020.

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

                                           Three Months Ended September 30
                                        Loss                             Loss
                        2021            Ratio            2020            Ratio          Change

Net earned
premium             $  7,737,622                     $  7,124,272                    $     613,350

Losses and loss
adjustment
expenses:
Provision for
insured events of
current year           8,017,701            104 %       9,385,389            132 %      (1,367,688 )
Development of
insured events of
prior years           (1,165,803 )          (15 )%      7,934,662            111 %      (9,100,465 )
Total losses and
loss adjustment
expenses            $  6,851,898             89 %    $ 17,320,051            243 %     (10,468,153 )



                                            Nine Months Ended September 30
                                        Loss                             Loss
                        2021            Ratio            2020            Ratio           Change

Net earned
premium             $ 21,309,130                     $ 20,805,517                    $     503,613

Losses and loss
adjustment
expenses:
Provision for
insured events of
current year          20,529,747             96 %      19,925,024             96 %         604,723
Development of
insured events of
prior years           (2,007,929 )           (9 )%      8,161,318             39 %     (10,169,247 )
Total losses and
loss adjustment
expenses            $ 18,521,818             87 %    $ 28,086,342          

 135 %   $  (9,564,524 )




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.



The $8,017,701 provision for insured events of current year for the three months
ended September 30, 2021, was $1,367,688 less than the $9,385,389 provision for
insured events of current year for the three months ended September 30, 2020,
due primarily to increases in the IBNR reserves associated with the Buildings
and Transportation business during the three months ended September 30, 2020. As
reported previously, in 2020 there was a large increase in IBNR which is also
impacted this analysis.



The $1,165,803 favorable development of insured events of prior years for the
three months ended September 30, 2021, was $9,100,465 higher compared to the
$7,934,662 adverse development for the three months ended September 30, 2020,
due primarily to increases in 2018 and 2019 accident year IBNR reserves
associated with the Buildings and Transportation business during the three
months ended September 30, 2020.



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The $20,529,747 provision for insured events of current year for the nine months
ended September 30, 2021, was $604,723 higher than the $19,925,024 provision for
insured events of current year for the nine months ended September 30, 2020, due
primarily to the increase in the 2021 accident year IBNR reserves associated
with the Transportation business as a result of premium growth in that line of
business. Also, contributing to the increase was a higher frequency and severity
of liability claims related to the Transportation business. The higher severity
of the Transportation liability claims was caused by several fatal accidents
which involved drivers insured by Crusader.



The $2,007,929 favorable development of insured events of prior years for the
nine months ended September 30, 2021, was $10,169,247 higher compared to the
$8,161,318 adverse development for the nine months ended September 30, 2020, due
primarily to increases in 2018 and 2019 accident year IBNR reserves associated
with the Buildings and Transportation business during the three months ended
September 30, 2020.



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.



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 has received seven claims related to civil unrest through March 1,
2022. One claim remains open for potential subrogation. The losses and loss
adjustment expenses associated with those claims will not exceed Crusader's
$500,000 excess of loss reinsurance treaty retention.

The following table breaks out adverse (favorable) development from total losses
and loss adjustment expenses quarterly since September 30, 2019:

                                            Adverse (Favorable)
             Provision for Insured        Development of Insured         

Total Losses and Loss

             Events of Current Year        Events of Prior Years          Adjustment Expenses

Three
Months
Ended:
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
December
31, 2019                   5,400,410                     1,824,349                     7,224,759
September
30, 2019                   4,299,018                       838,956                     5,137,974





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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.



Repeated and sustained underwriting losses in Crusader's Buildings line of
business and growth in Crusader's Transportation line of business, a product
which is generally known for its difficulty to be underwritten profitably,
coupled with changes in the market conditions, caused Crusader management to
reevaluate the assumptions used in its process for estimating loss and loss
adjustment expense reserves during the three months ended September 30, 2020.
This reevaluation and the use of updated assumptions led to significantly more
conservative estimates for expected claims frequency, claims severity and
ultimate incurred losses and loss adjustment expenses during the quarterly
re-evaluation of the loss and loss adjustment expense reserves as of September
30, 2020. The increase in the ultimate incurred losses and loss adjustment
expenses manifested primarily through higher IBNR reserves for 2018, 2019, and
2020 accident year claims pertaining to Buildings and Transportation liability
coverages during the three months ended September 30, 2020. During the three
months ended September 30, 2021, primarily lower ultimate estimates for
Transportation liability coverage for the 2020 accident year and favorable case
developments in 2017 and 2020 accident year Mainstreet liability claims resulted
in favorable development of insured events of prior years.



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



The preparation of the Company's 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.



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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 September 30
                                              2021            2020          Change
Policy acquisition costs                   $ 1,951,053     $ 1,279,703     $ 671,350
Ratio to net earned premium (GAAP ratio)            14 %            18 %

                                                 Nine Months Ended September 30
                                              2021            2020          Change
Policy acquisition costs                   $ 4,078,563     $ 3,626,154     $ 452,409
Ratio to net earned premium (GAAP ratio)            15 %            17 %

Policy acquisition costs increased due to an increase in ceded commissions,
which resulted in an overall decrease in the ratio for three and nine months
ended September 30, 2021, as compared to the three and nine months ended
September 30, 2020.

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 employee benefits

Salaries and employee benefits decreased $1,412,534 (55%) to $1,171,944 and
$1,453,235 (29%) to $3,505,665 for the three and nine months ended September
30, 2021, respectively, compared to $2,584,478 and $4,958,900 for the three and
nine months ended September 30, 2020.



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



                                                            Three Months Ended
                                                               September 30
                                                 2021            2020            Change

Total salaries and employee benefits
incurred                                      $ 2,283,485     $ 3,530,182     $ (1,258,286 )
Less: charged to losses and loss adjustment
expenses                                         (803,902 )      (550,143 )       (253,759 )
Less: capitalized to policy acquisition
costs                                            (307,639 )      (328,440 )

20,801

Less: charged to IT system upgrade                      -         (67,121 )

67,121

Net amount charged to operating expenses $ 1,171,944 $ 2,584,478

  $ (1,424,123 )






                                                          Nine Months Ended
                                                              September 30
                                                2021             2020            Change

Total salaries and employee benefits
incurred                                    $  6,607,768     $  7,603,460     $ (1,007,281 )
Less: charged to losses and loss
adjustment expenses                           (1,965,895 )     (1,459,208 )       (506,687 )
Less: capitalized to policy acquisition
costs                                           (967,891 )     (1,010,517 )

42,626

Less: charged to IT system upgrade              (168,317 )       (174,835 )

6,518

Net amount charged to operating expenses $ 3,505,665 $ 4,958,900

  $ (1,464,824 )




The decrease in the total salaries and employee benefits incurred for the three
and nine months ended September 30, 2021, compared to the three and nine months
ended September 30, 2020, was due primarily to a reduction in headcount,
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 on the health insurance program decreased $3,213
(14%) to $20,022 and $12,166 (17%) to $61,024 for the three and nine months
ended September 30, 2021, respectively, compared to $23,235 and $73,190 for the
three and nine months ended September 30, 2020. 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 decreased $346,785 (25%) to $1,051,350 and $531 (0%)
for the three and nine months ended September 30, 2021, respectively, compared
to $1,398,135 and $3,372,483 for the three and nine months ended September 30,
2020, respectively. The decreases in other operating expenses for the three and
nine months ended September 30, 2021, compared to the nine months ended
September 30, 2020, were primarily due to decreases in rent expense for the
corporate headquarters office space leased in February 2021, fees paid under
reinsurance arrangement with USIC, business insurance costs, and CA DOI
financial examination of Crusader expenses, partially offset by elimination of
building maintenance costs after the sale of the building owned by Crusader.



Income tax expense

Income tax expense was $59,579 (4% of pre-tax loss) and $3,594,572 (25% of
pre-tax loss) for the three months ended September 30, 2021, respectively.
Income tax expense was $310,191 (63% of pre-tax loss) for the nine months ended
September 30, 2021, and income tax expense was $3,543,153 (22% of pre-tax loss)
for the nine months ended September 30, 2020.



As of September 30, 2021, the Company had deferred tax assets of $8,075,081
generated from $38,452,769 of federal net operating loss carryforwards that will
begin to expire in 2035 and deferred tax assets of $2,490,156, generated from
state net operating loss carryforwards which expire between 2028 and 2040. In
connection with preparation of its consolidated financial statements, the
Company periodically performs an analysis of future income projections to
determine the adequacy of the valuation allowance. In light of the net losses
that were generated in recent years, at September 30, 2021, the Company has
established a valuation allowance for the aggregate amount of the federal and
state net operating losses and other deferred tax assets in the amount of
$10,955,661 that, in management's judgment, are not more-likely-than-not to be
realized. At December 31, 2020, the Company has established a valuation
allowance for the aggregate amount of the federal and state net operating losses
and other deferred tax assets in the amount of $10,557,080.



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OFF-BALANCE SHEET ARRANGEMENTS

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