UNICO AMERICAN CORP (Form: 10-Q, Received: 05/15/2020 17:22:57)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2020 or

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

For the transition period from ____ to ____.

Commission File No. 000-03978

UNICO AMERICAN CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Nevada	95-2583928
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

26050 Mureau Road, Calabasas, California	91302
(Address of Principal Executive Offices)	(Zip Code)

Registrant's telephone number, including area code: (818) 591-9800

No Change

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, No Par Value	UNAM	Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No __

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No__

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer," "accelerated filer," "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer __ Accelerated filer __

Non-accelerated filer __ Smaller reporting company X Emerging growth company __

(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. __

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at May 15, 2020
Common Stock, no par value per share	5,305,742

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UNICO AMERICAN CORPORATION

INDEX TO FORM 10-Q

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

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

· failure to meet minimum capital and surplus requirements;

· vulnerability to significant catastrophic property loss;

· the impact of the recent coronavirus outbreak;

· changes in accounting standards issued by the Financial Accounting Standards Board;

· ability to adjust claims accurately;

· insufficiency of loss and loss adjustment expense reserves to cover future losses;

· changes in federal or state tax laws;

· ability to realize deferred tax assets;

· ability to accurately underwrite risks and charge adequate premium;

· ability to obtain reinsurance or collect from reinsurers and or losses in excess of reinsurance limits;

· extensive regulation and legislative changes;

· reliance on subsidiaries to satisfy obligations;

· downgrade in financial strength rating or long-term issuer credit rating by A.M. Best;

· changes in interest rates;

· investments subject to credit, prepayment and other risks;

· geographic concentration;

· reliance on independent insurance agents and brokers;

· insufficient reserve for doubtful accounts;

· litigation;

· enforceability of exclusions and limitations in policies;

· reliance on information technology systems;

· single operating location;

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

· change in general economic conditions;

· dependence on key personnel;

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

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

relationships

· ability to effectively compete;

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

· control by a small number of stockholders;

· limited trading of stock;

· failure to maintain effective system of internal controls; and

· difficulty in effecting a change of control or sale of any subsidiaries.

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Please see Part I - Item 1A – “Risk Factors” in the Company’s 2019 Annual Report on Form 10-K as filed with the U.S. Securities and Exchange Commission (“SEC”), as well as other documents we file with the SEC from time-to-time, for other important factors that could cause the Company’s actual results to differ materially from the Company’s current expectations and from the forward-looking statements discussed herein. Because of these and other risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. In addition, these statements speak only as of the date of this Form 10-Q and, except as may be required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31		December 31
	2020		2019
		(Unaudited)
ASSETS
Investments
Available-for-sale:
Fixed maturities, at fair value (amortized cost: $81,814,388 a March 31, 2020, and $82,002,411 at December 31, 2019)	$	82,931,949	$	83,499,710
Held-to-maturity:
Fixed maturities, at amortized cost (fair value: $798,000 at March 31, 2020, and $798,000 at December 31, 2019)		798,000		798,000
Equity securities, at fair value (cost: $502,484 at March 31, 2020, and $0 at December 31, 2019)		457,684		—
Short-term investments, at fair value		2,198,017		2,196,815
Total Investments		86,385,650		86,494,525
Cash and cash equivalents		5,276,025		5,781,639
Accrued investment income		503,388		397,302
Receivables, net		3,986,844		4,019,437
Reinsurance recoverable:
Paid losses and loss adjustment expenses		365,668		685,841
Unpaid losses and loss adjustment expenses		15,399,752		14,725,855
Deferred policy acquisition costs		3,687,979		3,619,594
Property and equipment, net		10,223,162		10,226,595
Deferred income taxes		4,106,849		3,925,432
Other assets		468,458		430,305
Total Assets	$	130,403,775	$	130,306,525

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Unpaid losses and loss adjustment expenses	$	56,139,598	$	55,066,480
Unearned premiums		18,107,398		17,810,337
Advance premium and premium deposits		345,027		219,083
Accrued expenses and other liabilities		2,081,486		2,130,300
Total Liabilities	$	76,673,509	$	75,226,200

Commitments and contingencies

STOCKHOLDERS' EQUITY
Common stock, no par value – authorized 10,000,000 shares; 5,305,742 and 5,306,720, shares issued and outstanding at March 31, 2020, and December 31, 2019, respectively	$	3,772,189	$	3,772,669
Accumulated other comprehensive loss		882,873		1,182,866
Retained earnings		49,075,204		50,124,790
Total Stockholders’ Equity	$	53,730,266	$	55,080,325

Total Liabilities and Stockholders' Equity	$	130,403,775	$	130,306,525

See notes to condensed consolidated financial statements (unaudited).

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended
	March 31
	2020			2019
REVENUES
Insurance company operation:
Net earned premium	$	6,911,134		$	6,264,150
Investment income		520,692			532,630
Net realized investments gains (losses)		1,114			(8,149	)
Net unrealized investments losses on equity securities		(44,800	)		—
Other income (loss)		80,937			(260,700	)
Total Insurance Company Operation		7,469,077			6,527,931

Other insurance operations:
Gross commissions and fees		469,069			547,445
Investment income		2			7
Finance charges and fees earned		67,019			49,373
Other income		14			10,718
Total Revenues		8,005,181			7,135,474

EXPENSES
Losses and loss adjustment expenses		5,877,385			5,154,443
Policy acquisition costs		1,144,425			1,086,713
Salaries and employee benefits		1,122,499			1,027,849
Commissions to agents/brokers		25,955			50,121
Other operating expenses		980,415			628,080
Total Expenses		9,150,679			7,947,206

Loss before taxes		(1,145,498	)		(811,732	)
Income tax benefit		101,672			140,658
Net Loss	$	(1,043,826	)	$	(671,074	)



PER SHARE DATA:
Basic
Loss Per Share	$	(0.20	)	$	(0.13	)
Weighted Average Shares		5,306,720			5,307,103

Diluted
Loss Per Share	$	(0.20	)	$	(0.13	)
Weighted Average Shares		5,306,720			5,307,103

See notes to condensed consolidated financial statements (unaudited).

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

	Three Months Ended
	March 31
	2020			2019

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

See notes to condensed consolidated financial statements (unaudited).

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)


							Accumulated
	Common Shares						Other
	Issued and						Comprehensive			Retained
	Outstanding			Amount			Income (Loss)			Earnings			Total

Balance – December 31, 2018		5,307,103		$	3,772,857		$	(1,100,036	)	$	53,242,601		$	55,915,422

Change in comprehensive income, net of deferred income tax		—			—			975,885			—			975,885
Net loss		—			—			—			(671,074	)		(671,074	)
Balance – March 31, 2019		5,307,103		$	3,772,857		$	(124,151	)	$	52,571,527		$	56,220,233


								Accumulated
	Common Shares							Other
		Issued and						Comprehensive			Retained
		Outstanding			Amount			Income (Loss)			Earnings			Total

Balance – December 31, 2019		5,306,720		$	3,772,669		$	1,182,866		$	50,124,790		$	55,080,325

Shares repurchased		(978	)		(480	)		—			(5,760	)		(6,240	)
Change in comprehensive loss, net of deferred income tax		—			—			(299,993	)		—			(299,993	)
Net loss		—			—			—			(1,043,826	)		(1,043,826	)
Balance – March 31, 2020		5,305,742		$	3,772,189		$	882,873		$	49,075,204		$	53,730,266

See notes to condensed consolidated financial statements (unaudited).

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended
	March 31
	2020			2019
Cash flows from operating activities:
Net loss	$	(1,043,826	)	$	(671,074	)
Adjustments to reconcile net loss to net cash from operations:
Depreciation and amortization		188,085			135,027
Bond amortization, net		(6,711	)		6,880
Bad debt expense		(25	)		2,739
Net realized investment (gains) losses		(1,114	)		8,149
Net unrealized investment losses on equity securities		44,800			—
Changes in assets and liabilities:
Net receivables and accrued investment income		(73,468	)		(456,919	)
Reinsurance recoverable		(353,724	)		(3,136,056	)
Deferred policy acquisition costs		(68,385	)		(81,052	)
Other assets		(38,153	)		351,282
Unpaid losses and loss adjustment expenses		1,073,118			(324,284	)
Unearned premiums		297,061			561,777
Advance premium and premium deposits		125,944			108,521
Accrued expenses and other liabilities		(48,814	)		(78,202	)
Income taxes current/deferred		(101,672	)		(149,458	)
Net Cash Used by Operating Activities		(6,884	)		(3,722,670	)

Cash flows from investing activities:
Purchase of fixed maturity investments		(1,735,823	)		(3,573,566	)
Purchase of equity securities		(502,484	)		—
Proceeds from maturity of fixed maturity investments		1,328,128			1,779,271
Proceeds from sale or call of fixed maturity investments		603,543			482,696
Net decrease (increase) in short-term investments		(1,202	)		3,994,162
Additions to property and equipment		(184,652	)		(231,521	)
Net Cash Provided (Used) by Investing Activities		(492,490	)		2,451,042

Cash flows from financing activities:
Repurchase of common stock		(6,240	)		—
Net Cash Used by Financing Activities		(6,240	)		—

Net decrease in cash and cash equivalents		(505,614	)		(1,271,628	)
Cash and cash equivalents at beginning of period		5,781,639			4,917,762
Cash and Cash Equivalents at End of Period	$	5,276,025		$	3,646,134

Supplemental cash flow information
Cash paid during the period for:
Interest		—			—
Income taxes	$	8,800			8,800

See notes to condensed consolidated financial statements (unaudited).

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2020

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

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

Principles of Consolidation

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

Basis of Presentation

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

Use of Estimates in the Preparation of the Financial Statements

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect its reported amounts of assets and liabilities and its disclosure of any contingent assets and liabilities at the date of its financial statements, as well as its reported amounts of revenues and expenses during the reporting period. The most significant assumptions in the preparation of these condensed consolidated financial statements relate to losses and loss adjustment expenses. While every effort is made to ensure the integrity of such estimates, actual results may differ.

Fair Value of Financial Instruments

The Company employs a fair value hierarchy that prioritizes the inputs for valuation techniques used to measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Financial assets and financial liabilities recorded on the Condensed Consolidated Balance Sheets at fair value are categorized based on the reliability of inputs for the valuation techniques. (See Note 7.)

The Company has used the following methods and assumptions in estimating its fair value disclosures for instruments carried at fair value:

Investment securities, excluding long-term certificates of deposit, and short-term investments – Fair values are obtained from widely accepted third party vendors.

The Company has used the following methods and assumptions for estimating fair value for other financial instruments not carried at fair value:

Cash and cash equivalents– The carrying amounts reported in the Condensed Consolidated Balance Sheets approximate their fair values given the short-term nature of these instruments.

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

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

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

Cash Equivalents

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

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

On December 19, 2008, the Board of Directors authorized a stock repurchase program to acquire from time to time up to an aggregate of 500,000 shares of the Company’s common stock. This program has no expiration date and may be terminated by the Board of Directors at any time. As of March 31, 2020, and December 31, 2019, the Company had remaining authority under the 2008 program to repurchase up to an aggregate of 187,264 and 188,242 shares of its common stock, respectively. The 2008 program is the only program under which there is authority to repurchase shares of the Company’s common stock. The Company repurchased 978 shares of stock during the three months ended March 31, 2020, in unsolicited transactions at a cost of $6,240 of which $480 was allocated to capital and $5,760 was allocated to retained earnings. The Company did not repurchase any stock during the three months ended March 31, 2019. The Company has retired or will retire all stock repurchased.

NOTE 3 – LOSS PER SHARE

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

	Three Months Ended March 31
	2020			2019
Basic Loss Per Share
Net loss	$	(1,043,826	)	$	(671,074	)

Weighted average shares outstanding		5,306,720			5,307,103

Basic loss per share	$	(0.20	)	$	(0.13	)

Diluted Loss per Share
Net loss	$	(1,043,826	)	$	(671,074	)

Weighted average shares outstanding		5,306,720			5,307,103
Diluted shares outstanding		5,306,720			5,307,103

Diluted loss per share	$	(0.20	)	$	(0.13	)

Basic earnings per share exclude the impact of common share equivalents and are based upon the weighted average common shares outstanding. Diluted earnings per share utilize the average market price per share when applying the treasury stock method in determining common share dilution. When outstanding stock options are dilutive, they are treated as common share equivalents for purposes of computing diluted earnings per share and represent the difference between basic and diluted weighted average shares outstanding. In loss periods, stock options are excluded from the calculation of diluted loss per share, as the inclusion of stock options would have an anti-dilutive effect.

NOTE 4 – RECENTLY ISSUED ACCOUNTING STANDARDS

Recently adopted standards

In February 2016, the FASB issued ASU 2016-02 “Leases.” ASU 2016-02 requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by all leases, including those historically accounted for as operating leases. The Company adopted ASU 2016-02 effective January 1, 2019. The adoption of ASU 2016-02 did not have a material impact to the Condensed Consolidated Statements of Operations and the Condensed Consolidated Balance Sheets.

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

Standards not yet adopted

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

NOTE 5 – ACCOUNTING FOR TAXES

The Company and its wholly owned subsidiaries file consolidated federal and state income tax returns. Pursuant to a tax allocation agreement, the Company’s subsidiaries, Crusader Insurance Company (“Crusader”) and American Acceptance Corporation (“AAC”), are allocated taxes or tax credits in the case of losses, at current corporate rates based on their own taxable income or loss. The Company files income tax returns under U.S. federal and various state jurisdictions. The Company is subject to examination by U.S. federal income tax authorities for tax returns filed starting at taxable year 2016 and California state income tax authorities for tax returns filed starting at taxable year 2015. There are no ongoing examinations of income tax returns by federal or state tax authorities.

As of March 31, 2020, and December 31, 2019, the Company had no unrecognized tax benefits or liabilities and, therefore, had not accrued interest and penalties related to unrecognized tax benefits or liabilities. However, if interest and penalties would need to be accrued related to unrecognized tax benefits or liabilities, such amounts would be recognized as a component of federal income tax expense.

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

NOTE 6 – PROPERTY AND EQUIPMENT, NET

Property and equipment consist of the following:

	March 31			December 31
	2020			2019

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

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Depreciation on the Calabasas building, owned by Crusader, is computed using the straight line method over 39 years. Depreciation on furniture, fixtures, and equipment in the Calabasas building is computed using the straight line method over 3 to 15 years. Amortization of leasehold improvements in the Calabasas building is being computed using the shorter of the useful life of the leasehold improvements or the remaining years of the lease. Depreciation and amortization expense on all property and equipment for the three months ended March 31, 2020 and 2019 was $188,085 and $135,027, respectively.

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

For the three months ended March 31, 2020 and 2019, the Calabasas building incurred operating expenses (including depreciation) in the amount of $190,097 and $156,789, respectively, which are included in “Other operating expenses” in the Company’s Condensed Consolidated Statements of Operations.

The total square footage of the Calabasas building is 46,884, including common areas. As of March 31, 2020, 6,942 square feet of the Calabasas building was leased to non-affiliated entities and 7,539 square feet was vacant and available to be leased to non-affiliated entities.

The Company capitalizes certain computer software costs purchased from outside vendors for internal use or incurred internally to upgrade the existing systems. These costs also include configuration and customization activities, coding, testing and installation. Training costs and maintenance are expensed as incurred, while upgrade and enhancements are capitalized if it is probable that such expenditure will result in additional functionality. The capitalized costs are not depreciated until the software is placed into production.

NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS

In determining the fair value of its financial instruments, the Company employs a fair value hierarchy that prioritizes the inputs for the valuation techniques used to measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Financial assets and financial liabilities recorded on the Condensed Consolidated Balance Sheets at fair value are categorized based on the reliability of inputs for the valuation techniques as follows:

Level 1 – Financial assets and financial liabilities whose values are based on unadjusted quoted prices in active markets for identical assets or liabilities as of the reporting date.

Level 2 – Financial assets and financial liabilities whose values are based on quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in non-active markets; or valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability as of the reporting date.

Level 3 – Financial assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the financial assets and financial liabilities as of the reporting date.

The hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) or unobservable (Level 3). The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The following table presents information about the Company’s financial instruments and their estimated fair values, which are measured on a recurring basis, and are allocated among the three levels within the fair value hierarchy as of March 31, 2020, and December 31, 2019:

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

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

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

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

NOTE 8 – INVESTMENTS

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

	Three Months ended March 31
	2020			2019

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

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

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

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

A summary of the unrealized gains (losses) on investments in fixed maturities carried at fair value and the applicable deferred federal income taxes are shown below:

	March 31			December 31
	2020			2019

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

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

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

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

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

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

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

	March 31			December 31
	2020			2019

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

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

The Company’s investment in certificates of deposit included $598,000 of brokered certificates of deposit as of March 31, 2020 and December 2019. All of the Company’s certificates of deposit are within the FDIC insured permissible limits. Due to the nature of the Company’s business, certain bank accounts may exceed FDIC insured permissible limits.

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

	March 31		December 31
	2020		2019

Certificates of deposit	$	200,000	$	200,000
Short-term investments		200,000		200,000
Total state held deposits	$	400,000	$	400,000

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

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

	March 31		December 31
	2020		2019

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

NOTE 9 – UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

The following table provides an analysis of Crusader’s loss and loss adjustment expense reserves, including a reconciliation of the beginning and ending balance sheet liability for the periods indicated:

	Three Months Ended March 31
	2020		2019

Reserve for unpaid losses and loss adjustment expenses at January 1 – gross of reinsurance	$	55,066,480	$	51,657,155
Less reinsurance recoverable on unpaid losses and loss adjustment expenses		14,725,855		9,531,602
Reserve for unpaid losses and loss adjustment expenses at January 1 – net of reinsurance		40,340,625		42,125,553

Incurred losses and loss adjustment expenses:
Provision for insured events of current year		5,161,176		4,550,888
Development of insured events of prior years		716,209		603,555
Total incurred losses and loss adjustment expenses		5,877,385		5,154,443

Loss and loss adjustment expense payments:
Attributable to insured events of the current year		1,444,009		1,158,426
Attributable to insured events of prior years		4,034,155		6,468,019
Total payments		5,478,164		7,626,445

Reserve for unpaid losses and loss adjustment expenses at March 31 – net of reinsurance		40,739,846		39,653,551
Reinsurance recoverable on unpaid losses and loss adjustment expenses		15,399,752		11,679,320
Reserve for unpaid losses and loss adjustment expenses at March 31 – gross of reinsurance	$	56,139,598	$	51,332,871

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

NOTE 10 – CONTINGENCIES

The Company, by virtue of the nature of the business conducted by it, becomes involved in numerous legal proceedings as either plaintiff or defendant. From time to time, the Company is required to resort to legal proceedings against vendors providing services to the Company or against customers or their agents to enforce collection of premiums, commissions, or fees. These routine items of litigation do not materially affect the Company and are handled on a routine basis by the Company through its counsel.

The Company establishes reserves for lawsuits, regulatory actions, and other contingencies for which the Company is able to estimate its potential exposure and believes a loss is probable. For loss contingencies believed to be reasonably possible, the Company discloses the nature of the loss contingency, an estimate of the possible loss, a range of loss, or a statement that such an estimate cannot be made.

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

NOTE 11 – SUBSEQUENT EVENTS

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

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

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

General

Unico American Corporation, referred to herein as the "Company” or “Unico," is an insurance holding company. Currently, the Company’s subsidiary Crusader Insurance Company (“Crusader”) underwrites commercial property and casualty insurance, the Company’s subsidiaries Unifax Insurance Systems, Inc. (“Unifax”) and American Insurance Brokers, Inc. (“AIB”) provide marketing and various underwriting support services related to property, casualty, health and life insurance, the Company’s subsidiary American Acceptance Company (“AAC”) provides insurance premium financing, and the Company’s subsidiary Insurance Club, Inc., dba AAQHC (“AAQHC”), an Administrator provides membership association services.

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

This overview discusses some of the relevant factors that management considers in evaluating the Company's performance, prospects, and risks. It is not all inclusive and is meant to be read in conjunction with the entirety of the management discussion and analysis, the Company's consolidated financial statements and notes thereto, and all other items contained within the Company’s 2019 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

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

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

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

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

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

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Revenue and Income Generation

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

Insurance Company Operation

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

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

	Three Months Ended March 31
	2020		2019			Change

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

Crusader believes that it can grow its sales and profitability through improved specialization and sales incentives. Crusader currently focuses in four underwriting verticals: (1) Transportation, (2) Food, Beverage & Entertainment, (3) Garage & Mercantile, and (4) Apartments & Commercial Buildings. Crusader also is evaluating the possibility of expanding its operations geographically, on an admitted or non-admitted basis, so as to offer similar products in other states, but the timing of any such expansion is not yet determined.

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

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

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

	Three Months Ended March 31
	2020			2019

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

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

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

	Three Months Ended March 31
	2020			2019			Change

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

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

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

	Three Months Ended March 31
	2020			2019

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

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

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

	Three Months Ended March 31
	2020		2019		Change

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

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

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

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

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

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

The property and casualty insurance business is cyclical in nature. The conditions of a “soft market” include premium rates that are stable or falling and insurance is readily available. Contrarily, “hard market” conditions occur during periods in which premium rates rise and coverage may be more difficult to find. The Company believes that the California property and casualty insurance market is relatively mature and intensely competitive, with different products in different stages of the soft/hard market cycle at any given time.

Revenues from Other Insurance Operations

The Company’s revenues from other insurance operations consist of commissions, fees, investment and other income. Excluding investment and other income, these operations accounted for approximately 7% of total revenues in the three months ended March 31, 2020 and 2019.

Investments

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

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

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

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LIQUIDITY AND CAPITAL RESOURCES

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

Crusader has a significant amount of cash, cash equivalents, and investments as a result of its holdings of unearned premium reserves, its reserves for loss and loss adjustment expense payments, and its capital and surplus. Crusader's loss and loss adjustment expense payments are the most significant cash flow requirement of the Company. These payments are continually monitored and projected to ensure that the Company has the liquidity to cover these payments without the need to liquidate its investments. Cash, cash equivalents, and investments (at amortized cost) of the Company at March 31, 2020, were $90,588,914 compared to $90,778,865 at December 31, 2019. Crusader's cash, cash equivalents, and investments were 98% and 99% of the total cash and investments (at amortized cost) held by the Company as of March 31, 2020, and December 31, 2019, respectively.

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

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

	March 31		December 31
	2020		2019

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

The short-term investments include U.S. Treasury bills and certificates of deposit that are all highly rated and have initial maturity between three and twelve months. Amortized costs of the short-term investments approximate their fair values.

The Company is required to classify its investment securities into one of three categories: held-to-maturity, available-for-sale, or trading securities. Although part of the Company's investments in fixed maturity securities is classified as available-for-sale and, while the Company may sell investment securities from time to time in response to economic, regulatory, and market conditions, its investment guidelines place primary emphasis on buying and holding high-quality investments to maturity.

The Company’s Board of Directors approved investment guidelines are similar to what the Company believes are general investment guidelines used by Crusader’s peers.

Under the Company’s investment guidelines, investments may only include U.S. Treasury notes, U.S. government agency notes, mortgage-backed securities (including pass through securities and collateralized mortgage obligations) that are backed by agency and non-agency collateral, commercial mortgage-backed securities, U.S. corporate obligations, asset backed securities, (including but not limited to credit card, automobile and home equity backed securities), tax-exempt bonds, preferred stocks, common stocks, commercial paper, repurchase agreements (treasuries only), mutual funds, exchange traded funds, bank certificates of deposits and time deposits. The investment guidelines provide for certain investment limitations in each investment category.

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

	•		Mortgage loans, except for mortgage backed securities issued by an agency of the U.S. government.
	•		Derivative mortgage-backed securities including interest only, principal only and inverse floating rate securities.
	•		All fixed maturity real estate securities, except mortgage-backed securities (including pass through securities and collateralized mortgage obligations) that are backed by agency and non-agency collateral and commercial mortgage-backed securities.
	•		Options and futures contracts.
	•		All non-U.S. dollar denominated securities.
	•		Any security that would not be in compliance with the regulations of Crusader’s state of domicile.

An independent investment advisor manages Crusader’s investments. The advisor’s role currently is limited to maintaining Crusader’s portfolio within the investment guidelines and providing investment accounting services to the Company. The investments continue to be held by Crusader’s current custodian, Union Bank Global Custody Services.

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

While material capital expenditures may be funded through borrowings, the Company believes that its cash and short-term investments at March 31, 2020, net of statutory deposits of $710,000, and California insurance company statutory dividend restrictions applicable to Crusader, plus the cash to be generated from operations, should be sufficient to meet its operating requirements during the next 12 months without the necessity of borrowing funds.

RESULTS OF OPERATIONS

All comparisons made in this discussion are comparing the three months ended March 31, 2020, to the three months ended March 31, 2019, unless otherwise indicated.

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

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

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

Written premium

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

The property casualty insurance marketplace continues to be intensely competitive. While Crusader attempts to meet such competition with competitive prices, its emphasis is on service, innovation, promotion, and distribution. Crusader believes that rate adequacy is more important than premium growth and that underwriting profit (net earned premium less losses and loss adjustment expenses and policy acquisition costs) is its primary goal. The Company believes that it can grow its sales and profitability through improved specialization and sales incentives, currently focused in four underwriting verticals: (1) Transportation, (2) Food, Beverage & Entertainment, (3) Garage & Mercantile, and (4) Apartments & Commercial Buildings. The increase in direct written premium for the three months ended March 31, 2020 is due to growth in the Company’s Transportation underwriting vertical partially offset by declines in the other three underwriting verticals.

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

Direct earned premium

Direct earned premium (earned premium before reinsurance) increased $942,421 (12%) to $8,909,825 for the three months ended March 31, 2020, compared to $7,967,404 for the three months ended March 31, 2019. Crusader writes annual policies. Earned premium represents a portion of written premium that is recognized as income in the financial statements for the period presented and earned daily on a pro-rata basis over the terms of the policies, and, therefore, premiums earned in the current year are related to policies written during both the current year and immediately preceding year. The increase in direct earned premium was due primarily to an increase in direct written premium in 2019.

Ceded earned premium

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

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

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

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

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

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

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

	Three Months Ended March 31
	2020			2019

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

(1)

The average is based on the beginning and ending balance of the amortized cost of the invested assets for each respective period.

(2)

Investment income from insurance company operation included $34,879 of investment expense for the three months ended March 31, 2020, compared to $37,619 of investment expense for the three months ended March 31, 2019.

(3)

Annualized yield on average invested assets did not include the investment income from cash equivalents.

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

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

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

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

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

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

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

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

Other income

Other income included in Insurance Company Revenues and Other Insurance Operations was $80,951 for the three months ended March 31, 2020, compared to a loss of $(249,982) for the three months ended March 31, 2019. The other income was comprised primarily of $53,290 rental income and $27,661 increase in Crusader’s share of California FAIR Plan equity during the three months ended March 31, 2020, compared to $42,230 rental income and $299,320 decrease in Crusader’s share of California FAIR Plan equity during the three months ended March 31, 2019.

Gross commissions and fees

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

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

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	Three Months Ended March 31
	2020		2019		Change

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

Unifax sells and services insurance policies for Crusader. The commissions paid by Crusader to Unifax are eliminated as intercompany transactions and are not reflected as income in the condensed consolidated financial statements. Unifax also receives policy fee income that is directly related to the Crusader policies it sells. For financial statement reporting purposes, policy fees are earned ratably over the life of the related insurance policy. The unearned portion of the policy fee is recorded as a liability on the Condensed Consolidated Balance Sheets under “Accrued expenses and other liabilities.” The earned portion of the policy fee charged to the policyholder by Unifax is recognized as income in the condensed consolidated financial statements. Policy fee income decreased $37,658 (13%) in the three months ended March 31, 2020, compared to the three months ended March 31, 2019, due primarily to reduction in policy counts.

AIB markets health insurance in California through non-affiliated insurance companies for individuals and groups. For these services, AIB receives commission based on the premiums that it writes. Commission income decreased $38,798 (17%) in the three months ended March 31, 2020, compared to the three months ended March 31, 2019. The fluctuation in commission income reported in the three months ended March 31, 2020, when compared to the prior year period, is primarily a result of the loss of a large group account.

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

Finance charges and fees earned

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

Losses and loss adjustment expenses

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

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

	Three Months Ended March 31
	2020		2020 Loss Ratio			2019		2019 Loss Ratio			Change

Net earned premium	$	6,911,134				$	6,264,150				$	646,984

Losses and loss adjustment expenses:
Provision for insured events of current year		5,161,176		75	%		4,550,888		72	%		610,288
Development of insured events of prior years		716,209		10	%		603,555		10	%		112,654
Total losses and loss adjustment expenses	$	5,877,385		85	%	$	5,154,443		82	%	$	722,942

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

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

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

		Provision for Insured Events of Current Year		Adverse (Favorable) Development of Insured Events of Prior Years			Total Losses and Loss Adjustment Expenses

Three Months Ended:
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
June 30, 2019		5,134,626		(75,675	)		5,058,951
March 31, 2019		4,550,888		603,555			5,154,443
December 31, 2018		5,134,166		53,997			5,188,163
September 30, 2018		4,840,242		798,378			5,638,620
June 30, 2018		4,652,240		276,963			4,929,203
March 31, 2018		6,009,138		1,792,619			7,801,757

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

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

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

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

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

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

Policy acquisition costs

Policy acquisition costs consist of commissions, premium taxes, inspection fees, and certain other underwriting costs that are directly related to and vary with the successful production of Crusader insurance policies. These costs include both Crusader expenses and the allocated expenses of other Unico subsidiaries. Crusader's reinsurers pay Crusader a ceding commission, which is primarily a reimbursement of the acquisition cost related to the ceded premium. No ceding commission is received on facultative or catastrophe ceded premium. Policy acquisition costs, net of ceding commission, are deferred and amortized as the related premiums are earned. The Company annually reevaluates its acquisition costs to determine that costs related to successful policy acquisition are capitalized and deferred.

Policy acquisition costs and the ratio to net earned premium are as follows:

	Three Months Ended March 31
	2020			2019			Change

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

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

Salaries and employee benefits

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

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

	Three Months Ended March 31
	2020			2019			Change

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

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

Commissions to agents/brokers

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

Other operating expenses

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

Income tax benefit

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

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

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

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

OFF-BALANCE SHEET ARRANGEMENTS

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is currently a “smaller reporting company,” as defined in Item 10(f)(1) of Regulation S-K. The Company has elected to comply with the scaled disclosure requirements applicable to smaller reporting companies and has therefore omitted the information required under Item 305 of Regulation S-K.

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was carried out by the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of March 31, 2020, as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of March 31, 2019.

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During the period covered by this report, there has been no change in the Company's internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Securities Exchange Act of 1934 that has materially affected or is reasonably likely to materially affect the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company and its subsidiaries are named from time to time as defendants in various legal actions that are incidental to its business, including those which arise out of or are related to the handling of claims made in connection with Crusader’s insurance policies. Crusader establishes reserves for certain claims-related lawsuits, regulatory actions and other contingencies when it believes a loss is probable and is able to estimate its potential exposure. While actual losses may differ from the amounts recorded and such matters are subject to many uncertainties and outcomes that are not predictable with assurance, the Company is not aware of any currently pending or threatened legal or regulatory proceedings that, either individually or in the aggregate, it anticipates will have a material adverse effect on its consolidated financial condition, results of operations or cash flows.

ITEM 1A. RISK FACTORS

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

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

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

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

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

10.1#

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

10.2#

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

10.3#

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

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

101

The following information from the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2020, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive Loss; (iv) the Condensed Consolidated Statements of Cash Flows; and (v) the Condensed Notes to Unaudited Condensed Consolidated Financial Statements.*

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

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

UNICO AMERICAN CORPORATION

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

Cary L. Cheldin

Chairman of the Board, President and Chief

Executive Officer, (Principal Executive Officer)

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

Michael Budnitsky

Treasurer, Chief Financial Officer and Secretary, (Principal

Accounting and Principal Financial Officer)

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EXHIBIT 10.1

CERTAIN IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THE EXHIBIT BECAUSE IT IS BOTH NOT MATERIAL AND WOULD LIKELY CAUSE COMPETITIVE HARM TO THE REGISTRANT IF PUBLICLY DISCLOSED.

[***] INDICATES THAT INFORMATION HAS BEEN REDACTED.

QUOTA SHARE REINSURANCE AGREEMENT

AMONG

UNITED SPECIALTY INSURANCE COMPANY

AND

CRUSADER INSURANCE COMPANY

AND

UNIFAX INSURANCE SYSTEMS, INC.

EFFECTIVE APRIL 1, 2020

Table of Contents

Article Page

Preamble 1

1 Business Reinsured 1

2 Original Conditions 1

3 Exclusions 2

4 Commencement, Termination, Terms & Conditions 3

5 Loss and Loss Adjustment Expense 5

6 Reports and Remittances 6

7 Errors and Omissions 8

8 Premium and Commission 8

9 Access to Records 11

10 Arbitration 11

11 Assessments, Assignments, Fines and Penalties 12

12 Premium Financing 13

13 Insolvency 13

14 Alternate Payee 14

15 Hold Harmless Provisions 14

16 Loss in Excess of Policy Limits/ECO 16

17 Regulatory Matters 16

18 The General Agent 17

19 Reinsurer or General Agent or Transfer 18

20 Miscellaneous 18

21 Loss and Unearned Premium Reserve Funding 20

22 Savings Clause 21

QUOTA SHARE REINSURANCE AGREEMENT

THIS QUOTA SHARE REINSURANCE AGREEMENT (this "Agreement") is effective April 1, 2020, by and among CRUSADER INSURANCE COMPANY ("Reinsurer"), UNITED SPECIALTY INSURANCE COMPANY ("Company"), and UNIFAX INSURANCE SYSTEMS, INC. ("General Agent");

W I T N E S S E T H:

In consideration of the mutual covenants contained in this Agreement and upon the terms and conditions set forth below, the Parties hereto agree as follows:

PREAMBLE

It is understood that the Company, the Reinsurer and the General Agent (hereinafter identified collectively as the "Parties" and each individually a “Party”) hereto wish to enter into a reinsurance arrangement through which the Company is to bear no business, credit or insurance risk whatsoever (save the risk of the Reinsurer's insolvency). The Reinsurer shall hold the Company harmless and indemnify it for these and all risks. The Reinsurer further agrees that it shall make directly to the applicable parties any payments, arising out of or relating in any way to its obligations and liabilities arising from this Agreement and/or the subject insurance business produced hereunder, so that the Company shall not be required to make any such payments and then seek reimbursement from the Reinsurer. The sole consideration provided by the Company, in exchange for the fees as agreed to, is to permit the Policies (as hereinafter defined), which are reinsured 100% under this Agreement to be issued in the name of the Company. All provisions of this Agreement shall be interpreted so as to be in accord with this Preamble.

ARTICLE I

BUSINESS REINSURED

1.01 Effective as of the effective date of this Agreement, the Company obligates itself to cede to the Reinsurer, and the Reinsurer obligates itself to accept, 100% of the Company's gross liability under all policies, certificates, contracts, binders, agreements or other proposals or evidences of insurance, new and renewal policies, binders, and contracts of insurance (hereinafter called "Policies") issued by and on behalf of the Company, in its sole discretion, as Property, General Liability, CMP Property (burglary and theft; inland marine), and CMP Liability (burglary and theft, garage, fidelity) and miscellaneous coverages as endorsed during the term of this Agreement, by or through the General Agent appointed by the Company at the request of the Reinsurer.

1.02

Subject to Section 15.05 hereof, the maximum policy limits for Policies are as follows:

Lines of Business

Maximum Policy Limits

1.0

Property

$[***] total insurable value (greater than $[***] shall be facultative)

17.0

General Liability

$[***] per occurrence

$[***] in the aggregate

5.1

CMP Property – burglary and theft; inland marine

$[***] total insurable value (greater than $[***] shall be facultative)

5.2

CMP Liability – burglary and theft, garage, fidelity

$[***] per occurrence

$[***] in the aggregate

It is understood that the General Agent shall not bind the Company to amounts in excess of those stated above.

ARTICLE II

ORIGINAL CONDITIONS

2.01 Effective as of the effective date of this Agreement, the Company obligates itself to cede to the Reinsurer, and the Reinsurer obligates itself to accept, all of the Company's gross liability under all Policies issued by and on behalf of the Company by the General Agent.

2.02 Business ceded hereunder shall include every original policy, rewrite, renewal or extension (whether before or after the termination of this Agreement) required by applicable statute, or by rule or regulation of any policy of insurance ceded hereunder by the Company to the Reinsurer.

2.03 The liability of the Reinsurer shall commence obligatorily and simultaneously with that of the Company as soon as the Company becomes liable, and the premium on account of such liability shall be credited to the Reinsurer from the original date of the Company's liability.

2.04 All reinsurance for which the Reinsurer shall be liable, by virtue of this Agreement, shall be subject, in all respects, to the same rates, terms, conditions, interpretations, waivers, the exact proportion of premiums paid to the Company without any deduction for brokerage, and to the same modifications, alterations and cancellations, as the respective insurance of the Company to which such reinsurance relates, the true intent of this Agreement being that the Reinsurer shall, in every case to which this Agreement applies and in the proportion specified herein, follow the fortunes of the Company.

2.05 Nothing herein shall in any manner create any obligations, establish any rights or create any direct right of action against the Reinsurer in favor of any third party, or other person not party to this Agreement; or create any privity of contract between the policyholders and the Reinsurer.

ARTICLE III

EXCLUSIONS

With respect to the classes of business which the General Agent may be authorized to produce under this Agreement, the General Agent will not solicit or accept proposals or bind the Company for insurance coverage on the following risks:

(a) All business not specifically described as business covered under Article I of this Agreement.

ARTICLE IV

COMMENCEMENT, TERMINATION, TERMS AND CONDITIONS

4.01 The effective date of this Agreement is at 12:01 a.m. Central Time, on April 1, 2020. This Agreement shall remain continuously in force until terminated according to the provisions set forth herein.

4.02 This Agreement may be terminated as follows:

(a) By any Party hereto at any time, by providing at least ninety (90) days written notice to the other Parties, such notice to be sent by certified mail, return receipt requested, postage prepaid;

(b) Immediately by mutual consent of the Company and Reinsurer;

(c) Immediately upon written notice by the Reinsurer or the Company in the event of the cancellation or non-renewal of the General Agent's license by the California Department of Insurance;

(d) By the Reinsurer after thirty (30) days written notice to the General Agent and Company of the General Agent's failure to pay to the Reinsurer all payments of premiums due hereunder, provided, however, that in the event such payment is received by the Reinsurer prior to the date of cancellation stated in the Reinsurer's written notice this Agreement shall not be so terminated and said written notice shall be of no further force or effect. If the Reinsurer receives such late premium within a ten (10) day period following receipt of such notice, the Reinsurer shall inform the Company and the General Agent of such receipt as soon as the premium is received and the termination of the Agreement for reason of default shall be rescinded;

(e) Immediately, upon written notice by the Company, if the Reinsurer or General Agent is found to be insolvent by a State Insurance Department or court of competent jurisdiction, or is placed in supervision, conservation, rehabilitation, or liquidation, or has a receiver or supervisor appointed. By the Reinsurer, upon thirty (30) days written notice, if the Company or General Agent is found to be insolvent by a State Insurance Department or court of competent jurisdiction, or is placed in supervision, conservation, rehabilitation or liquidation, or has a receiver or supervisor appointed;

(f) By the Company immediately and automatically without prior written notice should the Texas Department of Insurance or other regulatory agency of competent jurisdiction, require cancellation or disallow credit for this reinsurance;

(g) After thirty (30) days written notice by any party in the event that the Company, the Reinsurer or the General Agent amalgamates with or passes under the control of any other company or corporation or changes a majority of its officers or board of directors during the term of this Agreement;

(h) As provided in Section 22.02 of this Agreement;

(i) Immediately by the Company if after the effective date of this Agreement: (i) the Reinsurer is required to secure its obligations under this Agreement and the General Agency Agreement pursuant to Article XXI of this Agreement; or (ii) the Reinsurer is required to increase the amount of collateral posted pursuant to Article XXI of this Agreement; or (iii) the Reinsurer fails to secure its obligations as required under this Agreement; or

(j) Automatically and immediately, without notice upon cancellation or termination of the General Agency Agreement, as hereinafter defined.

4.03 When this Agreement terminates for any reason, reinsurance hereunder shall continue to apply to the business in force at the time and date of termination until expiration or cancellation of such business. It is understood that any Policies with effective dates prior to the termination date but issued after the termination date are covered under this Agreement. Additionally, the reinsurance hereunder shall continue to apply as to Policies, which must be issued or renewed, as a matter of state law or regulation or because a producing agent has not been timely canceled, until the expiration dates on said Policies. The General Agent agrees that, notwithstanding anything to the contrary, its appointment by the Company to produce business terminates when this Agreement terminates unless the General Agent's authority has been terminated earlier; except that the Company shall provide the General Agent with the limited agency authority needed to service the run-off of the business, e.g., issue, cancel, offer renewal where required by law.

4.04 Upon termination of this Agreement, the Reinsurer and General Agent shall not be relieved of or released from any obligation created by or under this Agreement in relation to payment, expenses, reports, accounting or handling, which relate to insurance business reinsured under this Agreement. The Parties hereto expressly covenant and agree that they will cooperate with each other in the handling of all such run-off insurance business until all Policies have expired either by cancellation or by terms of such Policies and all outstanding losses and loss adjustment expenses have been settled. While by law and regulation, the Company recognizes its primary obligations to its policyholders, the Reinsurer and General Agent recognize that to the extent possible there shall be no cost to or involvement by the Company in servicing this run-off. Upon termination of this Agreement, the General Agent shall service the run-off of the business, and its duties for such run-off shall include, but not be limited to, handling all claims, and handling and servicing all policies through their natural expiration, together with any policy renewals, required to be made by provisions of applicable law, whether or not the effective date of such renewal is subsequent to the effective date of cancellation of this Agreement. All costs and expenses associated with the handling of such run-off business following the cancellation or termination of this Agreement shall be borne solely by the General Agent; however, the Reinsurer shall be ultimately responsible for the run-off and shall pay any such costs and/or expenses if the General Agent does not for any reason pay or cause to be paid such costs and expenses. If for any reason the General Agent fails or is unable to service any such run-off business (or any business while the Agreement is still in effect), including the payment of claims, then consistent with this Agreement, the Reinsurer's obligation with respect to such run-off business shall continue and the Reinsurer shall appoint a successor to the General Agent, subject to the approval of the Company, to administer and otherwise handle the run-off as provided herein. Such successor shall perform all of the duties and obligations of the General Agent with respect to servicing such run-off business, including the payment of claims. In addition, the Company in its sole discretion may terminate the authority of the General Agent or a successor thereto to handle such run-off business and the Reinsurer shall then appoint a successor to handle the run-off, subject to the Company's approval, at no cost to the Company.

4.05 In the event this Agreement is terminated, the Reinsurer shall remain liable to and shall, immediately upon request, reimburse the Company for any assessment made upon the Company. The Company shall likewise remain liable for, and account to the Reinsurer for any recovery of such assessment, or any credit allowed to it against its premium tax, applicable to the risks reinsured hereunder.

4.06 The title and ownership of all undelivered Policies, books, supplies or other property related to the reinsured business is in the name of the Company, and upon termination these shall be delivered immediately by the Reinsurer and/or General Agent to the Company, without compelling the Company to resort to any legal proceedings to secure the aforesaid described property of the Company.

4.07 This Agreement provides for termination on a run-off basis. The relevant provisions of the Agreement shall apply to the business being run-off and shall survive the termination of this Agreement.

4.08 At the option of the Company, this Agreement may be terminated on a cut-off basis. If the Company so elects, (i) the Reinsurer shall pay to the Company (or its designee) an amount equal to the sum of the ceded outstanding unearned premium as of the date of termination, and (ii) the Reinsurer shall incur no liability for losses occurring subsequent to the date of termination.

4.09 Upon termination of this Agreement, the Reinsurer shall ensure the General Agent takes those actions necessary, including, but not limited to, sending statutorily prescribed non-renewal notices to insureds in a timely manner to effectuate the intent that there be no renewals or new policies (but for those required by applicable law or regulation) after the termination of this Agreement.

ARTICLE V

LOSS AND LOSS ADJUSTMENT EXPENSE

5.01 All loss settlements made by the Company or the General Agent under the terms of this Agreement, whether under strict policy conditions or by way of compromise, shall be unconditionally binding upon the Reinsurer in proportion to its participation, and the Reinsurer shall benefit proportionately in all salvage and recoveries. The Reinsurer shall assume and be liable for and pay on behalf of the Company, 100% of all losses incurred in connection with the risks covered by this Agreement, including, but not limited to, judgments (including interest thereon) and settlements in connection therewith. The Reinsurer shall also be liable for 100% of and pay on behalf of the Company all costs, expenses, and fees (including, but not limited to, attorney's fees) incurred by the Company in connection with the investigation or settlement or contesting the validity of claims or losses covered under this Agreement (this shall include but, of course, is not limited to, costs, expenses and fees resulting from a declaratory judgment or injunctive action brought by an insured or other person).

5.02 The Reinsurer's 100% share of losses, expense and loss recovery shall be carried into the monthly accounting for which provision is hereinafter made.

5.03 The Company hereby empowers the Reinsurer, and the Reinsurer may, in its discretion, and under its supervision appoint the General Agent, to accept notice of and investigate any claim arising under any of the Policies, to pay, adjust, settle, resist or compromise any such claim, unless the Company specifically directs to the contrary with respect to any individual

claim. In the latter event, the Reinsurer and/or General Agent shall follow the instructions of the Company as respects such claim. All such loss settlements, whether under strict policy conditions or by the way of compromise, shall be unconditionally binding upon the Reinsurer. However, should the Company be ordered or instructed by an applicable Department of Insurance or any other regulatory agency of competent jurisdiction to take any action or refrain from taking any action with regard to any claim, the Reinsurer shall be bound by and shall follow the order or instructions of such regulatory agency as though Reinsurer were the object of such order or instruction. The Reinsurer will exercise the authority granted hereunder in good faith and toward the end of paying any and all valid claims.

5.04 All records pertaining to claims arising under insurance policies issued on behalf of the Company through or by the General Agent subject to this Agreement shall be deemed to be jointly owned records of the Company and the Reinsurer, and shall be made available to the Company or the Reinsurer or their respective representatives or any duly appointed examiner for any state within the United States; and these records shall be kept in the State of California or such other jurisdiction as may be required by applicable state law or regulation. Notwithstanding the foregoing, the Reinsurer is authorized to maintain duplicate working files of all such records outside the State of California. The Company, the Reinsurer and the General Agent each agree that it will not destroy any such records in its possession without the prior written approval of the other parties except that the Company shall not be required to retain files longer than required by the guidelines set forth by any applicable state department of insurance.

5.05 The Reinsurer shall, or shall cause the General Agent to, establish a separate claim register or method of recording claims arising under the Policies covered by this Agreement so that all claims may be segregated and identified separate and apart from other records of the Reinsurer or General Agent, with such claims register to identify each claim on an individual case basis both as to identify the insured(s) and the claimant, the reserve for loss and adjusting expense. Such claim register shall be kept in a manner whereby the Company can, at any time, determine the status of any claim arising under Policies covered by this Agreement. Such records shall reflect the amount of reserves established for the individual claim and the date when such reserve was established, and if closed, whether such claim was closed with or without payment, and if with payment, the amount paid thereon.

ARTICLE VI

REPORTS AND REMITTANCES

6.01 In lieu of the Company furnishing the Reinsurer with bordereaux showing the particulars of all reinsurances ceded hereunder, the Reinsurer shall furnish or cause to be furnished to the Company, within thirty (30) days after the close of each of the respective periods indicated below (on forms agreeable to the Parties), with monthly, quarterly and annual reports showing the following statistical data in respect to the business reinsured hereunder:

(a) Monthly, with the data segregated by major classes.

(i) Ceded premiums written.

(ii) Ceded unearned premiums.

(iii) Ceded losses paid.

(iv) Ceded adjustment expenses paid during this month.

(v) Losses outstanding.

(vi) Ceding fee due the Company.

(vii) Commission due the General Agent.

(b) Annually, with the data segregated by major classes.

(i)

Annual summaries of net premiums written, net losses paid, net adjusting expenses paid during the year in such form so as to enable the Company to record such data in its annual convention statement. Such information is to be furnished not later than December 15th of the year being reported. In force and unearned premium segregated as to advance premiums, premiums running twelve (12) months or less from inception date of policy, and premiums running more than twelve (12) months from inception date of policy in such form as to enable the Company to record such data in its convention annual statement.

(ii)

Annual summaries of net premiums written by geographical location in such form as to enable the Company to record such premiums in its annual report to the applicable Catastrophe Property Insurance Association.

Statistical or other data as may be requested from time to time by regulatory authorities.

6.02 In order to facilitate the handling of the business reinsured under this Agreement, the Reinsurer agrees to furnish the Company with any additional reports necessary to provide the information needed by the Company to prepare its monthly, quarterly and annual statements to regulatory authorities.

6.03 Within thirty (30) days after the end of each month, the General Agent shall remit to the Reinsurer the following:

(a) Ceded net written premium during the month, less;

(b) General Agent's commission thereon, less;

(c)

Paid losses and loss adjustment expenses paid, provided such losses and loss adjustment expenses have not been deducted on behalf of the Company in any previous monthly report.

The positive balance of (a) less (b) less (c) shall be remitted by the General Agent with its report. Any balance shown to be due the Company shall be remitted by the Reinsurer as promptly as possible after receipt and verification of the General Agent's report.

ARTICLE VII

ERRORS AND OMISSIONS

7.01 The Company shall not be prejudiced in any way by any omission through clerical error, accident or oversight to cede to the Reinsurer any reinsurance rightly falling under the terms of this Agreement, or by erroneous cancellation, either partial or total, or any cession, or by omission to report, or by erroneously reporting any losses, or by any other error or omission, but any such error or omission shall be corrected immediately upon discovery.

7.02 Should the Company suffer any loss whatsoever arising out of, relating to or in connection with this Agreement, the Reinsurer shall assume loss for its own account and save and hold the Company harmless therefor.

ARTICLE VIII

PREMIUM AND COMMISSION

8.01 In consideration of the acceptance by the Reinsurer of one hundred percent (100%) of the Company's liability on insurance business reinsured hereunder, the Reinsurer is entitled to one hundred percent (100%) of the Net Premiums (as hereinafter defined) received by the General Agent or the Reinsurer on Policies reinsured less (i) the ceding fee allowed the Company pursuant to Section 8.02 hereof, (ii) the commission paid to the General Agent and (iii) premium taxes on Policies subject to reinsurance hereunder. "Net Premiums" shall mean the gross premiums charged on all original and renewal Policies written on behalf of the Company, less return premiums (excluding policy fees). Such amounts as provided in Section 5.09 of the General Agency Agreement (as hereinafter defined) shall be paid to the Reinsurer or received from the Reinsurer by the General Agent on behalf of the Company. “Net Policy Fees” shall mean gross policy fees, if any, charged on all original and renewal Policies written on behalf of the Company, less return policy fees.

8.02 It is understood that the General Agent shall pay, and the Reinsurer shall guarantee, the Company directly a fee within thirty (30) days following the end of each month, [***] percent ([***]%) of Net Premiums and Net Policy Fees, plus the amount of assessments and state premium taxes as provided in this Article VIII. Notwithstanding anything else contained herein to the contrary, regardless of the amount of Net Premiums, the minimum ceding fee due the Company shall be (i) $500,000 for the first twenty-four month period after the effective date of the Agreement, plus the aforementioned assessments and state premium taxes and (ii) $250,000 for each twelve-month period thereafter during which the Agreement is in effect, plus the aforementioned assessments and state premium taxes. This minimum ceding fee shall not be affected by the amounts of Net Premiums written in other twelve-month or twenty-four month, as applicable, and shall not be reduced by reason of payments in excess of the minimum in other periods. Upon termination of this Agreement, the minimum fee shall be prorated to the effective date of such termination unless there are Policies issued after the termination of this Agreement. In such cases, the minimum fee shall continue past the termination of this Agreement until such time as no further Policies are issued. The minimum ceding fee for each period shall be paid within sixty (60) days of the end of each period. For these purposes, a policy's entire premium shall be applied to the period in which the policy is written. During the term of this Agreement, the General Agent shall be allowed to pay the ceding fee payable to the Company under this Section 8.02 on the basis of premiums written; provided, however, that the General Agent shall remain liable for the full amount of the ceding fee (i.e., based on premiums written) as specified above.

8.03 The General Agent shall allow and pay within thirty (30) days of the end of each month to the Company an amount equal to the state premium tax on the Net Premiums and Net Policy Fees reinsured hereunder for the past month. Should any additional premium tax be assessed at any time on the Net Premiums and Net Policy Fees reinsured hereunder, the Reinsurer shall pay the Company such additional premium tax within thirty (30) days of being informed by the Company of such additional premium tax. The Parties acknowledge that at the effective date of this Agreement, the applicable Departments of Insurance (or other state agency responsible for collecting premium taxes) may require the payment of estimated premium taxes in advance on

a semi-annual basis. The Reinsurer shall, therefore, pay to the Company within five days prior to the due date of any such estimated premium tax payment, the amount that would be due based upon the business produced hereunder. The General Agent shall also be responsible for the filing and payment of any and all other applicable taxes including, but not limited to, federal excise taxes. All such filings shall be made in the name of the party chosen by the Company. Should the General Agent fail to file for or pay any taxes due under this Section 8.03, the Reinsurer shall make such filings and/or payments as required hereunder.

8.04 The Reinsurer hereby guarantees that the Company will receive the ceding fee provided hereunder irrespective of any events, losses or developments for the term of this Agreement. Such payment is not dependent upon the performance of the General Agent, underwriting experience, loss experience, whether premium is collected or not, or any other event foreseen or unforeseen by the parties at the inception of this Agreement. The Reinsurer shall guarantee payment to the Company of its ceding fee on all premiums reinsured hereunder (prior to deduction of premiums, if any, ceded by the Company for inuring reinsurance), and in addition guarantees those amounts described in Section 8.06 of this Agreement and is directly responsible for payment of the amount described in Article XI. The Company shall allow return ceding fees on return premiums at the same rates.

8.05 The Reinsurer shall allow the General Agent a provisional commission of [***]% on all premiums ceded to the Reinsurer hereunder. The General Agent shall allow the Reinsurer return commission on return premiums at the same rate. This is an obligation owing directly from the Reinsurer to the General Agent. The General Agent shall not seek to recover from the Company, any commissions due and the Reinsurer shall not seek to recover from the Company, any return commissions due. No funds are due the General Agent from the Company.

8.06 It is expressly agreed that the commission allowed the General Agent includes provision for premium taxes, bureau fees and ceding fees. General Agent shall pay to the Company all premium taxes and ceding fees payable for policies subject to reinsurance hereunder. In the event that the ceding fee and premium taxes are not so paid by the General Agent within 60 days following the end of the month, the unpaid balance shall be paid directly to the Company by the Reinsurer.

ARTICLE IX

ACCESS TO RECORDS

The Reinsurer or its duly appointed representatives shall have free access at any and all reasonable times to such books and records of the Company or General Agent, its departmental or branch offices, as shall reflect premium and loss transactions of the Company and/or the business produced hereunder, for the purpose of obtaining any and all information concerning this Agreement or the subject matter thereof. Likewise, the Company or its duly appointed representatives shall have free access at any and all reasonable times to such books and records of the Reinsurer and/or General Agent, its departmental or branch offices as shall reflect premium and loss transactions of the Company and/or the business produced hereunder, for the purpose of obtaining any and all information concerning this Agreement or the subject matter hereof.

ARTICLE X

ARBITRATION

10.01 As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising between the Company and the Reinsurer with respect to this Agreement, or with respect to these Parties' obligations hereunder, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration.

10.02 One arbiter (an "Arbiter") shall be chosen by the Company and one Arbiter shall be chosen by the Reinsurer and an umpire (an "Umpire") shall be chosen by the Arbiters, all of whom shall be active or retired disinterested executive officers of property and casualty insurance or reinsurance companies.

10.03 In the event that a party fails to choose an Arbiter within thirty (30) days following a written request by either party to the other to name an Arbiter, the party who has chosen its Arbiter may choose the unchosen Arbiter. Thereafter, the Arbiters shall choose an Umpire before entering upon arbitration. If the Arbiters fail to agree upon the selection for the Umpire within thirty (30) days following their appointment, each Arbiter shall name three nominees, of whom the other shall decline two, and the decision shall be made by drawing lots.

10.04 Each party shall present its case to the Arbiters and Umpire within a reasonable amount of time after selection of the Umpire, unless the period is extended by the Arbiters and the Umpire in writing and/or at a hearing in Dallas, Texas. The Arbiters and Umpire shall consider this Agreement as an honorable engagement, as well as a legal obligation, and they are relieved of all judicial formalities and may abstain from following the strict rules of law regarding entering of evidence. The decision in writing by a majority of the Arbiters and Umpire when filed with the Parties shall be final and binding on the parties. Judgment upon the final decision of the Arbiters and Umpire may be entered in any court of competent jurisdiction.

10.05 In the event of a dispute between the Company and the Reinsurer concerning this Agreement and the General Agency Agreement (regardless of whether either party has claims against the General Agent), the entire dispute between the Company and the Reinsurer shall be subject to arbitration as provided in this Article X.

10.06 The costs of the arbitration, including the fees of the arbitrators and the umpire, shall be borne equally unless the Arbiters and Umpire shall decide otherwise.

10.07 This Agreement shall be interpreted under the laws of Texas and the arbitration shall be governed and conducted according to the Texas General Arbitration Act.

ARTICLE XI

ASSESSMENTS, ASSIGNMENTS, FINES AND PENALTIES

11.01 The Reinsurer hereby assumes liability for any and all assessments and assignments imposed as a result of Policies reinsured hereunder (whether before or after the termination of this Agreement). The Reinsurer shall immediately reimburse the Company for any assessments made against the Company pursuant to those laws and regulations creating obligatory funds (including, but not limited to, insurance guaranty and insolvency funds), pools, joint underwriting associations, FAIR plans and similar plans. Amounts owed by the Reinsurer under this Section shall be payable directly by the Reinsurer to the Company. The Reinsurer shall be entitled to receive from the Company on or prior to June 30 of each year thereafter (or such date on which such premium taxes are paid) a sum equal to the premium tax credit that is allowed to the Company with respect to such assessments. The premium tax credit allowed the Reinsurer hereunder is to be on a pro-rata and first-in, first-out basis. The Company shall

promptly return to the Reinsurer any amount of assessment refunded to or credited to the Company.

11.02 This Agreement shall apply to risks assigned to the Company under any assigned risk plan if, in the reasonable judgment of the Company, such risks were assigned to the Company because of the business written and reinsured hereunder. Should it be determined, in the Company’s sole discretion, that the General Agent, or any agent with whom assigned risks are also allocated under a specific assigned risk plan with the General Agent, is unwilling or unable to fulfill policyholder obligations under such assigned risk plan, the Company may elect alternative means to fulfill the policyholder obligations under the assigned risk plan. Any cost or expense arising out of or related to the administration of the assigned risks shall be paid by the Reinsurer under this Agreement.

11.03 The Reinsurer shall also pay promptly and directly to the Company any fines, penalties and/or any other charge incurred by the Company as respects the business reinsured hereunder arising out of the actions or inactions of the General Agent unless such fines, penalties and/or any other charge was a direct result of any willful misconduct on the part of the Company, which has been finally determined by a court of competent jurisdiction after the exhaustion of all appeals.

ARTICLE XII

PREMIUM FINANCING

With respect to Policies covered under the provisions of this Agreement, if any premiums are financed, the General Agent shall receive and accept on behalf of the Company all notices required by statute, contract or otherwise to be given to the Company, including, without limitation, notices of the existence of premium finance agreements or of cancellation of policies the premiums of which are financed ("financed policies"). No producing agent or any other agent shall be entitled to receive or accept any notice on behalf of the Company, and the General Agent shall be responsible for and will indemnify and hold the Company harmless from and against any and all liabilities, losses, claims, damages and expenses incurred by reason of or arising out of any action taken or inaction suffered as a result of receipt of any notice by any person, firm or entity other than the General Agent or the Company. Notwithstanding any other term or provision of this Agreement, the General Agent agrees to return and pay over to any premium finance company (whether affiliated with the Company or not) which has sent notice of cancellation of a financed policy to the General Agent, on behalf of the Company, within thirty (30) days of receipt of such notice of cancellation, any and all unearned commissions as of the date of cancellation, together with any and all unearned premiums due any premium finance company. The General Agent agrees to and does hereby relinquish any and all rights to any unearned commissions for any such financed policy as of the date of cancellation. The obligation of the General Agent to refund unearned commissions and unearned premiums on a canceled financed policy shall survive the termination or cancellation of this Agreement for so long as any policy written under the terms of this Agreement remains in force. If the General Agent does not fulfill its obligations to refund unearned commissions and unearned premiums as provided in this Article XII and/or to indemnify the Company as provided in this Article XII, then the Reinsurer shall pay the amount of the refund owed and/or shall indemnify the Company even if the premium finance company is an affiliate of the Company.

ARTICLE XIII

INSOLVENCY

13.01 In the event of insolvency of the Company, this reinsurance shall be payable directly to the Company or to its liquidator, receiver, conservator or statutory successor on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claims.

13.02 It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within thirty (30) days after such claim is filed in the insolvency, conservation or liquidated proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claims and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer.

13.03 Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Agreement as though such expense had been incurred by the Company.

13.04 It is further understood and agreed that, in the event of the insolvency of the Company, the reinsurance under this Agreement shall be payable directly by the Reinsurer to the Company or to its liquidator, receiver or statutory successor, except (i) as provided by applicable law, (ii) where the Agreement specifically provides another payee of such reinsurance in the event of the insolvency of the Company and (iii) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligation of the Company to such payees.

ARTICLE XIV

ALTERNATE PAYEE

14.01 As respects subject business assumed as reinsurance under this Agreement, it is agreed that if the Company has a conservator, liquidator or receiver appointed for it, or becomes the subject of any conservation, liquidation or insolvency proceeding, and the General Agent exercises its option to require the Company to permit all its liabilities under the Policies reinsured hereunder to be assumed by another licensed insurer as is permitted pursuant to the General Agency Agreement, such assuming insurer shall be substituted for the Company as payee of any reinsurance recoverable hereunder in respect of losses under Policies subject hereto, and the Reinsurer, shall make payment thereof directly to the substituted insurer. In the event of assumption, the Company shall, however, be entitled to any ceding fees and other sums owing hereunder with respect to Policies originally issued on its behalf.

14.02 In the event that an assuming insurer is substituted for the Company under Section 14.01, all the other provisions of this Agreement shall apply to the substituted insurer in the same manner as if said insurer were substituted for the Company as the reinsured party hereunder, and to the extent this Agreement reinsures such substituted insurer, coverage hereunder shall be excluded as respects the Company.

ARTICLE XV

HOLD HARMLESS PROVISIONS

15.01 Notwithstanding anything else contained herein to the contrary, as respects all matters related to this Agreement, in addition to those specific provisions insulating the Company from specific risks hereunder, the Reinsurer hereby covenants and agrees to reimburse and hold the Company harmless from and against every claim, demand, liability, loss, damage, cost, charge, attorneys' fees, expense, suit, order, judgment and adjudication of whatever kind or character regarding (i) this Agreement and/or (ii) the business reinsured hereunder (including, but not limited to, underwriting loss, credit loss, and/or run-off expense and/or all legal fees and expenses incurred by the Company in asserting its rights under this Agreement) whether or not such claim, demand, loss, damage, cost, charge, attorneys' fees, expense, suit, order, judgment or liability is within the terms of Policies written and reinsured hereunder. The Reinsurer's obligation hereto relates to, but is not limited to the following: all liability for agents' balances; return premiums and commissions; deceptive trade practice liability; premiums, policy fees or other charges (whether collected or not); costs, liability, damages, fees and/or expenses incurred by the Company due to a lawsuit between the Reinsurer and/or the General Agent (any dispute involving the Company and the Reinsurer is subject to arbitration); all actions or inactions by General Agent relating to this Agreement, any agreement with a premium finance company or claims administrator; and/or all fees and/or commissions owing to the General Agent under this and the aforementioned related agreements.

15.02 The Company shall not be liable to the Reinsurer for premiums unless the Company itself has actually received those premiums and wrongfully not remitted them to the Reinsurer. The Reinsurer may not offset any balances on account of losses, loss adjustment expenses or any other amounts due except as to premiums actually received by the Company itself (as distinct from premiums not collected, or premiums collected by the General Agent, or premium placed in the premium trust account pursuant to the General Agency Agreement) which have wrongfully not been transmitted to the Reinsurer.

15.03 If for any reason the General Agent fails or is unable to administer the policies reinsured hereunder (whether the Agreement is still in effect or the business is being run-off), (i) the Reinsurer shall appoint a party (acceptable and approved by the Company) to administer the business and the Reinsurer shall be responsible for 100% of the cost of said administration and (ii) the General Agent will fully cooperate with the Company (or its designated representative) in providing access to such of the General Agent’s personnel, computer systems or other assets or procedures as the Company may deem necessary to provide for an orderly transition of the administration of the Policies reinsured hereunder. If return premiums or other funds need to be returned to premium finance companies, policyholders or sub-agents, the Reinsurer shall pay these amounts if the successor or administrator does not.

15.04 The Reinsurer shall not sue, or seek arbitration, against the Company for any acts of the General Agent for any monies which the General Agent owes unless the Company has actually received those monies and has wrongfully not remitted them to the Reinsurer; and the Reinsurer shall indemnify the Company for any damages, liabilities and expenses incurred by reason of the General Agent's acts or failure to act. The Company is not responsible for any commissions or other monies payable to the General Agent in connection with this Agreement and the General Agent shall not sue, or seek arbitration against, the Company for any actions by, or debts owing from, the Reinsurer. The Reinsurer shall not seek to recover from, or offset against, the Company any sums, whether premiums or other monies, which the General Agent

was unable or unwilling to remit to the Company or the Reinsurer.

15.05 In the event the Reinsurer, or any agent appointed pursuant to this Agreement, binds the Company for insurance coverage on insurance risks which are in excess of the policy limits set forth in Article I, and/or are not within the terms of business specified in Article I, and/or are not within the territory specified in Article I, and/or are excluded under Article III, whether intentional or not, the Reinsurer and General Agent will do such things and take such actions as may be necessary to reduce the Company's exposure to such risks and to hold the Company harmless against any liability or loss which may be incurred by the Company in excess hereof. At the Company's request, the General Agent in accordance with applicable law, and policy terms, shall cancel or not renew any risk bound which is not in conformance with this Agreement. Any such insurance coverage on insurance risks bound contrary to the limitations which are in excess of the policy limits set forth in Article I, and/or are not within the classes of business specified in Article I, and/or are not within the territory specified in Article I, and/or are excluded under Article III, whether intentional or not, shall be 100% reinsured and subject to this Agreement.

15.06 In furtherance of the protections afforded to the Company under this Agreement, the Reinsurer expressly acknowledges that certain circumstances may come to exist with respect to the Policies reinsured hereunder that require adjustment to the timing of Reinsurer remittances. If, in the sole discretion of the Company, an advance payment or payments of the Reinsurer’s obligations under this Agreement is necessary to avoid irreparable harm to the Company (as, for example, in the circumstance where the funds available in the premium trust account established pursuant to Section 2.01 of the General Agency Agreement are insufficient to provide for timely payment of claims), the Reinsurer shall make such payment or payments promptly upon the Reinsurer’s receipt of the Company’s good faith estimate or calculation of the necessity thereof.

15.07 When a claim is asserted or action commenced, including class actions regardless of whether the class has been certified, relating in any way to the Policies produced under this Agreement, the General Agent shall assume the defense and associated costs and expenses thereof. The Company may elect, however, at its sole discretion, on a case-by-case basis, to engage counsel directly on its own behalf, and the expenses and costs related to such defense shall be passed on to and paid by the General Agent within 60 days written notice from the Company. In such cases where the claim or action relates to business written by more than one agent of the Company, costs and expenses shall be proportioned among applicable agents at the Company’s sole discretion. Should the General Agent fail to remit any amounts due to Company under this Section 15.07, then the Reinsurer shall pay such amounts within 60 days written notice from the Company.

ARTICLE XVI

LOSS IN EXCESS OF POLICY LIMITS/EXTRA CONTRACTUAL OBLIGATIONS

16.01 In the event the Company pays or is held liable to pay an amount of loss in excess of its policy limit, but otherwise within the terms of its policy (hereinafter called "loss in excess of policy limits") or any punitive, exemplary, compensatory or consequential damages (hereinafter called "extra contractual obligations") because of alleged or actual bad faith or negligence on its part in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its policyholder, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action, or in otherwise handling a claim under a policy subject to this Agreement, 100% of the loss in excess of policy limits and/or 100% of

the extra contractual obligations shall be added to the Company's loss, if any, under the Policy involved, and the sum thereof shall be reinsured 100% under this Agreement.

16.02 An extra contractual obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the Policy.

16.03 Notwithstanding anything stated herein, this Agreement shall not apply to any loss incurred by the Company as a result of any fraudulent and/or criminal act which has been finally determined by a court of competent jurisdiction, after the exhaustion of all appeals, by any officer or director of the Company acting individually or collectively or in collusion with any individual, corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder.

ARTICLE XVII

REGULATORY MATTERS

17.01 It is the Parties' understanding that any premiums which are overdue from the General Agent to the Company may be deemed non-admitted assets. In confirmation of the liabilities assumed by the Reinsurer under this Agreement, the Reinsurer hereby assumes 100% of all liability and responsibility for all premiums in the course of collection.

17.02 The Reinsurer shall agree, at no cost to the Company, to take those actions (including, but not limited to, modifications in how funds are handled and how accounts are cleared, settled and the manner in which incurred losses are accounted for) and agree to those arrangements necessary to ensure that the Company suffers no adverse impact because of this reinsurance program and is in compliance with any applicable laws of a state insurance department, insofar as this reinsurance program is concerned.

ARTICLE XVIII

THE GENERAL AGENT

18.01 The Company, the Reinsurer and the General Agent have entered into a General Agency Agreement effective April 1, 2020 (the "General Agency Agreement"), which is incorporated herein by this reference. The Reinsurer has selected the General Agent to administer the business reinsured hereunder. While for regulatory purposes, the General Agent may need to be appointed as the Company's agent, it is recognized that the General Agent is acting on behalf of the Reinsurer. The Company is making no evaluation of the General Agent's qualification, has no obligation to furnish reports or statistics to the Reinsurer, or to monitor the performance of the General Agent. The Company shall file with the State all reports requested by the State based upon information received from the General Agent and Reinsurer.

18.02 The Company will, at the request of the General Agent and the Reinsurer, appoint producing agents to produce business through the General Agent. The Company, in its sole discretion, may refuse to appoint any such agent; provided, however, that such appointment shall not be unreasonably withheld. The General Agent will not establish any sub-general agencies or any agencies with the authority of a general agency. The Reinsurer shall hold the Company harmless from and indemnify it for any damage, liability, claim, expense, cost or fees (including attorneys' fees and expenses) of whatever kind or character caused directly or indirectly by any action of or failure to act, by any such producing agent.

18.03 The General Agent shall be responsible for the control of the producing agents

appointed by the Company at the request of and on behalf of the Reinsurer, including compliance with state licensing laws and the financial condition of such agents.

18.04 The Reinsurer shall guarantee payment to the Company of any amounts due the Company from business produced by and/or policies issued by or through the producing agents appointed by the Company at the request of and on behalf of the General Agent and the Reinsurer. The Reinsurer and the General Agent shall be solely responsible for notifying such agents of this Agreement and of any termination hereof, and the Reinsurer shall be responsible for the consequences of any failure to provide such notification.

18.05 The General Agent shall not sue, or seek arbitration, against the Company for any acts of the Reinsurer and shall indemnify and hold the Company harmless from and against any damages, liabilities and expenses incurred by reason of the Reinsurer's acts or failures to act.

18.06 The Company shall conduct or have conducted the examinations of the General Agent as provided in Section 5.13 of the General Agency Agreement. The examinations provided for herein shall be at no cost to the Company, and the Reinsurer shall indemnify and hold the Company completely harmless as respects any liability, damage, charge, cost, fine, or penalty, the Company may incur as a result of such examinations.

ARTICLE XIX

REINSURER OR GENERAL AGENT SALE OR TRANSFER

The Reinsurer or the General Agent agree to give the Company, 90 days advance written notice of any sale or transfer of such party's business, or such party's consolidation with a successor firm, in order that the Company may, in its sole discretion:

(a)

Assign this Agreement to the successor; or

(b)

Enter into a new reinsurance agreement with the successor; or

(c)

Terminate this Agreement as provided in Section 4.02(g) of this Agreement.

ARTICLE XX

MISCELLANEOUS

20.01 This Agreement has been made and entered into in the State of Texas and the Agreement shall be subject to and construed under the laws of the State of Texas. This Agreement shall be deemed performable at the Company's administrative office in Bedford, Texas, and it is agreed that the venue of any controversy arising out of this Agreement, or any breach thereof, shall be in Tarrant County, Texas.

20.02 All notices required to be given hereunder shall be deemed to have been duly given by personally delivering such notice in writing or by mailing it, Certified Mail, return receipt requested, with postage prepaid. Any Party may change the address to which notices and other communications hereunder are to be sent to such Party by giving the other Party prior written notice thereof in accordance with this provision.

20.03 This Agreement shall be binding upon the Parties hereto, together with their respective successors. None of the Parties hereto may assign any of their rights or obligations under this Agreement.

20.04 This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

20.05 This Agreement is the entire agreement between the parties and supersedes any and all previous agreements, written or oral, and amendments thereto with respect to the subject matter hereof.

20.06 This Agreement may only be modified or changed by a written amendment to this Agreement executed by all Parties hereto.

20.07 A waiver by the Company, Reinsurer or General Agent of any breach or default by the other party under this Agreement shall not constitute a continuing waiver or a waiver by the Company or the Reinsurer of any subsequent act in breach or of default hereunder.

20.08 Headings used in this Agreement are for reference purposes only and shall not be deemed a part of this Agreement.

20.09 The Parties hereto intend all provisions of this Agreement to be enforced to the fullest extent permitted. Accordingly, should a court of competent jurisdiction or arbitration panel determine that the scope of any provision is too broad to be enforced as written, the Parties intend that the court or arbitration panel should reform the provision to such narrower scope as it determines to be enforceable under present or future law; such provision shall be fully severable; this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision were never a part hereof; and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance.

20.10 This Agreement is not exclusive and the Company reserves the right to appoint or contract with other reinsurers, agents and/or managing agents in the territory covered by this Agreement.

20.11 The Reinsurer or General Agent shall not insert any advertisement respecting the Company or the business to be written under this Agreement in any publication or issue any circular or paper referring to the Company or such business without first obtaining the written consent of the Company. The Reinsurer and/or General Agent shall establish and maintain records of any such advertising as required by applicable statutes and regulations.

20.12 Policy cancellations at the Company's request will be made strictly subject to requirements imposed by the Company's underwriting rules and practices or the Reinsurer's underwriting rules and practices, as approved by the Company, and in compliance with applicable statutes and regulations and the applicable provisions contained in this Agreement and the pertinent policy. Such cancellation authority shall be exercised only for causes inherent in the particular risk and shall not be construed as authority to make general or indiscriminate cancellations or replacement of the Policies with those of another Company, except upon specific written instructions from the Company. When directed by the Company, the Reinsurer will cancel any and all Policies produced by it for any reason the Company deems necessary.

20.13 This Agreement shall be interpreted in conformance with applicable Texas law and regulation. If it is found or ordered by a court or regulatory body that a term or provision of this Agreement does not conform to such law or regulation then this Agreement shall be deemed to

be amended and modified in accordance with such law. However, where this Agreement is found not to comply with applicable law or regulation, the Company may in its sole discretion terminate this Agreement immediately and without prior notice.

20.14 The Company agrees that the Reinsurer shall have the right, with the approval of the Company, to determine the rates and prepare the rate filing for the Company to file during the term of this Agreement and during the term of the run-off. The Reinsurer and General Agent understand and agree that no business shall be produced, until a written approval of the applicable rate rules and forms is received from the regulatory authority of competent jurisdiction, if applicable or required by statute.

20.15 It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Agreement.

ARTICLE XXI

LOSS AND UNEARNED PREMIUM RESERVE FUNDING

21.01 Within 10 business days of the effective date of this Agreement, the Reinsurer will secure [***]% of its obligations under this Agreement (“Obligations Under the Reinsurance Agreement”), which include but are not limited to [***]% of the obligations for unearned premiums reserves, if any, and reserves for losses incurred but not reported and losses reported but unpaid, via a security fund or trust agreement or letter of credit to be obtained by the Reinsurer in favor of the Company, which shall be in all respects acceptable to the Company and allow the Company to receive credit for the reinsurance hereunder from the Department of Insurance or applicable regulator of the state of domicile of the Company.

(a)

At a minimum, the security fund or trust or letter of credit must:

(i)

comply with the applicable laws and regulations; and

(ii)

be issued by or held with a Qualified United States Financial Institution acceptable to the Company (as defined by the applicable statute and regulation).

(b)

The Company may draw the full amount of the security fund or trust or letter of credit to satisfy, in whole or in part the obligations of the Reinsurer hereunder or, if:

(i)

The Reinsurer fails to comply with the provisions of this Agreement; or

(ii)

the issuer of the security fund or trust or letter of credit gives the Company notice of cancellation or non-renewal of the security fund or

letter of credit.

21.02 Within 10 business days of the effective date of this Agreement, and within 10 business days prior to the end of each calendar quarter thereafter, the Company shall provide the Reinsurer with a good faith estimate of the expected sum of [***]% of the Company’s ceded Unearned Premium and Loss Reserves as of the end of the forthcoming calendar quarter (the “Estimate”). The Reinsurer shall, within 2 business days of first receiving the Estimate, and within 2 business days prior to the commencement of such forthcoming calendar quarter thereafter, fund/obtain a security fund or letter of credit in an amount equivalent to [***]% of the Estimate. Additionally, each time thereafter that: (i) the Reinsurer’s A.M. Best rating or outlook is at any time reduced; or (ii) the Reinsurer’s A.M. Best rating or outlook is at any time removed or withdrawn such that the Reinsurer is not rated or unrated by A.M. Best; or (iii) the Reinsurer’s capital and policyholder surplus (or its equivalent) reduces [***] percent ([***]%) or more during any rolling twelve (12) month period measured quarterly; or (iv) the Reinsurer fails to maintain its CAT XOL reinsurance with coverage up to [***] dollars ($[***]) with a [***] ($[***]) retention and its multiline XOL reinsurance with coverage up to [***] dollars ($[***]) with a [***] dollar ($[***]) retention, each provided by the Reinsurer’s reinsurers existing as of the effective date of this Agreement, provided that the Reinsurer may add reinsurers with a minimum surplus of at least [***] dollars ($[***]) and an “A” rating by A.M. Best, the components of the Estimate shall increase by [***]% (i.e. the first time the Estimate shall increase to [***]% of the Company’s ceded outstanding Unearned Premium and Loss Reserves as of the end of the forthcoming calendar quarter, the second time the Estimate shall increase to [***]% of the Company’s ceded outstanding Unearned Premium and Loss Reserves as of the end of the forthcoming calendar quarter, etc.).

21.03 If at any time, based upon the monthly reporting provided to Company under this Agreement, it shall be determined by the Company or Reinsurer that the amount of the security fund or letter of credit may not be equivalent to the greater of: (i) [***]% of Company’s ceded Unearned Premium and Loss Reserves; (ii) [***]% of Company’s ceded Unearned Premium and Loss Reserves as of the end of the current calendar quarter (the “Revised Estimate”); or (iii) the amounts required under Section 21.02 of this Agreement, then upon written notice from Company, the Reinsurer shall immediately increase the amount of the security fund or letter of credit to an amount equivalent to the greater of (i), (ii) or (iii) and the Company shall at all times be in possession of a security fund or letter of credit equivalent to the greater of (i), (ii) or (iii) as of the end of the current calendar quarter.

21.04 Should the amount of the security fund or letter of credit at the end of any calendar quarter be greater than the amount required in this Article XXI, the Reinsurer shall be entitled to reduce the amount of the security fund or letter of credit to an amount not less than the amount required in this Article XXI. The Qualified United States Financial Institution shall permit such reduction upon receipt by it of the Company’s written statement that Reinsurer is entitled to such reduction, which written statement shall not be unreasonably withheld by Company.

21.05 For the purpose of this Article XXI, Unearned Premiums means, as of any given date, the aggregate premium attributable to the unexpired coverage period of all insurance policies produced under the Agreement, as determined in accordance with generally accepted statutory accounting principles consistently applied. For this purpose, premium shall be the written premium charged on the insurance policy for the period such policy is in force irrespective of the subsequent billing and collection of such premium.

21.06 For the purpose of this Article XXI, Loss Reserves means, as of any given date, the reserve attributable to losses incurred but not reported and losses reported but not paid with respect to the insurance policies produced under this Agreement, and shall include provision for both allocated and unallocated loss adjustment expense, in each instance as determined in accordance with generally accepted accounting principles consistently applied.

21.07 The Reinsurer hereby agrees that the actuarial opinion of the Company’s internal actuary shall be controlling, in its sole discretion, as to the timing and determination of the adequacy of loss reserves established for losses incurred and outstanding on business produced under this Agreement and the General Agency Agreement for the purposes of posting collateral hereunder. However, the Reinsurer shall have the right to have the Company engage on a semi-annual basis, at the expense of the Reinsurer an independent actuarial opinion, performed by MILLIMAN USA’s Dallas office, attesting to the adequacy of loss reserves established for losses incurred and outstanding on business produced under this Agreement and the General Agency Agreement. If the Reinsurer requests hereunder the actuarial opinion of MILLIMAN USA’s Dallas office, the Reinsurer hereby agrees to post the collateral required hereunder in accordance with the actuarial analysis of the Company’s internal actuary until an analysis is completed by MILLIMAN USA’s Dallas office. At such time, the Reinsurer shall post the collateral required hereunder in accordance with the actuarial analysis of MILLIMAN USA’s Dallas office. If MILLIMAN USA’s Dallas office is unable to perform the actuarial analysis, the analysis of the Company’s internal actuary shall be controlling for the purpose of determining the ultimate loss ratio and loss adjustment expense ratio picks required for posting collateral under the Agreements. If subsequent to the receipt of the applicable independent actuarial opinion, the Company determines in its sole discretion that there has been a significant change in the loss reserves as compared to the applicable independent actuarial opinion, the Company’s internal actuary shall again be controlling, in its sole discretion, as to the timing and determination of the adequacy of loss reserves established for losses incurred and outstanding on business produced under this Agreement and the General Agency Agreement until the Company again engages, at the expense of the Reinsurer, an independent actuarial opinion, performed by MILLIMAN USA’s Dallas office, attesting to the adequacy of loss reserves established for losses incurred and outstanding on business produced under this Agreement and the General Agency Agreement. Additionally, if the actuarial opinion of the Company’s internal actuary is not available, for any reason, the Company shall engage semi-annually, at the expense of the Reinsurer, an independent actuarial opinion, performed by MILLIMAN USA’s Dallas office, attesting to the adequacy of loss reserves established for losses incurred and outstanding on business produced under this Agreement and the General Agency Agreement.

ARTICLE XXII

SAVINGS CLAUSE

22.01 If any law or regulation of any Federal, State or local government of the United States of America, or the ruling of officials having supervision over insurance companies, should prohibit or render illegal this Agreement, or any portion thereof, as to risks or properties located in the jurisdiction of such authority, either the Company or the Reinsurer may upon written notice to the other suspend or abrogate this Agreement insofar as it relates to risks or properties located within such jurisdiction to such extent as may be necessary to comply with such law, regulations or ruling. Such illegality shall in no way affect any other portion thereof; provided, however, that the Reinsurer or the Company may terminate or suspend this Agreement insofar as it relates to the business to which such law or regulation may apply.

22.02 This Agreement shall be interpreted in accordance with the laws of the State of Texas.

All provisions of this Agreement are intended to be enforced to the fullest extent permitted. Accordingly, should a court of competent jurisdiction or arbitration panel determine that the scope of any provision is too broad to be enforced as written, the Parties intend that the court or arbitration panel should reform the provision to such narrower scope as it determines to be enforceable under present or future law; such provision shall be fully severable; this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision were never a part hereof; and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance; provided, however, that where this Agreement is so found not to comply with applicable law or regulation, the Company may in it sole discretion terminate this Agreement immediately without prior notice.

[THE REMAINDER OF THE PAGE IS LEFT INTENTIONALLY BLANK.

SIGNATURES APPEAR ON THE FOLLOWING PAGE.]

IN WITNESS WHEREOF, the Parties hereto by their respective duly authorized representatives have executed this Agreement as of the date first above written.

UNITED SPECIALTY INSURANCE COMPANY

BY: /s/ David Cleff

ITS: EVP

DATE: 4-3-2020

CRUSADER INSURANCE COMPANY

BY: /s/ Cary L. Cheldin

ITS: President

DATE: 4-1-20

UNIFAX INSURANCE SYSTEMS, INC.

BY: /s/ Cary L. Cheldin

ITS: President

DATE: 4-1-20

EXHIBIT 10.2

CERTAIN IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THE EXHIBIT BECAUSE IT IS BOTH NOT MATERIAL AND WOULD LIKELY CAUSE COMPETITIVE HARM TO THE REGISTRANT IF PUBLICLY DISCLOSED.

[***] INDICATES THAT INFORMATION HAS BEEN REDACTED.

GENERAL AGENCY AGREEMENT

THIS GENERAL AGENCY AGREEMENT (this "Agreement") is effective April 1, 2020, by and among UNITED SPECIALTY INSURANCE COMPANY ("Company"), CRUSADER INSURANCE COMPANY ("Reinsurer"), and UNIFAX INSURANCE SYSTEMS, INC. ("General Agent");

W I T N E S S E T H:

In consideration of the mutual covenants contained in this Agreement, and upon the terms and conditions set forth below, the parties hereto agree as follows:

PREAMBLE

The Company, the Reinsurer and the General Agent have entered into a Quota Share Reinsurance Agreement dated as of April 1, 2020 (the "Reinsurance Agreement"), which is incorporated herein by this reference, which Reinsurance Agreement requires the appointment of the General Agent to perform certain specified acts on behalf of the Company and Reinsurer. The General Agent desires to perform the functions and duties necessary under the Reinsurance Agreement. It is therefore mutually agreed by the parties that the General Agent will perform all functions necessary for the production, service and management of policies issued under the Reinsurance Agreement in accordance with the terms and conditions set forth therein and herein. To the extent that there is any conflict between the terms of this Agreement and the Reinsurance Agreement, the Reinsurance Agreement shall govern. Notwithstanding any provisions to the contrary contained elsewhere herein or in any other document, it is expressly understood that the execution and delivery of this Agreement and the Company's performance hereunder shall not under any circumstances be interpreted to affect, weaken or modify the Reinsurer's obligation to indemnify and hold the Company harmless from and against the business, credit and insurance risks as set forth in the Reinsurance Agreement. The contractual assumption by the Reinsurer of these risks in the Reinsurance Agreement is a condition precedent to the Company's entering into this Agreement with the General Agent.

ARTICLE I

APPOINTMENT AND DUTIES

1.01 The Company, at the direction of the Reinsurer, hereby appoints the General Agent as its general agent for the purpose of producing and handling the business which is the subject of the Reinsurance Agreement issued or renewed on or after the effective date of this Agreement. The Company, at the request of the Reinsurer, hereby grants authority to the General Agent to solicit, accept and receive applications for such classes of coverage as are specified in the Reinsurance Agreement; to secure, at its own expense, reasonable underwriting information through reporting agencies or other appropriate sources relating to each risk insured; to issue, renew and countersign policies, certificates, endorsements and binders which the Company may, from time to time, authorize to be issued, delivered, renewed and countersigned; and to collect and receipt for the premiums thereon and therefor.

1.02 All activities of the General Agent pursuant to this Agreement shall be in strict compliance with the terms of the Reinsurance Agreement and all rules, regulations and instructions of the Company, including, but not limited to, all rules, instructions and specifications included in the Company's rate manuals, rate brochures and rate schedules.

1.03 The Company, at the Reinsurer's request, further authorizes the General Agent to perform all acts and duties under policies of insurance issued by the Company as would otherwise be performed by the Company, including, but not limited to, properly sending and/or receiving reports and notices and remitting and/or receiving monies due from or to the Company, and adjusting and paying losses or other claims. The Company grants to the General Agent the authority to settle claims on behalf of the Company. However, the maximum dollar amount of such authority per claim shall not exceed the greater of [***]% of the Company’s policyholder surplus as of December 31 of the last completed calendar year or $[***]. For claims settlement in excess of the greater of [***]% of the Company’s policyholder surplus as of December 31 of the last completed calendar year or $[***], the General Agent may only settle such claims with prior approval of the Company and the Reinsurer. The Company retains final authority to determine any disputes relating to claims settlement and setting of loss reserves. In performing each of the acts mentioned above, the General Agent shall be under the direct supervision and control of the Reinsurer, and the Reinsurer shall be solely responsible for the acts of the General Agent. While there are acts of the General Agent which may be required by applicable law to be performed on behalf of the Company, the Reinsurer shall remain ultimately responsible for such acts and will indemnify and hold the Company completely harmless for any damage, cost, liability, expense and/or loss (including attorneys' fees and expenses) incurred by the Company as respects such acts of the General Agent. The General Agent must send to the Company a report, as soon as it becomes known, that a claim (i) involves a coverage dispute; (ii) involves a demand in excess of policy limits; (iii) alleges bad faith; (iv) is open for more than six months; or (v) alleges a violation of any applicable unfair practices and unfair competition statutes. The Company may suspend or terminate the settlement authority of the General Agent during the pendency of any dispute regarding any event of default by the General Agent.

1.04 The General Agent is authorized to have claims adjusted through independent claims adjusters, subject to the supervision of the Reinsurer. The selection of independent claims adjusters shall be subject to prior written approval of the Reinsurer and Company; provided, that each independent adjuster assigned to assess an individual claim shall not require such prior written approval. Such independent claims adjusters are not the agents of the Company and the Company shall be held harmless and indemnified by the Reinsurer for any liability, claim, demand, expense and/or cost of whatever kind or character as a result of, related to or connected with any action or inaction of such claims adjusters.

1.05 The Company shall not be responsible for the General Agent's expenses and costs, including, but not limited to, salaries, bonuses, rentals, transportation facilities, clerk hire, solicitors' fees, postage, advertising, exchange, personal license fees, adjustment by the General Agent of losses under policies issued by the General Agent, or any other agency expenses whatsoever. The General Agent's sole compensation shall be the amounts payable to the General Agent in Article VIII of the Reinsurance Agreement and in Article III of this Agreement.

1.06 The General Agent understands and agrees that it has no power or authority granted to it by the Company independent of the Reinsurance Agreement, and that this Agreement and the General Agent's authority hereunder shall cease immediately upon termination, for any reason, of this Agreement or of the Reinsurance Agreement (excepting only the General Agent's responsibilities with regard to run-off and other matters as set forth herein or in the Reinsurance Agreement).

1.07 The General Agent shall not have the power to accept or bind risk other than as set forth herein, as set forth in the Reinsurance Agreement or as may be subsequently authorized by the Company and Reinsurer in writing. The General Agent may not bind or cede reinsurance or retrocession on behalf of the Company, may not commit the Company to participation in insurance or reinsurance syndicates, and may not commit the Company to a claim settlement with a reinsurer other than the Reinsurer without the prior written approval of the Company. If such prior written approval is given, the General Agent shall forward promptly a report to the Company concerning such transaction and/or payment. The Company hereby authorizes the General Agent to collect payments for losses and loss adjustment expenses from a reinsurer. The General Agent shall send a report to the Company concerning such transactions promptly.

1.08 The General Agent acknowledges that, with respect to any state in which business is permitted to be written under the Reinsurance Agreement, this Agreement shall not become effective until the General Agent is first duly appointed by the Company with the applicable Department of Insurance. The General Agent agrees that any producing agent receiving commission pursuant to this Agreement shall first be duly registered by the Company, if applicable, and said appointment on file with any applicable state insurance department. The General Agent further agrees to be responsible for the payment of any penalty assessed to the Company for any violation by the General Agent or any producing agent or broker registered by the General Agent pursuant to the provisions of Article IV hereof of any license or appointment provision of the Texas Insurance Code or other applicable state statutes, and the rules and regulations promulgated thereunder. If the General Agent fails to pay such penalty, the Reinsurer shall pay it immediately upon written notification by the Company of the General Agent's failure to pay such penalty.

1.09 It is understood that the Reinsurer has acknowledged that the Company shall not be required to monitor the General Agent's compliance with the terms of either the Reinsurance Agreement or this Agreement and the Reinsurer shall be responsible for monitoring the General Agent's compliance with the Reinsurance Agreement and this Agreement.

1.10 The authority and limitations of the General Agent to issue policies are as follows:

(a) the maximum annual premium volume the General Agent may produce under this Agreement is $[***];

(b) the basis of the rates charged are as provided in the Company's rate manuals, rate brochures and rate schedules which the General Agent shall follow, and the General Agent shall not decrease rates or increase discounts without the prior approval of the Company and Reinsurer;

(c) the only classes of business the General Agent is authorized to produce and handle under this Agreement are the classes of business specified in the Reinsurance Agreement;

(d) the maximum limits of liability for policies to be produced pursuant to this Agreement are set forth in the Reinsurance Agreement;

(e) the General Agent may issue policies under this Agreement only to insured residents in the states in which business is permitted to be produced under the Reinsurance Agreement; but this limitation shall not apply to losses if said policies provide coverage outside the aforesaid territorial limit;

(f) the General Agent shall only cancel policies as set forth in the policy form for the policies produced hereunder or as otherwise permitted by applicable law;

(g) the maximum term for any policy issued hereunder shall be twelve (12) months;

(h) the General Agent shall employ all reasonable and appropriate measures to control and keep a record of the issuance of the Company's insurance policies hereunder, including, but not limited to, keeping records of policy numbers issued and maintaining policy inventories;

(i) the excluded risks are those set forth in the Reinsurance Agreement.

In underwriting policies, the General Agent shall follow the underwriting guidelines developed by the General Agent, the Reinsurer and the Company, and these guidelines are herein incorporated by reference.

ARTICLE II

PREMIUMS

2.01 It is expressly agreed and understood that all premiums collected by the General Agent are collected on behalf of the Company; that such premiums are the property of the Company and the Reinsurer as their respective interests may appear pursuant to the Reinsurance Agreement, less such commissions and fees as are due the General Agent as specified herein and in the Reinsurance Agreement. All premiums collected by the General Agent on the business produced under the Reinsurance Agreement shall be deposited in a premium trust account. Despite the General Agent’s ownership of the account, funds deposited therein on behalf of the Company are understood to be owned by the Company. The only disbursements from such account shall be the payment of claims, claims expenses, return premiums, commission due the General Agent as authorized herein and in the Reinsurance Agreement, and remittance of premiums to the Reinsurer and Company. In the event that, in the General Agent’s reasonable opinion, the funds in the premium trust account are not sufficient to make claim payments, the Reinsurer shall wire transfer, within five (5) working days of receipt of a written request from the General Agent, or as soon as reasonably practicable, but always within any applicable State requirements, into the premium trust account the funds necessary to make all then outstanding claims payments. The General Agent shall not make personal use of any funds in this account. The commissions payable to the General Agent are debts due to the General Agent by the Reinsurer and the privilege herein granted of deducting commissions from said premiums should not be taken as a waiver by the Company of its exclusive ownership rights of premiums as provided herein. Should any dispute arise between the Company, the Reinsurer and/or the General Agent regarding payment of premium, the General Agent shall remit immediately all money and property, without deductions for commissions, to the premium trust account with full reservation of any and all rights reserved by the parties.

2.02 The General Agent shall furnish to the Company and the Reinsurer all necessary premium and loss data (in a form acceptable to the Reinsurer and the Company) no later than thirty (30) days following the end of the month during which the business is written or losses are incurred to enable the Company to record statistics required by statutes, regulation or upon call by authorities having competent jurisdiction. Such data shall include, but is not limited to, premiums written and unearned premium. Said data shall be segregated by lines of insurance and location of risk.

2.03 The keeping of an account with the General Agent on the Company's books as a creditor and debtor account is declared a record memorandum of business transacted and neither such keeping of an account, nor alteration in commission rate, nor failure to enforce prompt remittance or compromise or settlement or declaration of balance of account, shall be held to waive assertion of the trust relation as to premiums collected by the General Agent.

2.04 The General Agent shall be liable for the payment of all premiums upon all policies of insurance written through the General Agent or any sub-agents of the General Agent.

2.05 The General Agent shall remit to the Reinsurer, or Company as applicable, any funds of or due to the Company under this Agreement within thirty (30) days from the end of the month in which premium is recorded.

2.06 The General Agent shall hold all funds of or due the Company in a fiduciary capacity.

ARTICLE III

COMPENSATION TO THE GENERAL AGENT

3.01 The Reinsurer shall allow the General Agent in full compensation for all services rendered and in full reimbursement for all expenditures made by the General Agent the fee specified in Article VIII of the Reinsurance Agreement. The General Agent shall pay the Company directly its ceding fee as specified in the Reinsurance Agreement (Article VIII), and the amounts for assignments, assessments, premium taxes, fines and penalties as specified in the Reinsurance Agreement (Articles XI and XII).

3.02 The Company shall not be liable for or responsible for any commissions or other monies payable by the Reinsurer to the General Agent. The General Agent shall not sue or seek arbitration against the Company for any actions by, or debts owing from, the Reinsurer.

3.03 In the event the Company or the Reinsurer, during the continuance of this Agreement or after its termination, refunds premiums under any policy of insurance by reasons of cancellation or otherwise, the General Agent agrees immediately to return to the Company or the Reinsurer, as applicable, the commission previously received by it on the portion of the premium refunded. The General Agent shall not be required to return, as commission or return commission, monies greater than the total commission paid or otherwise payable to the General Agent.

ARTICLE IV

SUB-AGENTS

4.01 The General Agent shall comply with, and shall be responsible to ensure the compliance by, all such producing agents with the terms of this Agreement and the Reinsurance Agreement and all other written rules and regulations of the Company, and treat as confidential and use only in the interest of the Company all instructions, information and materials received from the Company.

4.02 The General Agent shall be solely responsible for the performances of any producing agents under all of the terms and provisions hereof, including, but not limited to, the collections of premiums and refunds of premiums.

4.03 Each such producing agent must be registered or appointed, as required by the appropriate regulatory body, as an agent of the Company through the appropriate regulatory body before any application shall be accepted from him or other insurance performances on behalf of the Company are performed. The General Agent shall be ultimately responsible for the obligation of the producing agent to obtain an appointment as provided herein.

4.04 It is also specified that the General Agent shall be responsible for all commissions payable to any producing agents. The General Agent and any producing agent shall not seek to hold the Company or Reinsurer liable through litigation, arbitration or otherwise for commissions payable to such producing agents.

4.05 The Company, in its sole discretion with or without cause, and without prior written notice, may terminate the appointment of any producing agent.

4.06 The General Agent shall not permit its subagents or subproducers to serve on its Board of Directors.

4.07 The General Agent shall not appoint sub-managing general agents.

4.08 The General Agent shall not employ an individual who is employed with the Company.

ARTICLE V

ADDITIONAL DUTIES OF AGENT

5.01 The General Agent shall, at all times during the period of this Agreement, comply with all applicable laws and all orders, policy decisions or other requirements of the Texas Department of Insurance or other applicable state insurance department, and in addition shall also comply with all United States economic trade and sanction laws and regulations, as administered by the Office of Foreign Assets Control (“OFAC”) of the United States Department of the Treasury.

5.02 All books, records, accounts, documents and correspondence of the General Agent and any producing agent pertaining to the Company's and Reinsurer's business shall, at all times, be open to examination by any authorized representative of the Company or Reinsurer. The General Agent shall make copies of records available upon request by the Company or Reinsurer, whether such request is before or after termination of this Agreement or the Reinsurance Agreement. The General Agent must maintain separate records of business, including, but not limited to, underwriting files for each insurer for whom it acts as a general agent. Such records must be maintained for five (5) years or until the completion of a financial examination by the insurance department of the state in which the Company is domiciled, whichever is longer.

5.03 The General Agent shall maintain adequate accounting procedures and systems, at no cost or expense to the Company, and shall provide statistics in a timely manner for all reporting requirements under the Reinsurance Agreement or as shall be required from time to time by the regulatory authorities of the State of Texas or any other applicable governmental agency or authority. Such statistical information shall be provided to the Company by the General Agent at the General Agent's sole cost and expense.

5.04 The General Agent shall forward to the Company, no later than the 30th day following the month being accounted for, a report in detail of all policies of insurance written or placed, or liability increased or decreased, or policies continued or renewed or canceled by or through the General Agent during the month being accounted for, which shall include all premiums due thereon whether collected or not. Such report shall show the net amount due to the Company and Reinsurer on all such business on the lines of business authorized to be written by the General Agent and the amounts paid in losses, loss adjustment expenses and commissions. Such report shall also include, to the extent not already included, both insurance and reinsurance transactions, including:

(a)

statement of written, earned and unearned premiums;

(b)

losses and loss expenses outstanding;

(d)

any management fees.

The report shall be received by or confirmed to the Company no later than thirty (30) days from the close of the month for which business is reported. The Company shall maintain such account reports on file for at least five (5) years and shall make the account reports available to the Commissioner of Insurance of the State of Texas (the "Commissioner"), or other applicable state department of insurance, for review upon request.

5.05 The General Agent shall account for and furnish to the Company, upon request with reasonable notice, complete copies of all policies issued, copies of all spoiled, voided or otherwise unissued policies, and copies of all claim files created with respect to all loss occurrences under any policy issued under this Agreement.

5.06 The title of all undelivered policies, books, supplies, or other property related to the reinsured business is in the Company, and these shall be delivered to the Company by the General Agent immediately upon the termination of this Agreement. The General Agent agrees to surrender peaceably the same without compelling the Company to resort to any legal proceedings whatsoever. Upon request of the Company, prior to or after the termination of this Agreement, the General Agent shall provide to the Company, at the General Agent’s sole cost and expense, electronic copies of any and all data related to the reinsured business in a format reasonably specified by the Company. Further, the General Agent shall ensure any vendor or other third party acknowledges and agrees the Company, at no expense to the Company, shall have use of any systems, data, information, reports, files or statistics prior to or after the termination of this Agreement in support of or relating to this Agreement as requested by the Company.

5.07 The General Agent shall not insert any advertisement respecting the Company in any publication or issue any circular or paper referring to the Company without first obtaining the written consent of the Company. The General Agent shall comply with all statutes and regulations pertaining to advertising, and establish and maintain records of any such advertising as required by the applicable laws of the states in which it is doing business.

5.08 The General Agent shall maintain on behalf of the Company and Reinsurer complete copies of all policies issued hereunder and copies of all claim files created with respect to all loss occurrences thereunder. Any or all policies and/or claim files required to be maintained by General Agent pursuant to this Section 5.08 may be maintained in electronic data storage form accessible by computer and if so stored in this fashion, no physical copy of such items need be maintained. Where electronic claims files are maintained by the General Agent, any data from such files requested or required by the Company shall be provided within thirty (30) days or less if so requested by the Company.

5.09 The General Agent shall pay to the Reinsurer the positive balance, if any, no later than thirty (30) days following the end of the month during which the business was written, of net written premiums collected hereunder (being defined as premiums received and/or due the General Agent from the insured in a given month less return premiums) less the General Agent's Provisional Commissions (as defined in the Reinsurance Agreement) and less loss adjustment expenses and loss payments. Should such balance be a negative amount, the Reinsurer shall pay the General Agent as soon as possible after the end of the month, after receipt and verification of the amount due as reported by the General Agent.

5.10 The General Agent shall be solely responsible for procuring any renewal, extension, or new policy of insurance that may be required by any state or rule or regulation of any state insurance department with respect to policies originally written directly for the Company. The General Agent and Reinsurer shall indemnify the Company and hold it harmless from any loss, damage, cost, claim or expense whatsoever that the Company may incur, or for which it may become liable, as a result of the said General Agent's failure, refusal or neglect to fulfill said responsibility.

5.11 The General Agent agrees that its duties and obligations under this Agreement shall be due and owing also to the Company's and Reinsurer's successors and assigns.

5.12 Nothing in this Article V shall be construed as requiring the Company to monitor the book of business which is the subject of the Reinsurance Agreement for the benefit of the Reinsurer.

5.13 The Company shall conduct or cause to be conducted a semi-annual examination of the General Agent, in accordance with the Company’s examination guidelines. Furthermore, if the Company's aggregate premium volume increases by thirty (30) percent in any thirty (30) day period, the Reinsurer at no expense to the Company, and on behalf of the Company, shall examine or cause to be examined within ninety (90) days the General Agent if it writes more than twenty (20) percent of the Company's volume and has also experienced a twenty (20) percent increase in premium volume during that same thirty (30) day period.

The examinations required under the preceding paragraph shall adequately provide the Commissioner with the information outlined in (a) through (e) below, shall be made available to the Commissioner for review, shall remain on file with the Company for a minimum of three (3) years and shall, at a minimum, contain information concerning the following:

(a)

claims procedures of the General Agent;

(b)

timeliness of claims payments by the General Agent (i.e., lag time between date claim is reported and date claim is paid);

(c)

timeliness of premium reporting and collection by the General Agent;

(d)

compliance by the General Agent with underwriting guidelines under Section 1.10 hereof; and

(e)

reconciliation of policy inventory.

5.14 The General Agent shall return any unearned premium due insureds or other persons on the business which is the subject of the Reinsurance Agreement; if for any reason, the General Agent does not return such unearned premium, then the Reinsurer shall pay such amount and/or amounts.

5.15 The General Agent shall be duly licensed as required under applicable law to perform its duties hereunder.

5.16 Should any state insurance department make a request to the Company for any data required to comply with a statistical data call, the General Agent shall be solely responsible to provide the Company with such data. Should the request from such state insurance department require the Company to contract the services of an outside source, such as an actuarial firm, to compile the data required, the General Agent shall be responsible for its proportionate share of the total cost for services rendered.

5.17 General Agent, when placing business under this Agreement, may not charge a per-policy fee in excess of any fees allowed by the applicable insurance regulatory authority.

5.18 The General Agent shall provide Company, at General Agent's expense, an independent financial examination in a form acceptable to the applicable state departments of insurance, or other regulatory body, if required.

5.19 The General Agent shall provide annually to Company, at General Agent's expense, an independent actuarial opinion attesting to the adequacy of loss reserves established for losses incurred and outstanding on business produced hereunder if General Agent establishes total loss reserves including IBNR, if required by the applicable insurance regulatory authority.

5.20 The General Agent acknowledges receipt of the Company’s Statistical Reporting Policy and Procedure Manual, if applicable, and will act in accordance therewith. The General Agent will act, at its sole cost and expense, on behalf of the Company to produce, prepare, and file statistical information with the designated statistical reporting bureau, if applicable. The General Agent will also furnish the Company, and other parties as designated by the Company, with monthly, quarterly and annual reports showing statistical data in respect of the business written as required.

5.21 The General Agent shall remit directly to Company on a monthly basis [***]% of written premium for bureau fees related to statistical reporting, and boards and bureaus participation (“Bureau Fees”). Should the actual amount of Bureau Fees be greater than the amount remitted to the Company on a monthly basis, the General Agent shall remit such additional Bureau Fees within thirty (30) days of receiving notice in writing from the Company of such additional Bureau Fees. In addition to the Bureau Fees, should the Company be charged any fines or penalties for incomplete, inaccurate, or delinquent reporting, the General Agent shall pay such fines or penalties immediately upon written notice. Should the General Agent fail to remit any amounts due to Company under this Section 5.21, then the Reinsurer shall pay such amounts within 60 days written notice from the Company. The Bureau Fees are in addition to other fees and expenses expressly enumerated herein.

5.22 Upon request of the Company or the Reinsurer, the General Agent shall provide an audited balance sheet of the General Agent as at the end of each such fiscal year and the related audited statements of income and of cash flows for such fiscal year in accordance with United States generally accepted accounting principles (“GAAP”) setting forth in each case in comparative form the figures for the previous fiscal year, reported on without a “going concern” or like qualification or exception, or qualification arising out of the scope of the audit, by an independent certified public accounting firm satisfactory to the Company (the “Annual Financial Statements”). If the General Agent does not have the audited balance sheet described above, it shall prepare or cause to be prepared for each of its fiscal quarters an unaudited balance sheet of the General Agent as at the end of each such fiscal quarter and the related unaudited statements of income and of cash flows for such fiscal year in accordance with GAAP setting forth in each case in comparative form the figures for the fiscal quarter (the “Quarterly Financial Statements”). No later than thirty (30) days after they are prepared and issued, the General Agent shall deliver to the Company and the Reinsurer a copy of the General Agent’s Annual Financial Statements. No later than ten (10) days after they are prepared, the General Agent shall deliver to the Company and Reinsurer a copy of the General Agent’s Quarterly Financial Statements.

5.23 If the General Agent produces business in California on behalf of the Company, the General Agent must adhere to the rules and regulations outlined in California Code of Regulations, Subchapter 9 Insurance Fraud, Article 2 Special Investigative Unit Regulations, in its entirety, and the applicable provisions of the California Insurance Fraud Prevention Act, in addition to the terms and duties set forth in this Agreement. The General Agent, the General Agent’s personnel, and the General Agent’s contracted third party entity(ies), if applicable, must comply with all applicable state or federal anti-fraud requirements, statutes, and regulations. The General Agent will require its personnel, and any contracted third party entity(ies), with responsibilities for business under this Agreement, including without limitation, claims handlers, underwriters, policy handlers, call center staff within the claims or policy function, legal staff and other employee classifications that perform similar duties (collectively “Integral Personnel”), to refer suspected fraud to the Company’s designated Special Investigative Unit (“SIU”) as part of their regular duties. Anti-fraud activities performed on behalf of the Company, including processing, investigating, or litigation pertaining to the payment or denial of a claim or application for adjudication of a claim, or an application for insurance, are to be conducted with oversight by the Company’s designated SIU. In the event the General Agent maintains any type of SIU facility, all anti-fraud activities related to applications, policies, and claims underwritten, bound, or executed on behalf of the Company will be conducted with oversight by, and referred to, the Company’s designated SIU.

The General Agent shall comply with all Company requests for anti-fraud related reporting and information as statutorily required. Monthly reports of anti-fraud related data shall include, but not be limited to, the number of California closed claims, the number of California SIU referrals to the Company’s designated SIU, the number of newly hired employees, and the number of Integral Personnel handling the Company’s policies and claims. If the General Agent produces business in California on behalf of the Company, the General Agent will require all Integral Personnel to successfully complete anti-fraud in-service training that complies with the California Insurance Fraud Prevention Act (California Insurance Code Sections 1871 et seq.) and the regulations promulgated thereunder by December 31st of each year, or other date as may be necessitated by California requirements or reasonably required by the Company. The General Agent will provide California-compliant documentation of the completion of such training, in a manner designated by the Company, and by the date specified by the Company. The General Agent and its Integral Personnel are expressly prohibited from reporting suspected fraud to any Department of Insurance or other regulatory entity. All suspected fraud is to be referred to the Company’s designated SIU. The Company, directly and through the Company’s designated SIU, shall have the authority to exercise oversight over all aspects of anti-fraud compliance related to the business under this Agreement or activities performed on behalf of the Company. The General Agent shall remain responsible for implementation of compliant anti-fraud processes and procedures. The General Agent will fully cooperate with the Company’s SIU compliance audits and will ensure that all corrective action plans are implemented on a timely basis.

ARTICLE VI

TERM AND TERMINATION

6.01 The effective date of this Agency Agreement is 12:01 a.m., Central Time, on April 1, 2020, and shall remain continuously in force unless canceled as follows:

(a) This Agreement may be canceled by any party at any time by giving at least ninety (90) days prior written notice to the other party. Notice shall be provided by registered mail, return receipt requested, and notice shall be deemed to have been provided on the date of mailing.

(b)

Immediately by mutual consent of the Company and General Agent.

(c) At any time, by the Company, without prior notice in the event of the General Agent declaring bankruptcy or being declared or found bankrupt or insolvent, or being the subject of a cease and desist order, corrective order, or being placed in, or subject to, a proceeding of supervision, conservation, rehabilitation or liquidation.

(d) Immediately upon written notice by the Company in the event of the cancellation or non-renewal of the General Agent's license by the California Department of Insurance.

(e) Immediately upon written notice by the General Agent in the event any action against the Company is commenced by Texas Department of Insurance or other applicable state insurance department pursuant to rehabilitation or liquidation. The Company agrees to furnish notice of such action immediately to the General Agent.

(f) If the General Agent shall default in making remittance for net premiums then this Agreement shall be terminated according to the terms provided in Section 4.02(d) of the Reinsurance Agreement.

(g) If the General Agent shall defraud or attempt to defraud the Company; or any policyholder, then the Company may at its sole discretion cancel this contract by giving the General Agent written notice of cancellation served personally or by mail, which shall be effective immediately.

(h) As provided in Section 8.11 of this Agreement.

(i)

Automatically and immediately, without notice upon cancellation or termination of the Reinsurance Agreement.

6.02 This Agreement shall automatically become renewed from year to year upon the renewal of the license or certificate of authority granted to the Company by the Delaware Department of Insurance, provided this Agreement shall not be otherwise canceled.

6.03 It is expressly agreed and understood that nothing in this Article VI authorizes the General Agent to write any new business under this Agreement should the Reinsurance Agreement terminate, except the business that is required to be renewed or issued because of applicable law or regulation, as provided in Section 4.03 of the Reinsurance Agreement.

6.04 The Company shall have no liability to the General Agent by virtue of the Company's termination of this Agreement as set forth in this Article; it being expressly understood that partial consideration for the Company's grant of agency authority to the General Agent is the General Agent's promise that the Company shall not be responsible for any damages which might arise by virtue of any termination of this Agreement.

6.05 In the event of termination of this Agreement, after the General Agent having promptly accounted for and paid over premiums for which it may be liable, the General Agent's records, use and control of expirations shall remain the property of the General Agent and left in its undisputed possession.

6.06 In the event that this Agreement is terminated, the General Agent, for no additional fee, shall have the authority (unless revoked by the Company at its sole discretion in which case the Reinsurer shall appoint a successor at no cost to the Company) as provided in this Agreement to continue to perform all of its duties under this Agreement on the remaining policies during the run-off period. The General Agent's duties during the run-off period shall include handling and servicing of all policies through their natural expiration, together with any policy renewals required to be made by the provisions of applicable law, whether or not the effective date of such renewal is subsequent to the effective date of cancellation of this Agreement. Further, upon termination of this Agreement, the General Agent shall not be relieved of or released from any obligation created by or under this Agreement in relation to payment, expenses, reports, accounting or handling, which relate to the outstanding insurance business under this Agreement existing on the date of such termination. The Company, General Agent and Reinsurer will cooperate in handling all such business until the business has expired either by cancellation or by the terms of the policies and all outstanding losses and loss adjustment expenses have been settled.

6.07 As the Reinsurance Agreement provides for termination on a run-off basis, the relevant provisions of this Agreement shall apply to business being run-off. It is also expressly agreed that the terms, conditions and obligations of the Preamble and Articles II, IV and V, Sections 6.04, 6.05, 6.06, 6.07 and 6.08, Articles VII, Section 8.11 and Article IX herein shall survive termination of this Agreement.

6.08 The Company may suspend the authority of the General Agent during the pendency of any dispute regarding any event of default by the General Agent.

ARTICLE VII

HOLD HARMLESS AND INDEMNIFICATION

The General Agent agrees to and does hereby indemnify and hold the Company harmless from and against any and all actions, causes of actions, suits, arbitrations, or proceedings of any kind, liabilities, losses, claims, damages, costs, or expenses (including attorneys' fees and expenses), incurred by the Company by reason of, arising out of, or relating in any way to this Agreement or any action taken or inaction by the General Agent in breach of the terms of this Agreement, United States economic trade and sanction laws and regulations as administered by OFAC, or the terms of the Reinsurance Agreement, or which is not in full compliance therewith.

ARTICLE VIII

MISCELLANEOUS

8.01 This Agreement has been made and entered into in the State of Texas and shall be governed by and construed in accordance with the laws of the State of Texas.

8.02 This Agreement is not exclusive and the Company reserves the right to appoint other agents in the territory covered by this Agreement and the General Agent reserves the right to act as General Agent for other insurers or reinsurers.

8.03 This Agreement shall be binding upon the parties hereto, together with their respective successors.

8.04 The Company shall have no right of control over the General Agent as to time, means or manner of the General Agent's conduct within the terms of the Agreement and the Reinsurance Agreement and the authority herein granted and nothing herein is intended or shall be deemed to constitute the General Agent an employee or servant of the Company. The General Agent shall at all times be an independent contractor.

8.05 This Agreement shall be deemed performable at the Company's administrative office in Bedford, Texas, and it is agreed that the venue of any controversy arising out of this Agreement, or for the breach thereof, shall be in Tarrant County, Texas.

8.06 No party shall assign any of its rights or obligations under this Agreement. No verbal modification will be recognized by any party hereto and this Agreement cannot be modified by any subsequent practices or course of dealing by the parties inconsistent herewith. If the Company or the General Agent shall fail to take advantage of a breach, if any, by another party of the terms, conditions, covenants, or any of them herein contained, such failure shall not be deemed to constitute, or be construed as, a waiver of any rights on the part of the General Agent or Company to thereafter enforce any of the said terms, conditions or covenants.

8.07 This Agreement may be amended, modified or supplemented only by a written instrument executed by all parties hereto. All such amendments or changes shall specify the effective date of such amendments or changes.

8.08 This Agreement supersedes any and all provisions, terms and/or conditions of any other general agency agreements, whether oral or written, by between and among the parties with respect to the subject matter hereof.

8.09 The General Agent shall notify the Company in writing within thirty (30) days when there is a change in the ownership of 10% or more of the outstanding stock in the General Agent or when there is any change in the General Agent's principal officers or directors.

8.10 The General Agent shall not offset balances due under this Agreement against balances due or owing under any other contract.

8.11 This Agreement shall be interpreted in conformance with applicable Texas law and regulation. If it is found or ordered by a court or regulatory body that any provision or term of this Agreement does not conform to such law or regulation then this Agreement shall be deemed to be amended, and modified to be in accordance with such law. However, where this Agreement is found not to comply with applicable law or regulations, the Company may in its sole discretion terminate this Agreement immediately and without prior notice.

8.12 This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

ARTICLE IX

ARBITRATION

9.01 As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising between the Company, on the one hand, and the General Agent, on the other hand, with respect to this Agreement or with respect to the General Agent's and/or the Company's obligations hereunder, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration.

9.02 The Company shall choose one arbiter (an "Arbiter") and the General Agent shall choose one Arbiter. An umpire (an "Umpire") shall be chosen by the two Arbiters, all of whom shall be active or retired disinterested executive officers of property and casualty insurance or reinsurance companies.

9.03 Both the General Agent and the Company shall choose an Arbiter within 30 days following a written request by one party to the other to name an Arbiter. In the event either the Company or the General Agent fails to choose an Arbiter within this time period, the party who has chosen its Arbiter may choose the unchosen Arbiter. Thereafter, the Arbiters shall choose an Umpire before entering upon arbitration. If the Arbiters fail to agree upon the selection for the Umpire within 30 days following their appointment, each Arbiter shall name three nominees, of whom the other shall decline two and the decision shall be made by drawing lots.

9.04 Each side shall present its case to the Arbiters and Umpire, in a hearing in Dallas, Texas. The Arbiters and Umpire shall consider this Agreement as an honorable engagement, as well as a legal obligation, and they are relieved of all judicial formalities and may abstain from following the strict rules of law regarding entering of evidence. The decision in writing by a majority of the Arbiters and Umpire when filed with the Company and the General Agent shall be final and binding. Judgment upon the final decision of the Arbiters and Umpire may be entered in any court of competent jurisdiction.

9.05 In the event of a dispute between the Company and the General Agent concerning this Agreement and the Quota Share Reinsurance Agreement between the Company and the Reinsurer, regardless of whether either party has claims against the Reinsurer, the entire dispute between the Company and the General Agent shall be subject to arbitration as provided under this Article IX.

9.06 The costs of the arbitration, including the fees of the Arbiters and the Umpire, shall be borne equally by the sides unless the Arbiters and Umpire shall decide otherwise.

9.07 This Agreement shall be interpreted under the laws of Texas and the arbitration shall be governed by the Texas Arbitration Code.

ARTICLE X

PRIVACY

10.01 The General Agent shall provide to each new policyholder, prior to or upon the issuance of any Policies written under this Agreement, and in accordance with applicable state and federal laws, an initial notice of the Company’s privacy policies and practices. Not less than annually thereafter, the General Agent, upon the request of the Company, distribute a copy of the Company’s annual privacy notice, as may be amended from time to time, to each existing policyholder. In addition, the General Agent shall, upon the request of the Company, distribute revised privacy notices and opt-out notices as applicable to each policyholder to reflect any revisions which may be made to the Company’s privacy policies and practices. In each case, the Company shall be responsible for providing the General Agent with a copy of the form for its privacy policies and practices notice, which forms the General Agent shall use to create and deliver the notices described herein, at the General Agent’s sole cost and expense. These notices shall be created and delivered independent of any separate legal obligation the General Agent may have to create and deliver its own such notices.

10.02 The General Agent shall not disclose or use any nonpublic personal financial information or nonpublic personal health information related to any policyholder, or to any consumer or customer (as such terms are defined under applicable state and federal privacy laws), except as necessary to carry out its duties and obligations under this Agreement or as otherwise permitted under applicable state or federal law.

10.03 The General Agent shall develop and implement, in accordance with applicable state and federal laws, a comprehensive written information security program designed to (i) ensure the security and confidentiality of nonpublic personal financial information and nonpublic personal health information related to any policyholder, or to any consumer or customer (as such terms are defined under applicable state and federal privacy laws), (ii) protect against any anticipated threats or hazards to the security or integrity of such information, and (iii) protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer.

[THE REMAINDER OF THE PAGE IS LEFT INTENTIONALLY BLANK.

SIGNATURES APPEAR ON THE FOLLOWING PAGE.]

IN WITNESS WHEREOF, the Parties hereto by their respective duly authorized representatives have executed this Agreement as of the date first above written.

UNITED SPECIALTY INSURANCE COMPANY

BY: /s/ David Cleff

ITS: EVP

DATE: 4-3-2020

UNIFAX INSURANCE SYSTEMS, INC.

BY: /s/ Cary L. Cheldin

ITS: President

DATE: 4-1-20

CRUSADER INSURANCE COMPANY

BY: /s/ Cary L. Cheldin

ITS: President

DATE: 4-1-20

EXHIBIT 10.3

CERTAIN IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THE EXHIBIT BECAUSE IT IS BOTH NOT MATERIAL AND WOULD LIKELY CAUSE COMPETITIVE HARM TO THE REGISTRANT IF PUBLICLY DISCLOSED.

[***] INDICATES THAT INFORMATION HAS BEEN REDACTED.

REINSURANCE TRUST AGREEMENT

(hereinafter referred to as the “Agreement”)

entered into by and among

Crusader Insurance Company

(hereinafter referred to as the “Grantor”)

and

United Specialty Insurance Company

(hereinafter referred to as the “Beneficiary”)

Held By

Comerica Bank & Trust, National Association

Trustee

(hereinafter referred to as the “Trustee”)

SECTION 1. PURPOSE OF AGREEMENT

1.1 The Grantor has assumed all liabilities of Beneficiary arising from insurance business subject to that certain Quota Share Reinsurance Agreement dated effective April 1, 2020, between the Grantor, Unifax Insurance Systems, Inc. (the “General Agent”) and the Beneficiary (hereinafter referred to as the “Reinsurance Agreement”).

1.2 Grantor desires to secure the payment of its liabilities and the performance of its Obligations Under The Reinsurance Agreement. Beneficiary reserves the right to require deposits to secure the payment of Grantor’s liabilities and performance of its Obligations Under (i) The Reinsurance Agreement, and (ii) that certain General Agency Agreement, both dated effective April 1, 2020, between Grantor, General Agent and Beneficiary.

1.3 Grantor desires to deliver to Trustee “Securities” (as defined in Section 4.1 hereof) to be held by Trustee as collateral and security for the sole use and benefit of Beneficiary, which securities may hereinafter be referred to as the “Trust Account,”

SECTION 2. SECURITY GRANTED BY GRANTOR

2.1 Pursuant to the terms hereof, the Grantor hereby obligates itself to deliver to and deposit with the Trustee Securities in accordance with Section 3 hereof as collateral and security for the Grantor’s Obligations Under The Reinsurance Agreement including the obligations for unearned premiums reserves, if any, and reserves for losses incurred but not reported and losses reported but unpaid. The Loss Reserves shall include all allocated loss adjustment expenses and appropriate unallocated loss adjustment expenses. For purposes of this Agreement, the following terms shall have the following meanings:

(a)

“Unearned Premiums” means, as of any given date, the aggregate premium attributable to the unexpired coverage period of all insurance policies produced under the Reinsurance Agreement, as determined in accordance with generally accepted accounting principles consistently applied. For this purpose, premium shall be the written premium charged on the insurance policy for the period such policy is in force irrespective of the subsequent billing and collection of such premium.

(b)

“Loss Reserves” means, as of any given date, the reserve attributable to losses incurred but not reported and losses reported but not paid with respect to the insurance policies produced under the Reinsurance Agreement, and shall include provision for both allocated and unallocated loss adjustment expense, in each instance as determined in accordance with generally accepted accounting principles consistently applied.

(c)

“Obligations Under The Reinsurance Agreement” and “Obligations Of The Grantor Under The Reinsurance Agreement,” for purposes of this Agreement, share the same meaning as set forth in the Quota Share Reinsurance Agreement.

The Grantor hereby agrees that the actuarial opinion of the Beneficiary’s internal actuary shall be controlling, in its sole discretion, as to the timing and determination of the adequacy of loss reserves established for losses incurred and outstanding on business produced under the Reinsurance and General Agency Agreements unless the Grantor requests that the Beneficiary engage on a semi-annual basis, at the expense of the Grantor, an independent actuarial opinion, performed by MILLIMAN USA’s Dallas office, attesting to the adequacy of loss reserves established for losses incurred and outstanding on business produced under the Reinsurance and General Agency Agreements. If the Grantor requests hereunder the actuarial opinion of MILLIMAN USA’s Dallas office, the Grantor hereby agrees to post the collateral required hereunder in accordance with the actuarial analysis of the Beneficiary’s internal actuary until an analysis is completed by MILLIMAN USA’s Dallas office. At such time, the Grantor shall post the collateral required hereunder in accordance with the actuarial analysis of MILLIMAN USA’s Dallas office. However, if subsequent to the receipt of the applicable independent actuarial opinion, the Beneficiary determines in its sole discretion that there has been a significant change in the loss reserves as compared to the applicable independent actuarial opinion, the Beneficiary’s internal actuary shall again be controlling, in its sole discretion, as to the timing and determination of the adequacy of loss reserves established for losses incurred and outstanding on business produced under the Reinsurance and General Agency Agreements until the Beneficiary again engages, at the expense of the Grantor, an independent actuarial opinion, performed by MILLIMAN USA’s Dallas office, attesting to the adequacy of loss reserves established for losses incurred and outstanding on business produced under the Reinsurance and General Agency Agreements. Additionally, if the actuarial opinion of the Beneficiary’s internal actuary is not available, for any reason, the Beneficiary shall engage semi-annually, at the expense of the Grantor, an independent actuarial opinion, performed by MILLIMAN USA’s Dallas office, attesting to the adequacy of loss reserves established for losses incurred and outstanding on business produced under the Reinsurance and General Agency Agreements.

2.2 During the term of this Agreement, Grantor hereby agrees that Trustee shall act for the benefit of Beneficiary in taking delivery and possession of the said securities pursuant to Section 3 hereof and in holding such securities as collateral for the purposes expressed herein for Beneficiary’s benefit, and Grantor hereby grants to Trustee all powers necessary and reasonable in the performance hereunder.

2.3 The existence of the Trust Account, as security for obligations of Grantor to Beneficiary, shall not affect Grantor’s Obligations Under The Reinsurance Agreement, nor shall the securities of the Trust Account be used as a set off by Grantor for any obligations to Beneficiary, except for Grantor’s right to withdraw securities from the Trust Account in accordance with Section 3 or to receive any excess securities held by Beneficiary pursuant to Section 5.5.

SECTION 3. DEPOSITS TO AND INVESTMENT OF SECURITY

3.1 Within 10 business days of the effective date of this Agreement, and within 10 business days prior to the end of each calendar quarter thereafter, Beneficiary shall provide Grantor with a good faith estimate of the expected sum of [***]% of the Beneficiary’s ceded Unearned Premium and Loss Reserves as of the end of the forthcoming calendar quarter (the “Estimate”). Each time (i) the Grantor’s A.M. Best rating or outlook is at any time reduced; or (ii) the Grantor’s A.M. Best rating or outlook is at any time removed or withdrawn such that the Grantor is not rated or unrated by A.M. Best; or (iii) the Grantor’s capital and policyholder surplus (or its equivalent) reduces [***]percent ([***]%) or more during any rolling twelve (12) month period measured quarterly; or (iv) the Grantor fails to maintain its CAT XOL reinsurance with coverage up to [***] dollars ($[***]) with a [***] dollars ($[***]) retention and its multiline XOL reinsurance with coverage up to [***] ($[***]) with a [***] dollars ($[***]) retention, each provided by the Reinsurer’s reinsurers existing as of the effective date of this Agreement, provided that the Grantor may add reinsurers with a minimum surplus of at least [***] dollars ($[***]) and an “A” rating by A.M. Best, the components of the Estimate shall increase by [***]% (i.e. the first time the Estimate shall increase to [***]% of the Beneficiary’s ceded Unearned Premium and Loss Reserves as of the end of the forthcoming calendar quarter, the second time the Estimate shall increase to [***]% of the Beneficiary’s ceded Unearned Premium and Loss Reserves as of the end of the forthcoming calendar quarter, etc.). The Grantor shall, within two business days prior to the commencement of such forthcoming calendar quarter, fund the Reinsurance Trust in an amount equivalent to [***]% of the Estimate.

3.2 The Grantor shall be entitled at any time to withdraw Securities from the Trust Account if concurrently therewith Securities (as defined in Section 4.1 hereof) of equal or greater market value are deposited in the Trust Account, and the Trustee is authorized to permit such substitution of Securities upon receipt of the Beneficiary’s written approval, which shall not be unreasonably withheld.

3.3 All securities deposited by the Grantor (i) shall be free and clear of all encumbrances, and (ii) shall be fully negotiable or in such form that Trustee may sell, transfer or otherwise deposit the same without any additional signature or agreement from Grantor.

SECTION 4. SECURITIES

4.1 The term “Securities” as used herein is defined as any combination of (a) cash, or deposits held, or negotiable certificates of deposit issued by an institution that is (i) organized or licensed under the laws of the United States or any state thereof, (ii) is regulated, supervised and examined by U.S. federal or state authorities having regulatory authority over banks and trust companies, and (iii) appears on the most recently issued list of approved banks published by the Securities Valuation Office of the National Association of Insurance Commissioners, (b) United States Government issued or guaranteed bonds, bills or notes, or (c) any other bonds with a Standard & Poor’s or Moody’s quality rating of “A” or better. All securities and assets held in the Trust Account shall be readily marketable over a national exchange and shall be listed by the Securities Valuation Office of the National Association of Insurance Commissioners with designations of “1-Highest Quality”. All securities and assets held in the Trust Account shall be of the type required by the applicable laws or regulations. All such securities shall be in conformance with the investment requirements described in the applicable laws or regulations.

4.2 For purposes of this Agreement, the market value of the Securities shall be determined as follows: (a) at the time any Securities are deposited initially with the Trustee, and as respects Securities on deposit at the end of each calendar month, the Trustee shall in good faith place a tentative market value on the Securities and shall notify the Beneficiary of such valuation by supplement to the Trustee’s monthly activities report; provided pursuant to Section 8.6; (b) if the Beneficiary disagrees with such tentative market valuation, it may so notify the Trustee within 30 days after the date it receives the Trustee’s monthly activities report and the Trustee’s supplement thereto (Beneficiary’s failure to so notify the Trustee within such 30 day period shall signify that Beneficiary agrees with such tentative market value); (c) in the event the parties cannot resolve any difference with respect to the market value of the Securities, the market value of the security in dispute shall be determined by the Securities Valuation Office of the National Association of Insurance Commissioners; and (d) With respect to securities on deposit at the end of each calendar month, the Trustee shall value the securities by utilizing various standard industry pricing services and brokerage contacts to provide current pricing information for active publicly traded securities. The Trustee shall attempt to provide a reasonably accurate current market value for assets not publicly traded. Many fixed income securities are priced on a matrix system, resulting in a mathematical approximation of price derived by computer. Although the Trustee will make reasonable and good faith efforts to provide accurate pricing, in some instances prices may not reflect the most accurate pricing readily available or the true value of the asset. The Trustee shall have no liability for such an occurrence.

SECTION 5. BENEFICIARY’S CLAIM ON THE TRUST ACCOUNT

5.1 The Beneficiary shall have the right to withdraw securities from the Trust Account, without diminution because of the insolvency of the Grantor, for the purposes and to the extent specified in Sections 5.2 and 5.3 below, with written notice from the Beneficiary to the Trustee given in accordance with Section 8.1 of this Agreement. Upon such written notice by the Beneficiary, the Trustee shall immediately take any and all steps necessary to transfer to the Beneficiary absolute and unequivocal right, title and interest in the requested securities and assets in the Trust Account and to deliver such securities and assets to the Beneficiary and Beneficiary shall acknowledge to the Trustee receipt of such withdrawn securities and assets. Any dispute between Grantor and Beneficiary regarding Beneficiary’s claim on the Trust Account shall be resolved by arbitration pursuant to Section 12. Trustee shall strictly comply with its instructions hereunder without resorting to interpleader. Beneficiary will hold Trustee harmless if acting upon Beneficiary’s instructions hereunder.

5.2 The Beneficiary has the right to withdraw assets from the Trust Account at any time, without notice to the Grantor, subject only to written notice from the Beneficiary to the Trustee, the Trustee having no responsibility for such withdrawal, in accordance with the terms of this Agreement. No statement or document, other than written notice from the Beneficiary to the Trustee, shall be accepted to withdraw assets. The Beneficiary hereby covenants to the Grantor that it shall use and apply any withdrawn assets, without diminution because of the insolvency of the Beneficiary or the Grantor, for the following purposes only:

(a)

to pay or reimburse the Beneficiary for the Grantor’s share under the Reinsurance Agreement regarding any losses and allocated loss expenses paid by the Beneficiary but not recovered from the Grantor, or for unearned premiums due to the Beneficiary, if not otherwise paid by the Grantor;

(b)

to make payment to the Grantor of any amounts held in the Trust Account that exceed 102% of the actual amount required to fund the Grantor’s entire Obligations Under The Reinsurance Agreement. Trustee has no responsibility to determine whether the value of Assets exceeds 102%and may rely on the statement or notice from Beneficiary certifying as such; or

(c)

where the Beneficiary has received notification of termination of the Trust Account pursuant to Section 11 of this agreement, and where the Grantor’s entire Obligations Under The Reinsurance Agreement remain unliquidated and undischarged 10 days prior to the termination date, to withdraw amounts equal to 102% of such obligations and deposit such amounts in a separate account, in the name of the Beneficiary, in any qualified United States financial institution, apart from its general assets, in trust for the uses and purposes specified in subparagraphs (a) and (b) of this Section as may remain executory after such withdrawal and for any period after such termination date.

5.3 In the event the Beneficiary takes control of the securities pursuant to Section 5.2, such securities shall be maintained by the Beneficiary for the purpose of securing the Obligations Under The Reinsurance Agreement, and otherwise securing the Beneficiary under the terms of this Agreement, in the manners provided in subsection (a) or (b) of this subsection 5.3 only:

(a)

such securities shall be held by the Beneficiary as an asset and maintained, on the books and records of the Beneficiary, in an identifiable manner as “Funds Held By the Beneficiary Under the Quota Share Reinsurance Treaty” (hereinafter referred to as “Funds Held”), to use and disburse the Funds Held for purposes described in Section 5.4. An amount equal to the market value of the Funds Held shall be carried by the Beneficiary as a liability under its financial statement denominated “Funds Held by Beneficiary Under Reinsurance Treaties,” and all amounts paid out of such Funds Held by the Beneficiary shall reduce the liability of the Grantor. Any securities in excess of the amount required to pay or reimburse Beneficiary for the purposes described herein shall be returned to Grantor, its successor or legal representative, upon the conclusion of all further Obligations Of Grantor Under The Reinsurance Agreement.

(b)

Such Securities shall be deposited in a New York Insurance Regulation 114 trust (“114 Trust”) for the benefit of the Beneficiary, provided the Grantor's approval is not required for the Beneficiary to use and disburse funds held in such trust for purposes described in Section 5.4.

5.4 The Beneficiary may disburse amounts from the Funds Held or 114 Trust assets for the payment of losses and refunds through the Reinsurance Agreement pursuant to the terms of its General Agency Agreement with the Beneficiary, or to any successor appointed by the Beneficiary to act as general agent in connection with the business subject to the Reinsurance Agreement. Also, the Beneficiary may use such Funds Held or 114 Trust assets to reimburse itself for any amounts the Grantor is obligated under the Reinsurance Agreement, including, but not be limited to, any losses paid, and unearned premiums refunded by the Beneficiary, and for actual costs of administration incurred by the Beneficiary in the event the Beneficiary is required to assume control of the servicing and claims handling of the business subject to the Reinsurance Agreement.

5.5 In the event the Beneficiary takes control of the securities pursuant to Section 5.3, the Grantor shall remain obligated for amounts due under the Reinsurance Agreement and shall be obligated to maintain, in the Funds Held by Beneficiary or 114 Trust, a value at least equal to the Unearned Premium and Loss Reserves in accordance with Section 3.1. The Grantor’s rights and obligations to withdraw and deposit securities from the Funds Held shall be the same as when the securities were held in the Trust Account by the Trustee as provided in Section 3.

SECTION 6. INTEREST, DIVIDENDS AND EXPENSES

6.1 Any interest, dividends or other investment income generated from the securities held by Trustee shall remain in the Trust Account, subject, however, to Grantor’s right to withdraw assets from the Trust Account in accordance with Sections 3.2 and 3.3. Grantor shall be liable for reporting and paying any income taxes arising therefrom.

6.2 Also, Grantor will receive the benefit of the interest, dividends or other investment income generated from any securities taken and held by the Beneficiary pursuant to Section 5.3.

6.3 All fees and expenses charged by the Trustee for its services under the terms of this Agreement shall be paid by the Grantor. The Grantor shall pay or reimburse the Trustee for all of the Trustee’s expenses and disbursements in connection with its duties under this Agreement (including reasonable attorney's fees and expenses), except any such expense or disbursement as may arise from the Trustee‘s negligence, willful misconduct, or lack of good faith. The Trustee shall be entitled to deduct its compensation and expenses from the aggregate market value of the Trust Account should it be over the amount required in Section 3.1, subject to the Beneficiary's prior written approval which shall not be unreasonably withheld, except that such compensation shall not be greater than 1.0% of the corpus per annum. The Grantor and the Beneficiary jointly and severally hereby indemnify the Trustee for, and holds it harmless against, any loss, liability, costs or expenses (including reasonable attorney's fees and expenses) incurred or made without negligence, willful misconduct or lack of good faith on the part of the Trustee, arising out of or in connection with the performance of its obligations in accordance with the provisions of this Agreement, including any loss, liability, costs or expenses arising out of or in connection with the status of the Trustee and its nominee as the holder of record of the Securities in the Trust Account. The Grantor and the Beneficiary hereby acknowledges that the foregoing indemnities shall survive the resignation or discharge of the Trustee or the termination of this Agreement and hereby grants the Trustee a lien, right of set-off and security interest in the portion of the aggregate market value of the Trust Account that is over the amount required in Section 3.1 for the payment of any claim for compensation, reimbursement or indemnity hereunder.

SECTION 7. SECURITY INTEREST

7.1 The Grantor and Beneficiary acknowledge and agree that the Assets held by the Trustee in the Trust Account hereunder have been deposited in said Trust Account for the sole benefit of the Beneficiary and pledged by the Grantor to the Beneficiary as security for the Grantor’s Obligations Under The Reinsurance Agreement. In furtherance of the foregoing, the Grantor hereby pledges with, assigns to, and grants the Beneficiary a continuing first security interest in, and a lien upon the Trust Account, all Assets (and after-acquired proceeds of all Assets) in the Trust Account, all financial assets and cash from time to time credited thereto and all security entitlements in respect thereof pursuant to the Uniform Commercial Code as in effect from time to time in the State of Texas (the "UCC"). The Grantor and Beneficiary are entering into this Trust to perfect the deposit of the Trust Account Assets for the sole benefit of the Beneficiary, as well as the security interest in and lien on such collateral. Trustee acknowledges that a security interest has been granted by the Grantor to the Beneficiary in the Trust Account and the Assets held therein. Except as otherwise expressly stated herein, the terms defined in the UCC have the same meanings herein. In addition to whatever other rights and remedies the Beneficiary may have thereunder, the Beneficiary shall also have all rights and remedies of an Entitlement Holder under the UCC. Subject to the terms and conditions of this Agreement, the Trustee agrees to comply with any timely entitlement order originated by the Beneficiary and relating to cash, financial asset credited thereto or any other Assets in the Trust Account without further consent by the Grantor or any other person.

7.2 To the extent that securities (as defined by the UCC) are deposited in the Trust Account, the parties hereto agree that (i) the Trust Account shall be deemed a securities account; (ii) the Trustee is a securities intermediary with respect to the Trust Account; (iii) the Trustee shall, subject to the terms of this Agreement, treat the Beneficiary as the entitlement holder with respect to the Trust, entitled to exercise the rights that comprise all financial assets from time to time credited to the Trust Account; (iv) each item of property (whether Securities, investment property, security, instrument, or other property, but not cash which shall not be a financial asset for the purposes of this Agreement) credited to the Trust Account shall be treated as a financial asset; and (v) the State of New York shall be deemed to be the securities intermediary’s jurisdiction for purposes of the UCC.

7.3 The Trustee waives, except as set forth in Section 6.3, any security interest, lien, or right to make deductions or setoffs that it may now have or hereafter acquire in or with respect to the Trust, any financial asset credited thereto or any security entitlement in respect thereof. Neither the financial assets credited to the Trust nor the security entitlements in respect thereof will be subject to deduction, set-off, banker’s lien, or any other right in favor of any person other than the Beneficiary.

7.4 The Trustee has not entered into, and until the termination of this Agreement will not enter into, any agreement with any person (other than the Beneficiary and Grantor) relating to the Trust Account and/or any financial asset credited thereto pursuant to which it has agreed, or will agree, to comply with entitlement orders of such person. The Trustee has not entered into any other agreement with the Beneficiary or the Grantor purporting to limit or condition the obligation of the Trustee to comply with entitlement orders as agreed above.

7.5 Except for the claims and interests of the Beneficiary and the Grantor, the person executing this Agreement on behalf of the Trustee does not know of any claim to, or interest in, the Trust Account, any financial asset credited thereto or any security entitlement in respect thereof. If any person asserts any lien, encumbrance or adverse claim (including any writ, garnishment, judgment, attachment, execution or similar process) against the Trust Account, any financial asset credited thereto or any security entitlement in respect thereof, the Trustee will promptly notify the Beneficiary and the Grantor in writing thereof.

7.6 In the event of any conflict between the duties and responsibilities of the Trustee under this Section 7 and the duties and responsibilities of the Trustee under the other Sections of this Agreement, the duties and responsibilities under this Section 7 shall govern and control.

SECTION 8. TRUSTEE’S AGREEMENT

8.1 The Trustee agrees to hold and disburse the Trust Account in accordance with the provisions expressed herein. Trustee shall disburse securities to the Beneficiary upon receipt of a duly executed and completed Affidavit by Beneficiary in accordance with the form attached hereto as Exhibit “A”. Trustee is authorized and directed by both parties to act upon such instructions in compliance herewith without inquiry as to the accuracy of the facts and statements made in any such affidavit and without regard to protest by any party; provided, however, Trustee would not be expected to act contrary to any court order or any arbitration directive pursuant to Section 12, supported by the affidavit of two of the three arbitrators.

8.2 The Trust Account shall be (i) in the possession of Trustee at its offices in Detroit, Michigan, (ii) kept separate and apart from any assets of the Trustee and any other securities held by the Trustee for whomever and for whatsoever purpose, (iii) clearly identifiable as securities subject to this Agreement at all times while in the possession of the Trustee, and (iv) in such form that the Beneficiary or the Trustee upon the direction of the Beneficiary may, whenever necessary, negotiate any securities in the Trust Account, without the consent or signature from the Grantor or any other person or entity.

8.3 The Trustee shall not deposit any securities of the Trust Account with correspondent banks, investment bankers, brokers or any other third-party nor shall such securities be pledged or hypothecated by the Trustee in any manner nor shall such securities be used by the Trustee in any manner for the benefit of the Trustee.

8.4 The Trustee shall on request of the Beneficiary, or the Grantor certify in writing the securities held by the Trustee for the Beneficiary. That certification shall include the name of the issuer of each security, the class of security, the “CUSIP” number of each security, the number of shares of units, and the face amounts of such securities.

8.5 The Trustee shall fully and completely respond to any direct inquiries of any duly authorized insurance regulatory agency of any state concerning the Trust Account, including, but not limited to detailed inventories of securities or funds, and the Trustee will permit the representative of any such regulatory agency to examine and audit all securities or funds held hereunder.

8.6 The Trustee agrees to provide copies of monthly activities reports to the Beneficiary and the Grantor as soon as possible following the end of each month, which reports shall show all deposits, withdrawals, substitutions and a listing of securities in the Trust Account as of the end of the month. If neither the Grantor, nor the Beneficiary files with the Trustee written objection to any such report within 60 days of receipt, the Grantor and Beneficiary shall be deemed to have approved such report, and the Trustee shall be released and discharged with respect to all matters set forth in such report as though the same had been judicially settled. The Trustee agrees to notify the Grantor and the Beneficiary within 10 days of any deposits to, or withdrawals from the Trust Account. The Grantor and Beneficiary agree that such notice shall be provided by access to Trust Account information via Comerica Trust Online or another transmission method selected by the Trustee and communicated to the Grantor and Beneficiary by the Trustee.

8.7 The Trustee hereby waives any right of offset and all other rights and remedies against or affecting the Trust Account.

8.8 The Trustee may at any time resign from, and terminate its capacity hereunder by written notice of resignation, effective not less than 90 days after receipt by both the Beneficiary and the Grantor. However, no such resignation by the Trustee shall be effective until a successor to the Trustee shall have been duly appointed as provided in this Agreement and all the securities and assets in the Trust Account have been duly transferred to such successor. The Beneficiary, upon receipt of such notice, shall undertake to obtain the agreement of a qualified, successor depository, agreeable to the Grantor, to act in accordance with all agreements of the Trustee herein. A qualified depository shall be any United States financial institution member of the Federal Reserve System. Grantor agrees not to unreasonably withhold approval if the depository so chosen has capital and surplus of at least $100,000,000. Upon the Trustee’s delivery of the Trust Account to the qualified, successor depository, along with a closing statement showing all activities (as contemplated in Section 8.6) from the last monthly report, the Trustee shall be discharged of further responsibilities hereunder.

SECTION 9. TRUSTEE’S RESPONSIBILITY

9.1 The Trustee shall in no way be responsible for determining the amount of securities required to be deposited by the Grantor or monitoring whether or not the securities conform to investment requirements.

9.2 The Trustee is not a party to, and is not bound by or charged with notice of the Reinsurance Agreement or any other agreement out of which this Agreement may arise.

9.3 The Trustee is not responsible or liable in any manner whatsoever for the sufficiency, correctness, genuineness or validity of the subject matter of this Agreement or any part thereof, or for the form or execution thereof, for the identity or authority of any person executing or depositing it.

9.4 The Trustee shall be protected in acting upon any written notice, request, affidavit, waiver, consent, certificate, receipt, authorization, power of attorney or other paper or document which the Trustee in good faith believes to be genuine and that purports to be from the Beneficiary or the Grantor.

9.5 The Trustee shall be indemnified and not held liable for anything which it may do or refrain from doing in connection herewith, except its own negligence, willful misconduct, lack of good faith, or breach of fiduciary duty. Trustee shall further be indemnified and not held liable for transferring the Trust assets to another institution, when jointly directed to do so by the Grantor and the Beneficiary.

9.6 Notwithstanding anything else contained herein to the contrary, the Trustee acknowledges liability for any certificates lost due to theft or any error or omission or other comparable act of the Trustee, or authorized representative thereof, and Trustee agrees that it shall maintain fidelity or other insurance coverage applicable to such liability which shall be in addition to the full faith and credit of the Trustee therefor.

SECTION 10. ACCESS TO RECORDS

10.1 The Beneficiary and the Grantor shall have the right at any reasonable time to examine all papers in the possession of each other, or with the Trustee, applicable to this Agreement and the Trust Account deposited and maintained hereunder.

SECTION 11. TERMINATION

11.1 Termination of this Agreement shall only occur upon at least thirty (30) days written notice via certified mail from the Trustee to the Beneficiary and Reinsurance Division of the Texas State Board of Insurance located at 333 Guadalupe Street Austin TX 78701, and the Trustee shall release and deliver to the Grantor all securities held pursuant to this Agreement upon receipt by the Trustee of written notice from the Beneficiary that the Grantor’s Obligations Under The Reinsurance Agreement for Unearned Premium and Loss Reserves have been discharged, including obligations for the “run-off” of any business subject to the Reinsurance Agreement.

11.2 The termination of the Reinsurance Agreement shall not terminate this Agreement, but Grantor shall continue to pay claims under the terms of the Reinsurance Agreement as if there were no security provided under this Agreement, subject, however, to Grantor’s right to withdraw securities from the Trust Account in accordance with Section 3, or to receive any excess securities held by Beneficiary pursuant to Section 5.5.

SECTION 12. ARBITRATION

12.1 It is agreed between Beneficiary and Grantor that any disagreement between such parties regarding the construction, application, or implementation of this Agreement may be submitted to arbitration pursuant to arbitration provisions contained in the Reinsurance Agreement. However, questions arising out of Section 3 or Section 5 require an expedited resolution pursuant to these provisions.

12.2 The party invoking arbitration with respect to Section 3 or Section 5 shall notify the other party and shall provide the name of its designated arbitrator at that time. The second party shall have 15 days from receipt of notice to designate its arbitrator, who shall contact the first arbitrator to select a third arbitrator. Both arbitrators shall use their best efforts to obtain a third arbitrator within 30 days. Once chosen, the three arbitrators should expeditiously resolve the issues presented by the parties. If the party receiving notice of intent to arbitrate does not provide notice of its arbitrator within the 15 day period required, such party shall be deemed to have waived its right to designate the second arbitrator and the arbitrator first designated shall designate the second arbitrator. The arbitrators shall be disinterested, active or retired officers of property and casualty insurance companies. The arbitration provisions of the Reinsurance Agreement may be referred to for guidance as to matters not specifically provided herein.

12.3 The Beneficiary and the Grantor agree to be bound by the final or any interim findings and directives of the arbitrators, including the immediate deposit or return of securities or assets to the Trust Account if so directed.

SECTION 13. CONSTRUCTION AND EFFECT

13.1 This Agreement and all proceedings pursuant hereto shall be governed by the laws of the State of Texas.

13.2 This Agreement shall be binding upon and shall inure to the benefit of the parties hereto, their successors and assigns.

13.3 (a) In the event of the failure of the Grantor to perform its Obligations Under The Reinsurance Agreement or the terms of this Agreement, Grantor, at the request of the Beneficiary, shall submit to the jurisdiction of any court of competent jurisdiction in any State of the United States, will comply with all requirements necessary to give such court jurisdiction, and will abide by the final decision of such court or of any Appellate Court in the event of an appeal.

(b) The parties, after consulting (or having had the opportunity to consult) with counsel of their choice, each knowingly and voluntarily waives its right to trial by jury in any action, proceeding or counterclaim brought by any of the parties hereto against another party on any matters whatsoever arising out of or in any way connected with this Agreement.

13.4 The Grantor shall be deemed to have designated the State Board of Insurance in any state in which business is produced, or a designated attorney, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Beneficiary. This provision, however, is not intended to conflict with or override the obligation of the parties to arbitrate their disputes.

13.5 This Agreement is not subject to any conditions or qualifications outside of this Agreement and is not conditioned upon any other agreements or documents.

SECTION 14. NOTICES

14.1 Unless otherwise specifically provided herein, every notice required or permitted to be given under this Agreement shall be given in writing to an officer of the party to whom it is directed by actual delivery to the address, or by telecopy message to the number, as follows:

Grantor:

Crusader Insurance Company

Attn: Michael Budnitsky

26050 Mureau Road

Calabasa, CA 91302-3171

Beneficiary:

United Specialty Insurance Company

1900 L. Don Dodson Drive

Bedford, Texas 76021

Trustee:

Comerica Bank & Trust, N.A.

411 West Lafayette Boulevard

Detroit, MI 48226

Attn: Sandy Truman-Swayne, MC 3462

Any party to this Agreement may change the address and telecopy number above set out by giving the other parties notice of such change in the manner specified for notice in this Agreement.

SECTION 15. EFFECTIVE DATE

15.1 This Agreement shall be effective April 1, 2020.

[Balance of page intentionally left blank. Signatures appear on next page.]

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized officers have executed this Agreement.

BENEFICIARY

UNITED SPECIALTY INSURANCE COMPANY

By: /s/ David Cleff

Its: EVP

Date: 4-3-2020

GRANTOR

CRUSADER INSURANCE COMPANY

By: /s/ Cary L. Cheldin

Its: President

Date: 4-1-20

Trustee

Comerica Bank & Trust, National Association

By: /s/ Sandra Swayne

Its: Vice President

Date: April 6, 2020

EXHIBIT A

CERTIFICATION OF WITHDRAWAL OF SECURITIES

Reference is made to that certain Reinsurance Trust Agreement dated effective April 1, 2020, by and among Crusader Insurance Company, as “Grantor,” United Specialty Insurance Company, as “Beneficiary,” and Comerica Bank & Trust, National Association, as “Trustee” (the “Agreement”). Section 5 of the Agreement sets forth circumstances under which the Beneficiary may withdraw securities from the Trust Account. Beneficiary hereby certifies to Trustee, pursuant to Section 8 of the Agreement that the following event has occurred which entitles Beneficiary to withdraw securities from the Trust Account:

Capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed to such terms in the Agreement.

Dated: UNITED SPECIALTY INSURANCE COMPANY

By:

Its:

THE STATE OF TEXAS §

COUNTY OF TARRANT §

I, , a Notary Public, do hereby certify that on this the day of , 20__, personally appeared before me , who declared that he is of the corporation executing the foregoing instrument, and being by me first duly sworn, acknowledged that he signed the foregoing document in the capacity therein set forth and declared that the statements therein contained are true.

IN WITNESS WHEREOF, I hereunder set my hand and seal of office, the date and year before written.

Notary Public in and

for the State of Texas

My Commission expires:

Comerica Bank

New Account Client Questionnaire

Account Name:

Anticipated Conversion Date:

Due Diligence Questions:

Please state the nature of your business:

What is the primary geographic market area where you conduct business?

Please provide your Taxpayer Identification Number:

Please provide the following documents (those that apply):

Certified Articles of Incorporation

IRS Letter regarding tax-exempt status

Trust Agreement

Government issued business license

Partnership Agreement

Financial Statements and/or Annual Reports

IRS Form W-9

Where will the assets/funds be coming from?

What will be the market value of the initial funding?

If frequent deposits will be made, what do you anticipate the market value to be after 12 months?

Are there third party deposits into or withdrawals from the account (e.g., checks, wire transfers, etc.)?

Yes

Will the account be sending wire transfers to and/or receiving wire transfers from a foreign entity?

Yes

Captive Insurance Accounts Only

Account Domicile

What is the captive structure?

Name of Parent Company (if applicable)

Has the company taken a 953(d) election?

Yes

If yes, please provide a copy of the IRS approval letter

If no, please provide an IRS Form W-8BEN

Captive Manager

Contact Name

q Phone Number

E-mail Address

Is the account a Reinsurance Trust?

Yes

If yes, please provide contact details for the beneficiary:

Firm Name

Contact Name

Phone Number

E-mail Address

Account Set-Up Questions (for all accounts):

Who should receive statements?

Name:

Address:

Monthly

Quarterly

Annually

How Often:

Name:

Address:

Monthly

Quarterly

Annually

How Often:

Do you need a consolidated statement to combine all accounts?

Do you require paper copies of statements mailed to you or will you be retrieving statements from Custody On-line?

	Mail paper statements
	Custody On-line will be utilized for statement retrieval

Please provide the following information for the individual at your current custodian who will be handling the transfer of assets to Comerica (if applicable).

Contact Name

Firm Name

Phone Number

Fax Number

E-mail Address

Please provide the following information for the main contact at your organization (individual who will handle day to day issues).

Name

Phone Number

Fax Number

E-mail Address

Cash Accounting

	Dual Cash Accounting (principal and income cash separated)
	Single Cash Accounting (principal and income cash combined)

If cost basis and tax acquisition dates will be supplied to us by someone other than the current custodian, please provide the details:

What write-down method should be used on your account for sale transactions?

(i.e., LIFO, FIFO, Average, etc.) NOTE: The default option is FIFO

Is amortization/accretion reporting required?

If yes, using which method:

	Constant Yield (default option)
	Straight Line

What is the Fiscal Year End?

If your account holds mutual funds, please specify your preferred method for income and capital gains distributions:

Dividends		Cash
		Reinvest

Capital Gains		Cash
		Reinvest

Select party responsible for proxy voting (usually determined by agreement or contract with investment management firm):

	Client
	Appointed Investment Manager
	Comerica
	Other

If applicable, please provide contact information for outside Investment Managers

Contact Name

Firm Name

Phone Number

E-mail Address

Please provide any special reporting requirements

Other

Will Comerica be maintaining records for outside collective funds or other investments that will not be held at one of Comerica’s depositories? If so, please provide the details:

If applicable, please provide contact information for your investment consultant, actuary or other service providers we may work with in servicing your account:

Contact Name

Firm Name

Phone Number

E-mail Address

Contact Name

Firm Name

Phone Number

E-mail Address

We direct charge the account for our services on a quarterly basis. Please provide the name and address of the person to receive a copy of our invoice:

Name:

Address:

Client Signature:

Date Signed:

EXHIBIT 31.1

CERTIFICATION

Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934,

as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Cary L. Cheldin, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Unico American Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 15, 2020

/s/ Cary L. Cheldin

Cary L. Cheldin

Chairman of the Board, President and Chief Executive Officer

EXHIBIT 31.2

CERTIFICATION

Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934,

as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Michael Budnitsky, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Unico American Corporation;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 15, 2020

/s/ Michael Budnitsky

Michael Budnitsky

Treasurer, Chief Financial Officer and Secretary

EXHIBIT 32.1

CERTIFICATION

Pursuant to 18 U.S.C. Section 1350,

as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the quarterly report on Form 10-Q of Unico American Corporation (the "Company") for the period ended March 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Cary L. Cheldin, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Cary L. Cheldin

Name: Cary L. Cheldin

Title: Chairman of the Board, President and Chief Executive Officer

Date: May 15, 2020

EXHIBIT 32.2

CERTIFICATION

Pursuant to 18 U.S.C. Section 1350,

as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the quarterly report on Form 10-Q of Unico American Corporation (the "Company") for the period ended March 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael Budnitsky, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Michael Budnitsky

Name: Michael Budnitsky

Title: Treasurer, Chief Financial Officer and Secretary

Date: May 15, 2020