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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the year ended December 31, 2001 Commission File No. 0-3978
UNICO AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 95-2583928
(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification No.)
23251 Mulholland Drive, Woodland Hills, California 91364
(Address of Principal Executive Offices) (Zip Code)
(818) 591-9800
Registrant's telephone number
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of each class)
Securities registered pursuant to section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-X is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy of information statements
incorporated by reference as Part III of this Form 10-K or any amendment to this
Form 10-K. __
The aggregate market value of Registrant's voting stock held by non-affiliates
as of March 22, 2002, was $16,100,496 (based on the closing sales price on such
date, as reported by the Wall Street Journal).
5,484,533
Number of shares of common stock outstanding as of March 22, 2002
Portions of the definitive proxy statement that Registrant intends to file
pursuant to Regulation 14(A) by a date no later than 120 days after December 31,
2001, to be used in connection with the annual meeting of shareholders, are
incorporated herein by reference into Part III hereof. If such definitive proxy
statement is not filed in the 120 day period, the information called for by Part
III will be filed as an amendment to this Form 10-K not later than the end of
the 120 day period.
1
PART I
------
Item 1. Business
- -----------------
Unico American Corporation is an insurance holding company that underwrites
property and casualty insurance through its insurance company subsidiary;
provides property, casualty, health and life insurance through its agency
subsidiaries; and provides insurance premium financing, claim administration
services, 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, unless otherwise indicated. Unico was incorporated under the
laws of Nevada in 1969.
Descriptions of the Company's operations in the following paragraphs are
categorized between the Company's major segment, its insurance company
operation, and all other revenues from insurance operations. The insurance
company operation is conducted through Crusader Insurance Company ("Crusader"),
Unico's property and casualty insurance company. Insurance company revenues and
other revenues from insurance operations for the years ended December 31, 2001,
and December 31, 2000, are as follows:
Year ended December 31
----------------------
2001 2000
------------------------ ------------------------
Percent Percent of
of Total Total
Total Company Total Company
Revenues Revenues Revenues Revenues
-------- -------- -------- --------
Insurance Company Revenues $35,563,628 84.4% $31,572,070 82.3%
Other Revenues from Insurance Operations
Health and life insurance program commission 2,582,290 6.1% 2,625,193 6.9%
Income
Service fee income 1,726,811 4.1% 1,654,735 4.3%
Daily automobile rental insurance program
commission and claim administration fees 667,418 1.6% 811,641 2.1%
Association operations membership and fee income 398,677 1.0% 397,157 1.0%
Other commission and fee income 114,029 0.3% 71,949 0.2%
Workers' compensation program commission income 19,730 - 44,818 0.1%
--------- ---- --------- ----
Total gross commission and fee income 5,508,955 13.1% 5,605,493 14.6%
Insurance premium financing operation finance
charges and late fees 868,496 2.1% 837,902 2.2%
Non-insurance company investment income 159,600 0.4% 338,492 0.9%
Other income 16,227 - 13,992
--------- ---- --------- ----
Total Other Revenues from Insurance Operations 6,553,278 15.5% 6,795,879 17.7%
--------- ---- --------- ----
Total Revenues $42,116,906 100.0% $38,367,949 100.0%
========== ===== ========== =====
INSURANCE COMPANY OPERATION
---------------------------
General
- -------
The insurance company operation is conducted through Crusader, which as of
December 31, 2001, was licensed as an admitted insurance carrier in the states
of Arizona, California, Colorado, Idaho, Montana, Nevada, Ohio, Oregon and
Washington. Crusader is a multiple line property and casualty insurance company
that began transacting business on January 1, 1985. During the year ended
December 31, 2001, 96% of Crusader's business was commercial multiple peril
business package insurance policies. Commercial multiple peril policies provide
a combination of property and liability coverage for businesses. Commercial
property coverages insure against loss or damage to buildings, inventory and
equipment from natural disasters, including hurricanes, windstorms, hail, water,
explosions, severe winter weather and other events such as theft and vandalism,
fires and storms and financial loss due to business interruption resulting from
covered property damage. Commercial liability coverages insure against third
party liability from accidents occurring on the insured's premises or arising
2
out of its operations, such as injuries sustained from products sold. In
addition to commercial multiple peril policies, Crusader also writes separate
policies to insure commercial property and commercial liability risks on a
mono-line basis.
Crusader's business is produced by Unifax Insurance Systems, Inc., ("Unifax")
its sister corporation. Unifax has substantial experience with these classes of
business. The commissions paid by Crusader to Unifax are eliminated as
intercompany transactions and are not reflected in the previous table. Crusader
is licensed in all property and casualty and disability lines by the California
Department of Insurance.
Reinsurance
- -----------
A reinsurance transaction occurs when an insurance company transfers ("cedes") a
portion of its exposure on business written by it to a reinsurer that assumes
that risk for a premium ("ceded premium"). Reinsurance does not legally
discharge the Company from primary liability under its policies. If the
reinsurer fails to meet its obligations, the Company must nonetheless pay its
policy obligations. Since 2000, Crusader has had its primary reinsurance
agreements with Partners Reinsurance Company of the U.S., a California admitted
reinsurer rated A+ by the A.M. Best Company. In 1999, Crusader had its primary
reinsurance agreements with General Reinsurance Corporation, a California
admitted reinsurer rated A++ by the A.M. Best Company. These reinsurance
agreements help protect Crusader against liabilities in excess of certain
retentions, including major or catastrophic losses that may occur from any one
or more of the property and/or casualty risks which Crusader insures. Crusader
also has additional catastrophe reinsurance from various other reinsurance
companies of which 90% of the premium is ceded to participating catastrophe
reinsurers that are admitted in California. The Company has no reinsurance
recoverable balances in dispute.
The aggregate amount of earned premium ceded to the reinsurers was $5,515,330
for the fiscal year ended December 31, 2001, and $6,843,931 for the fiscal year
ended December 31, 2000.
On July 1, 1997, Crusader increased its retention from $150,000 to $250,000 per
risk. Concurrently, Crusader maintained catastrophe and clash covers (subject to
a maximum occurrence and annual aggregate) to help protect the Company from one
loss occurrence affecting multiple policies. Beginning January 1, 1998, an
annual aggregate deductible of $750,000 commenced on losses ceded to its
reinsurance treaty covering losses between $250,000 and $500,000. Beginning
January 1, 2000, the annual aggregate deductible decreased to $500,000, but will
increase back to $750,000 commencing January 1, 2002. Prior to January 1, 1998,
National Reinsurance Corporation (acquired by General Reinsurance Corporation in
1996) charged a provisional rate on exposures up to $500,000 that was subject to
adjustment and was based on the amount of losses ceded, limited by a maximum
percentage that could be charged. That provisional rated treaty was cancelled on
a runoff basis and replaced by a flat rated treaty on January 1, 1998.
On most of the premium that Crusader cedes to the reinsurer, the reinsurer pays
a commission to Crusader that includes a reimbursement of the cost of acquiring
the portion of the premium that is ceded. Crusader does not currently assume any
reinsurance. The Company intends to continue obtaining reinsurance although the
availability and cost may vary from time to time. The unpaid losses ceded to the
reinsurer are recorded as an asset on the balance sheet.
Unpaid Losses and Loss Adjustment Expenses
- ------------------------------------------
Crusader maintains reserves for losses and loss adjustment expenses with respect
to both reported and unreported losses. Crusader establishes reserves for
reported losses based on historical experience, upon case-by-case evaluation of
facts surrounding each known loss, and the related policy provisions. The amount
of reserves for unreported losses is estimated by analysis of historical and
statistical information. Historical data includes the 17 years that Crusader has
been in operation and the data from its general agent developed with other
insurance companies prior to 1985. The ultimate liability of Crusader may be
greater or less than estimated reserves. Reserves are monitored and adjusted
when appropriate and reflected in the statement of operation in the period of
adjustment. Reserves for losses and loss adjustment expenses are estimated to
cover the future amounts needed to pay claims and related expenses with respect
to insured events that have occurred.
3
The process of establishing loss reserves involves significant judgment. The
following table shows the development of the unpaid losses and loss adjustment
expenses for fiscal years 1992 through 2001. The top line of the table shows the
estimated liability for unpaid losses and loss adjustment expenses recorded at
the balance sheet date for each of the indicated years. This liability
represents the estimated amount of losses and loss adjustment expenses for
losses arising in the current and prior years that are unpaid at the balance
sheet date, including the estimated losses that had been incurred but not
reported to the Company. The table shows the reestimated amount of the
previously recorded liability based on experience as of the end of each
succeeding year. The estimate is increased or decreased as more information
becomes known.
The table reflects redundancies and deficiencies in Crusader's net loss and loss
adjustment expense reserves. At December 31, 1999, only fiscal years ended March
31, 1994 and 1995 reflected a cumulative deficiency. At December 31, 2001, all
periods reflected in the table except the fiscal year ended March 31, 1992,
reflected a cumulative deficiency. The change from redundancy to deficiency
since December 31, 1999, was primarily the result of an increase in the
Company's estimate of ultimate reported and unreported claims for construction
defects, non-California liquor liability, and apartment house habitability
claims during the years ended December 31, 2001 and 2000. See discussion of
losses and loss adjustment expenses in Item 7- Management Discussion and
Analysis - Result of Operations - Insurance Company Operations.
Crusader is a relatively small insurance company with 17 years of its own
statistical experience. Crusader is constantly changing its product mix and
exposures, including the types of businesses insured within its business package
program as well as its lines of business. In addition, it is regularly expanding
its territories both inside and outside of California. Considering the
uncertainties from this changing environment as well as its limited internal
data and history, the Company recognizes the difficulties in developing its own
unique reserving statistics; therefore, it incorporates industry standards and
averages into its estimates. The Company believes that its loss and loss
adjustment expense reserves are properly stated. When subsequent loss and loss
adjustment expense development justifies changes in reserving practices, the
Company acts accordingly.
When evaluating the information in the following table, it should be noted that
each amount includes the effects of all changes in amounts of prior periods;
therefore, the cumulative redundancy or deficiency represents the aggregate
change in the estimates over all prior years. Conditions and trends that have
affected development of liability in the past may not necessarily occur in the
future. Accordingly, it may not be appropriate to extrapolate future
deficiencies or redundancies based on this table.
4
CRUSADER INSURANCE COMPANY
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
Fiscal Year Ended March 31 Fiscal Year Ended December 31
--------------------------------------------------------------------- ------------------------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
(Nine Months)
Reserve for Unpaid
Losses and Loss
Adjustment Expenses $21,249,902 $20,824,039 $21,499,778 $27,633,304 $32,682,153 $37,111,846 $40,591,248
Paid Cumulative as of
- ---------------------
1 Year Later 6,368,554 8,904,427 7,687,180 8,814,611 7,019,175 10,996,896 12,677,646
2 Years Later 9,583,885 10,824,024 13,453,833 13,502,224 15,292,415 19,488,853 23,740,181
3 Years Later 11,814,445 13,178,262 16,597,366 18,911,104 20,898,580 25,552,756 30,217,031
4 Years Later 12,667,989 14,462,911 19,073,442 22,631,450 24,932,922 29,730,976 35,620,705
5 Years Later 13,093,970 15,821,444 21,452,429 25,509,618 27,726,438 33,893,473
6 Years Later 13,385,215 16,936,140 23,900,335 27,844,199 31,701,748
7 Years Later 14,067,010 17,729,857 25,687,342 31,445,057
8 Years Later 14,479,299 18,628,698 28,197,077
9 Years Later 14,959,539 19,643,508
10 Years Later 15,562,774
Reserves Reestimated as of
- --------------------------
1 Year Later 18,562,116 19,599,695 20,912,743 25,666,251 31,232,388 32,838,369 35,730,603
2 Years Later 15,021,149 15,742,478 20,289,699 24,984,032 28,636,286 31,086,210 36,032,215
3 Years Later 13,802,009 15,463,566 21,217,766 24,575,023 28,074,691 32,347,788 38,844,953
4 Years Later 13,620,235 16,174,111 21,843,632 26,146,874 29,774,762 35,513,862 45,907,785
5 Years Later 13,790,786 16,888,885 23,767,472 28,687,265 32,382,991 43,335,778
6 Years Later 13,878,797 17,762,615 26,193,900 31,416,091 40,773,954
7 Years Later 14,374,473 18,692,720 28,528,744 40,165,717
8 Years Later 15,132,286 19,849,364 35,793,968
9 Years Later 15,387,869 22,962,939
10 Years Later 16,797,804
Cumulative
Redundancy
(Deficiency) $4,452,098 $(2,138,900) $(14,294,190) $(12,532,413) $(8,091,801) $(6,223,932) $(5,316,537)
========= ========= ========== ========== ========= ========= =========
Gross Liability for Unpaid
Losses and Loss Adjustment Expenses $23,011,868 $26,294,199 $32,370,752 $37,006,458 $39,740,865 $42,004,851
Ceded Liability for Unpaid
Losses and Loss Adjustment Expenses (2,187,829) (4,794,421) (4,737,448) (4,324,305) (2,629,019) (1,413,603)
--------- --------- --------- --------- --------- ---------
Net Liability for Unpaid
Losses and Loss Adjustment Expenses $20,824,039 $21,499,778 $27,633,304 $32,682,153 $37,111,846 $40,591,248
========== ========== ========== ========== ========== ==========
Gross Liability Reestimated $32,852,034 $48,873,132 $56,625,261 $59,195,935 $65,085,837 $61,536,027
Ceded Liability Reestimated (9,889,095) (13,079,164) (16,459,544) (18,421,981) (21,750,059) (15,628,242)
---------- ---------- ---------- ---------- ----------
Net Liability Reestimated $22,962,939 $35,793,968 $40,165,717 $40,773,954 $43,335,778 $45,907,785
========== ========== ========== ========== ========== ==========
Gross Reserve Redundancy (Deficiency) $(9,840,166) $(22,578,933) $(24,254,509) $(22,189,477) $(25,344,972) $(19,531,176
========= ========== ========== ========== ========== ==========
5
CRUSADER INSURANCE COMPANY
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
Fiscal Year Ended December 31
---------------------------------------------------------
1998 1999 2000 2001
---- ---- ---- ----
Reserve for Unpaid
Losses and Loss
Adjustment Expenses $40,374,232 $37,628,165 $34,546,026 $49,786,215
Paid Cumulative as of
- ---------------------
1 Year Later 15,393,167 18,745,224 20,841,417
2 Years Later 28,570,117 34,905,359
3 Years Later 38,923,545
4 Years Later
5 Years Later
6 Years Later
7 Years Later
8 Years Later
9 Years Later
10 Years Later
Reserves Reestimated as of
- --------------------------
1 Year Later 39,132,945 41,898,796 53,872,376
2 Years Later 43,164,627 56,423,375
3 Years Later 52,349,735
4 Years Later
5 Years Later
6 Years Later
7 Years Later
8 Years Later
9 Years Later
10 Years Later
Cumulative
Redundancy
(Deficiency) $(11,975,503) $(18,795,210) $(19,326,350)
========== ========== ==========
Gross Liability for Unpaid
Losses and Loss Adjustment Expenses $41,513,945 $41,592,489 $45,217,369 $60,534,295
Ceded Liability for Unpaid
Losses and Loss Adjustment Expenses (1,139,713) (3,964,324) (10,671,343) (10,748,080)
--------- --------- --------- ---------
Net Liability for Unpaid
Losses and Loss Adjustment Expenses $40,374,232 $37,628,165 $34,546,026 $49,786,215
========== ========== ========== ==========
Gross Liability Reestimated $70,427,031 $75,138,900 $72,001,181
Ceded Liability Reestimated (18,077,296) (18,715,525) (18,128,805)
---------- ---------- ----------
Net Liability Reestimated $52,349,735 $56,423,375 $53,872,376
========== ==========
Gross Reserve Redundancy (Deficiency) $(28,913,086) $(33,546,411) $(26,783,812)
========== ========== ==========
5
The following table provides an analysis of the roll forward of Crusader's
losses and loss adjustment expenses, including a reconciliation of the ending
balance sheet liability for the periods indicated:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Reserve for unpaid losses and loss adjustment expenses
at beginning of year - net of reinsurance $34,546,026 $37,628,165 $40,374,232
---------- ---------- ----------
Incurred losses and loss adjustment expenses
Provision for insured events of current year 22,350,667 17,406,284 18,268,710
Increase (decrease) in provision for events of prior years (*) 19,326,349 4,270,631 (1,241,520)
---------- ----------- ----------
Total losses and loss adjustment expenses 41,677,016 21,676,915 17,027,190
---------- ---------- ----------
Payments
Losses and loss adjustment expenses attributable to
insured events of the current year 5,595,410 6,013,830 4,380,090
Losses and loss adjustment expenses attributable to
insured events of prior years 20,841,417 18,745,224 15,393,167
---------- ---------- ----------
Total payments 26,436,827 24,759,054 19,773,257
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses
at end of year - net of reinsurance $49,786,215 $34,546,026 $37,628,165
Reinsurance recoverable on unpaid losses and loss
adjustment expenses at end of year 10,748,080 10,671,343 3,964,324
---------- ---------- -----------
Reserve for unpaid losses and loss adjustment expenses at
end of year per balance sheet, gross of reinsurance (**) $60,534,295 $45,217,369 $41,592,489
========== ========== ==========
(*) See discussion of losses and loss adjustment expenses in Item 7 -
Management Discussion and Analysis - Result of Operations -
Insurance Company Operations.
(**) In accordance with Financial Accounting Standards Board Statement No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts," reinsurance recoverable on unpaid losses and
loss adjustment expenses are reported for generally accepted accounting
principles (GAAP) as assets rather than netted against the corresponding
liability for such items on the balance sheet.
Net Premium Written to Policyholders' Surplus Ratio
- ---------------------------------------------------
The following table shows, for the periods indicated, Crusader's statutory
ratios of net premiums written to statutory policyholders' surplus. Due to
certain GAAP adjustments for written premium on policies that do not become
effective in the year written, statutory net premiums written differ slightly
from those reported on the Company's financial statements. Since each property
and casualty insurance company has different capital needs, an "acceptable"
ratio of net premium written to policyholders' surplus for one company may be
inapplicable to another. While there is no statutory requirement applicable to
Crusader that establishes a permissible net premium to surplus ratio, guidelines
established by the National Association of Insurance Commissioners provide that
such ratio should generally be no greater than 3 to 1.
Twelve months ended December 31
-----------------------------------------------------------------------------------
Statutory: 2001 2000 1999 1998 1997
- ---------- ---- ---- ---- ---- ----
Net Premiums Written $32,106,175 $26,406,565 $26,209,180 $34,203,908 $36,059,086
Policyholders' Surplus $27,519,538 $39,626,269 $40,952,456 $37,611,089 $30,899,761
Ratio 1.2 to 1 .7 to 1 .6 to 1 .9 to 1 1.2 to 1
Regulation
- ----------
The insurance company operation is subject to regulation by the California
Department of Insurance ("the insurance department") and by the department of
insurance of other states in which Crusader is licensed. The insurance
department has broad regulatory, supervisory, and administrative powers. These
powers relate primarily to the standards of solvency which must be met and
maintained; the licensing of insurers and their agents; the nature
6
and limitation of insurers' investments; the prior approval of rates, rules and
forms; the issuance of securities by insurers; periodic examinations of the
affairs of insurers; the annual and other reports required to be filed on the
financial condition and results of operations of such insurers or for other
purposes; and the establishment of reserves required to be maintained for
unearned premiums, losses, and other purposes. The regulations and supervision
by the insurance department are designed principally for the benefit of
policyholders and not for the insurance company shareholders. The last
examination of Crusader by the insurance department covered the three years
ended December 31, 1997. The report of examination that was filed with the
insurance department on December 23, 1998, reported no adjustments to Crusader's
statutory financial statements. The Company has been notified by the California
Department of Insurance that it is scheduled for a financial examination in
2002.
In December 1993, the National Association of Insurance Commissioners ("NAIC")
adopted a Risk-Based Capital ("RBC") Model Law for property and casualty
companies. The RBC Model Law is intended to provide standards for calculating a
variable regulatory capital requirement related to a company's current
operations and its risk exposures (asset risk, underwriting risk, credit risk
and off-balance sheet risk). These standards are intended to serve as a
diagnostic solvency tool for regulators that establishes uniform capital levels
and specific authority levels for regulatory intervention when an insurer falls
below minimum capital levels. The RBC Model Law specifies four distinct action
levels at which a regulator can intervene with increasing degrees of authority
over a domestic insurer if its RBC is equal to or less than 200% of its computed
authorized control level RBC. A company's RBC is required to be disclosed in its
statutory annual statement. The RBC is not intended to be used as a rating or
ranking tool nor is it to be used in premium rate making or approval. Taking
into consideration the Job Creation and Workers Assistance Act of 2002 discussed
below, Crusader adjusted capital at December 31, 2001 was 458% of authorized
control level risk-based capital.
The following table sets forth the different levels of risk-based capital that
may trigger regulatory involvement and the corresponding actions that may
result.
- -------------------------- ----------------------------------- --------------------------------------------------------
LEVEL TRIGGER CORRECTIVE ACTION
- -------------------------- ----------------------------------- --------------------------------------------------------
Company Action Level Adjusted Capital less that 200% The insurer must submit a comprehensive plan to
of Authorized Control Level insurance commissioner
- -------------------------- ----------------------------------- --------------------------------------------------------
Regulatory Action Level Adjusted Capital less that 150% In addition to above, insurer is subject to examination,
of Authorized Control Level analysis and specific corrective action
- -------------------------- ----------------------------------- --------------------------------------------------------
Authorized Control Level Adjusted Capital less that 100% In addition to both of the above, insurance commissioner
of Authorized Control Level may place insurer under regulatory control
- -------------------------- ----------------------------------- --------------------------------------------------------
Mandatory Control Level Adjusted Capital less that 70% of Insurer must be placed under regulatory control
Authorized Control Level
- -------------------------- ----------------------------------- --------------------------------------------------------
Insurance Regulatory Information System ("IRIS") was developed by a committee of
state insurance regulators primarily to assist state insurance departments in
executing their statutory mandate to oversee the financial condition of
insurance companies. IRIS helps those companies that merit highest priority in
the allocation of the regulators' resources on the basis of 12 financial ratios
that are calculated annually. The analytical phase is a review of annual
statements and the financial ratios. The ratios and trends are valuable in
pointing to companies likely to experience financial difficulties, but are not
themselves indicative of adverse financial condition. The ratio and benchmark
comparisons are mechanically produced and are not intended to replace the state
insurance departments' own in-depth financial analysis or on-site examinations.
An unusual range of ratio results has been established from studies of the
ratios of companies that have become insolvent or have experienced financial
difficulties. In the analytical phase, all companies that receive four or more
financial ratio values outside the usual range are analyzed in order to identify
those companies that appear to require immediate regulatory action.
Subsequently, a more comprehensive review of the ratio results and an insurer's
annual statement is performed to confirm that an insurer's situation calls for
increased or close regulatory attention.
In 2001, the Company was outside the usual values of 5 of the 12 IRIS ratio
tests, primarily as a result of adverse loss and loss adjustment expense
development. The IRIS ratio test outside the usual values were the Two Year
Overall Operating Ratio, Change in Surplus, One Year Reserve Development to
Surplus, Two Year Reserve Development to Surplus, and Estimated Current Reserve
Deficiency to Surplus.
7
NAIC's Statutory Accounting Initiative
- --------------------------------------
The NAIC's project to codify accounting practices was approved by the NAIC in
March 1998. The approval included a provision for commissioners' discretion in
determining appropriate statutory accounting for insurers in their states.
Consequently, prescribed and permitted accounting practices may continue to
differ from state to state. Codification became effective on January 1, 2001.
The primary effect of Codification on Crusader was the recognition, subject to
limitations, of deferred tax assets previously not allowed. As of December 31,
2001, Crusader reported to the California insurance department in its annual
statutory filing, total deferred tax assets of $7,243,071 of which $3,962,627
was admitted and included in surplus and $3,280,444 was non-admitted and not
included in surplus. The admitted deferred tax assets of $3,962,627 would not
have been allowed prior to codification. On March 9, 2002, subsequent to
Crusader's statutory filing, the Job Creation and Workers Assistance Act of 2002
was signed into law. This act was effective for tax years ending in 2001 and
provided that a net operating loss for tax years ending in 2001 or 2002 is
carried back five years, rather than the previously allowed two years. The
income tax credit resulting from net operating loss carrybacks are treated as
current receivables while income tax credit resulting from net operating loss
carryforwards, subject to limitations, are treated as deferred tax assets and
are limited to an aggregate amount no greater than 10% of beginning surplus.
This act allowed Crusader to carryback its entire net operating loss and thus
converted its net operating loss carryforward of $3,934,772 to a current
receivable. Taking into consideration the Job Creation and Workers Assistance
Act of 2002, Crusader's admitted deferred tax assets were $2,087,678 and its
non-admitted deferred tax assets were $1,220,621. Taking into consideration the
Job Creation and Workers Assistance Act of 2002, the primary effect of
codification on Crusader was to increase its surplus by recognizing admitted
deferred tax assets of $2,087,678.
The Company is unable to predict how insurance rating agencies will interpret or
react to any such changes. No assurance can be given that future legislative or
regulatory changes resulting from such activities will not adversely affect the
Company and its subsidiaries.
California Insurance Guarantee Association
- ------------------------------------------
In 1969, the California Insurance Guarantee Association ("CIGA") was created
pursuant to California law to provide for payment of claims for which insolvent
insurers are liable but which cannot be paid out of such insurers' assets.
Crusader is subject to assessment by CIGA for its pro-rata share of such claims,
based on premiums written in the particular line in the year preceding the
assessment by insurers writing that line of insurance in California. Such
assessments are based upon estimates of losses incurred in liquidating an
insolvent insurer. In any particular year, Crusader cannot be assessed an amount
greater than 1% of its premiums written in the preceding year. California
Insurance Code Sections 1063.5 and 1063.14 allow Crusader to recoup assessments
by surcharging policyholders. No assessment was made by CIGA for the 2001 or
2000 calendar years.
Holding Company Act
- -------------------
Crusader is subject to regulation by the insurance department pursuant to the
provisions of the California Insurance Holding Company System Regulatory Act
(the "Holding Company Act"). Pursuant to the Holding Company Act, the insurance
department may examine the affairs of Crusader at any time. Certain transactions
defined to be of an "extraordinary" type may not be effected without the prior
approval of the insurance department. Such transactions include, but are not
limited to, sales, purchases, exchanges, loans and extensions of credit, and
investments made within the immediately preceding 12 months involving the lesser
of 3% of admitted assets or 25% of policyholders' surplus, as of the preceding
December 31. An extraordinary transaction also includes a dividend which,
together with other dividends or distributions made within the preceding twelve
months, exceeds the greater of 10% of the insurance company's policyholders'
surplus as of the preceding December 31 or the insurance company's net income
for the preceding calendar year. An insurance company is also required to notify
the insurance department of any dividend after declaration, but prior to
payment.
The Holding Company Act also provides that the acquisition or change of
"control" of a California domiciled insurance company or of any person who
controls such an insurance company cannot be consummated without the prior
approval of the Insurance Commissioner. In general, a presumption of "control"
arises from the ownership of voting securities and securities that are
convertible into voting securities, which in the aggregate constitute 10% or
more of the voting securities of a California insurance company or a person that
controls a California insurance company, such as Crusader. A person seeking to
acquire "control," directly or indirectly, of the Company must generally file
with the Insurance Commissioner an application for change of control containing
8
certain information required by statute and published regulations and provide a
copy of the application to the Company. The Holding Company Act also effectively
restricts the Company from consummating certain reorganization or mergers
without prior regulatory approval. The Company is in compliance with the Holding
Company Act.
Rating
- ------
Insurance companies are rated to provide both industry participants and
insurance consumers with meaningful information on specific insurance companies.
Higher ratings generally indicate financial stability and a strong ability to
pay claims. These ratings are based upon factors relevant to policyholders and
are not directed toward protection of investors. Such ratings are neither a
rating of securities nor a recommendation to buy, hold or sell any security and
may be revised or withdrawn at any time. Ratings focus primarily on the
following factors: capital resources, financial strength, demonstrated
management expertise in the insurance business, credit analysis, systems
development, market segment position and growth opportunities, marketing, sales
conduct practices, investment operations, minimum policyholders' surplus
requirements and capital sufficiency to meet projected growth, as well as access
to such traditional capital as may be necessary to continue to meet standards
for capital adequacy.
The claims-paying abilities of insurers are rated to provide both insurance
consumers and industry participants with comparative information on specific
insurance companies. Claims-paying ratings are important for the marketing of
certain insurance products. A higher rating generally indicate greater financial
strength and a stronger ability to pay claims.
Primarily as a result of the underwriting losses in 2001 and 2000, the A.M. Best
Company recently lowered Crusader's rating from A (Excellent) to A- (Excellent).
A.M. Best remains concerned with the potential for further adverse loss reserve
development and the negative impact it would have on the Company's operating
performance and overall capitalization. As a result, A.M. Best views the rating
outlook as negative. The Company does not believe that the lowering of
Crusader's rating from A to A- will have a material adverse effect on the
Company.
OTHER INSURANCE OPERATIONS
--------------------------
General Agency Operations
- -------------------------
Unifax primarily sells and services commercial multiple peril business insurance
policies. In addition, it sells and services commercial liability, commercial
property, workers' compensation, and commercial earthquake insurance policies.
Unifax's workers' compensation, commercial earthquake, and some of the
commercial liability insurance policies are sold primarily in California for
non-affiliated insurers. All other policies are sold and serviced for Crusader
by Unifax in Arizona, California, Idaho, Kentucky, Montana, Nevada, Ohio,
Oregon, Pennsylvania, Texas, and Washington. Unifax intends to discontinue its
sales of workers' compensation insurance policies in 2002.
Bedford Insurance Services, Inc., ("Bedford") sells and services daily
automobile rental policies in most states for a non-affiliated insurer.
As general agents, these subsidiaries market, rate, underwrite, inspect and
issue policies, bill and collect insurance premiums, and maintain accounting and
statistical data. Unifax is the exclusive general agent for Crusader. Unifax and
Bedford are non-exclusive general agents for non-affiliated insurance companies.
The Company's marketing is conducted through advertising to independent
insurance agents and brokers. For its services, the general agent receives a
commission (based on the premium written) from the insurance company and, in
some cases, a service fee from the customer. These subsidiaries all hold
licenses issued by the California Department of Insurance and other states where
applicable.
Insurance Claim Administration Operation
- ----------------------------------------
The Company's subsidiary U.S. Risk Managers, Inc., ("U.S. Risk") provides
insurance claim administration services to the non-affiliated property and
casualty insurance companies that Bedford represents as a general agent. These
services consist of receiving, reserving, adjusting, paying and accounting for
insurance claims. U.S. Risk engages independent field examiners for all work
performed outside the Company's office. U.S. Risk operates under a license
issued by the California Department of Insurance and other states where
applicable. All
9
claim adjusting services for Crusader policies are administered by Crusader.
Crusader engages independent field examiners for all work performed outside the
Company's office.
Insurance Premium Finance Operation
- -----------------------------------
American Acceptance Corporation ("AAC") is a licensed insurance premium finance
company that provides insurance purchasers with the ability to pay their
insurance premiums on an installment basis. The premium finance company pays the
insurance premium to the insurance company in return for a premium finance note
from the insured. These notes are paid off by the insured in nine monthly
installments and are secured by the unearned premiums held by the insurance
company. AAC provides premium financing primarily for the Crusader policies that
are produced by Unifax in California.
Health and Life Insurance Operations
- ------------------------------------
The Company's subsidiaries National Insurance Brokers, Inc., ("NIB") and
American Insurance Brokers, Inc., ("AIB") market medical, dental, life, vision,
and accidental death and dismemberment insurance through non-affiliated
insurance companies for individuals and groups. The services provided consist of
marketing, billing and collection, accounting, and customer service. For their
services, these subsidiaries receive a commission from the insurance company.
Most of the business is produced through independent insurance agents and
brokers who receive a commission from NIB or AIB. NIB and AIB hold licenses
issued by the California Department of Insurance. All business is currently
written in California.
Association Operation
- ---------------------
The Company's subsidiary Insurance Club, Inc., DBA The American Association for
Quality Health Care ("AAQHC"), is a membership association that provides various
consumer benefits to its members, including participation in group health care
and life insurance policies that AAQHC negotiates for the association. For these
services, AAQHC receives membership and fee income from its members.
INVESTMENTS
-----------
The investments of the Company are made by the Company's Chief Financial Officer
under the supervision of an investment committee appointed by the Company's
Board of Directors. The Company's investment guidelines on equity securities
limit investments in equity securities to an aggregate maximum of $2,000,000.
The Company's investment guidelines on fixed maturities limit fixed maturity
investments to high-grade obligations with a maximum term of eight years and a
maximum investment in any one issuer of $2,000,000. This dollar limitation
excludes bond premiums paid in excess of par value and U.S. government or U.S.
government guaranteed issues. All investments in municipal securities are
pre-refunded and secured by U.S. treasury securities. Short-term cash
investments consist of bank money market accounts, certificates of deposit,
commercial paper, a U.S. government obligation money market fund, and U.S.
treasury bills. These short-term investments are either U.S. government
obligations, FDIC insured or are in an institution with a Moody's rating of P1
and/or Standard & Poor's rating of A1. All of the Company's investments are
readily marketable and could be liquidated without any material financial
impact.
The following table sets forth the composition of the investment portfolio of
the Company at the dates indicated:
(Amounts in Thousands)
As of December 31
-------------------------------------------------------------------------------
2001 2000 1999
---- ---- ----
Amortized Market Amortized Market Amortized Market
Type of Security Cost Value Cost Value Cost Value
- ---------------- ---- ----- ---- ----- ---- -----
Certificates of deposit $ 400 $ 400 $ 400 $ 400 $ 200 $ 200
U.S. treasury securities 5,459 5,802 7,995 8,192 10,056 10,076
Industrial and miscellaneous taxable bonds 77,740 79,990 66,613 66,356 60,807 58,974
State and municipal tax-exempt bonds 8,213 8,436 19,790 20,035 28,079 28,344
------ ------- ------ ------ ------ ------
Total fixed maturity investments 91,812 94,628 94,798 94,983 99,142 97,594
Short-term cash investments 2,864 2,864 3,355 3,355 5,968 5,968
Equity investments - - 26 26 164 66
------ ------ ------ ------ ------- -------
Total investments $94,676 $97,492 $98,179 $98,364 $105,274 $103,628
====== ====== ====== ====== ======= =======
10
At December 31, 2001, the Company had net unrealized gains on all investments of
$2,816,423 before income taxes. The amortized cost and estimated market value of
fixed maturity investments at December 31, 2001, by contractual maturity are as
follows. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
penalties.
(Amounts in Thousands)
As of December 31, 2001
-----------------------
Amortized Market
Fixed maturities due Cost Value
-------------------- ---- -----
Within 1 year $12,218 $12,414
Beyond 1 year but within 5 years 70,174 72,695
Beyond 5 years but within 10 years 9,420 9,519
----- ------
Total $91,812 $94,628
====== ======
COMPETITION
-----------
General
- -------
The property and casualty insurance industry is highly competitive in the areas
of price and service. It is highly cyclical, characterized by periods of high
premium rates and shortages of underwriting capacity followed by periods of
severe price competition and excess capacity.
The profitability of insurers is affected by many factors including rate
competition, the frequency of claims and their average cost, natural disasters,
state regulations, interest rates, crime rates, general business conditions, and
court decisions redefining and expanding the extent of coverage and granting
higher compensation awards. One of the challenging and unique features of the
property and casualty business is the fact that, since premiums are collected
before losses are paid, its products are normally priced before its costs are
known.
Insurance Company and General Agency Operations (Property and Casualty)
- ----------------------------------------------------------------------
The Company's property and casualty insurance business continues to experience a
competitive marketplace. There are many substantial competitors who have larger
resources, operate in more states, and insure coverages in more lines and in
higher limits than the Company. In addition, Crusader competes not only with
other insurance companies but also with the general agents. Many of these
general agents offer more products than the Company. The principal method of
competition among competitors is price. While the Company attempts to meet this
competition with competitive prices, its emphasis is on service, promotion, and
distribution. Additional information regarding competition in the insurance
marketplace is discussed in the Management Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations.
Insurance Claim Administration Operation
- ----------------------------------------
The insurance claim administration operation generates all its business from
insurance policies produced by its sister company Bedford for a non-affiliated
insurance company. Competition is not a major factor as long as U.S. Risk
produces a quality product at a fair price. The growth of U.S. Risk is dependent
on the growth of Bedford.
Insurance Premium Financing Operation
- -------------------------------------
The insurance premium financing operation currently finances only policies
written through its sister company, Unifax. Although competition is intense in
the premium finance business, the competitive pricing, the quality of its
service, and the ease and convenience of financing with AAC has made its growth
and profitability possible. AAC's growth is dependent on the growth of Crusader
and Unifax.
Health and Life Insurance Operations
- ------------------------------------
Competition in the health and life insurance business is also intense.
Approximately 94% of the Company's present health and life insurance business is
from the CIGNA HealthCare medical and dental plan programs. This percentage is
higher than the 93% in the prior year. The Company is continuing its efforts to
diversify and offer a wider variety of products to its customers.
11
EMPLOYEES
---------
On March 15, 2002, the Company employed 139 persons at its facility located in
Woodland Hills, California. The Company has no collective bargaining agreements
and believes its relations with its employees are excellent.
Item 2. Properties
- -------------------
The Company presently occupies a 46,000 square foot building located at 23251
Mulholland Drive, Woodland Hills, California, under a master lease expiring
March 31, 2007. The lease provides for an annual gross rent of $1,025,952. Erwin
Cheldin, the Company's president, chairman and principal stockholder, is the
owner of the building. On February 22, 1995, the Company signed an extension to
the lease with no increase in rent to March 31, 2007. The Company believes that
the terms of the lease at inception and at the time the lease extension was
signed were at least as favorable to the Company as could have been obtained
from non-affiliated third parties.
The Company utilizes for its own operations 100% of the space it leases.
Item 3. Legal Proceedings
- --------------------------
The Company, by virtue of the nature of the business conducted by it, becomes
involved in numerous legal proceedings in which it may be named as either
plaintiff or defendant. Incidental actions are sometimes brought by customers or
others that relate to disputes concerning the issuance or non-issuance of
individual insurance policies or other matters. In addition, the Company resorts
to legal proceedings from time to time in order to enforce collection of
premiums, commissions, or fees for the services rendered to customers or to
their agents. These routine items of litigation do not materially affect the
Company and are handled on a routine basis through its counsel, and they do not
materially affect the operations of the Company.
City of Los Angeles Business License
- ------------------------------------
On September 13, 2000, the City of Los Angeles audited Unico (parent company
only) for the years 1997, 1998 and 1999 with respect to its Los Angeles business
license gross receipts tax. The audit resulted in an assessment of $97,681 in
gross receipts tax, interest of $24,196, and penalties of $39,072, resulting in
a total due of $160,949. The assessment was based on the city's position that
expenses of Unico's subsidiaries that are paid by Unico (parent company) are
subject to the gross receipts business tax when those expenses are reimbursed by
the subsidiaries to Unico. The Company disagreed with the audit findings and has
appealed the matter. A formal hearing was held on January 3, 2001. The Company
received the decision of the board of review that resulted in a revised gross
receipts tax of $46,589 and a reduction in the interest assessment of $13,500.
The Company is awaiting its request that all penalties be waived. As of December
31, 2001, the Company has expensed the revised tax due and recorded the interest
expense adjustment.
12
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The Company's common stock is traded on the NASDAQ National Market System under
the symbol "UNAM." The high and low sales prices (by quarter) and dividends
declared during the last two comparable twelve-month periods are as follows:
High Low Dividend
Quarter Ended Price Price Declared
------------- ----- ----- --------
March 31, 2000 7.875 4.625 $0.15
June 30, 2000 6.750 4.500
September 30, 2000 7.250 5.875
December 31, 2000 7.750 5.375
March 31, 2001 6.625 5.375 $0.05
June 30, 2001 6.400 5.300
September 30, 2001 6.630 4.050
December 31, 2001 6.750 4.900
As of December 31, 2001, the approximate number of shareholders of record of the
Company's common stock was 500. In addition, the Company estimates beneficial
owners of the Company's common stock held in the name of nominees to be
approximately 1,000.
The Company has declared a cash dividend on its common stock annually since June
24, 1991. The Company's intention is to declare annual cash dividends subject to
continued profitability and cash requirements. On March 1, 2001, the Company
declared an annual cash dividend of $0.05 per common share payable on May 18,
2001, to shareholders of record on April 27, 2001. On March 4, 2002, the Company
declared an annual cash dividend of $0.05 per common share payable on May 17,
2002, to shareholders of record on April 26, 2002. Because the Company is a
holding company and operates through its subsidiaries, its cash flow and,
consequently, its ability to pay dividends are dependent upon the earnings of
its subsidiaries and the distribution of those earnings to the Company. Also,
the ability of Crusader to pay dividends to the Company is subject to certain
regulatory restrictions under the Holding Company Act (See Item 1 - Business -
Insurance Company Operation - Holding Company Act). As of December 31, 2001, the
maximum additional dividend that could have been made by Crusader to Unico
without prior approval was $2,751,954.
In the year 2001, the Company issued an aggregate of 59,860 shares of its common
stock upon exercise of employee stock options granted under the Unico American
Corporation Employee Incentive stock Option Plan. These shares were issued to an
aggregate of two employees of the Company. These shares were issued for an
aggregate of 31,033 shares of the Company's common stock and an aggregate of
$37.25 in cash. These shares were acquired for investment and without a view to
the public distribution or resale thereof, and the issuance thereof was exempt
from the registration requirements under the Securities Act of 1933, as amended,
under Section 4(2) thereof as transactions not involving a public offering.
13
The Company has previously announced that its Board of Directors had authorized
the repurchase in the open market from time to time of up to an aggregate of
945,000 shares of the common stock of the Company (See Note 17). During the year
ended December 31, 2001, the Company retired an aggregate of 240,358 shares of
its common stock at a cost of $1,387,397. Of this amount, $432,046 came from
cash on hand and the proceeds from the maturities of short-term investments, and
$955,351 from the proceeds of the sale of U.S. treasury notes. As of December
31, 2001, the Company has purchased and retired under the Board of Directors
authorization an aggregate of 868,958 shares of its common stock at a cost of
$5,517,465.
Item 6. Selected Financial Data
- --------------------------------
Fiscal year ended December 31
-------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Total revenues $42,116,906 $38,367,949 $40,734,257 $47,544,270 $48,290,721
Total costs and expenses 58,840,015 38,174,336 33,609,368 34,789,372 37,301,688
---------- ---------- ---------- ---------- ----------
Income (loss) before taxes $(16,723,109) $193,613 $7,124,889 $12,754,898 $10,989,033
Net income (loss) $(10,870,018) $439,797 $5,131,366 $8,708,669 $7,654,362
Basic earnings (loss) per share $(1.97) $0.07 $0.82 $1.41 $1.25
Diluted earnings (loss) per share $(1.97) $0.07 $0.81 $1.36 $1.20
Cash dividends per share $0.05 $0.15 $0.25 $0.07 $0.07
Total assets $128,823,273 $123,945,820 $121,978,756 $121,717,643 $112,942,384
Stockholders' equity $40,620,376 $51,413,329 $54,840,797 $54,168,082 $45,060,784
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
Liquidity and Capital Resources:
-------------------------------
Due to the nature of the Company's business (insurance and insurance services)
and whereas Company growth does not normally require material reinvestments of
profits into property or equipment, the cash flow generated from operations
usually results in improved liquidity for the Company. Because the Company is a
holding company and operates through its subsidiaries, its cash flow is
dependent upon the earnings of its subsidiaries and the distributions of those
earnings to the Company.
The most significant liquidity risk faced by the Company would be continued
adverse development of the insurance company claims, both reported and
unreported. The Company has taken measures to address the underlying causes of
the adverse development; however, no assurance can be given that the measures
taken will be successful or that the Company's estimate of ultimate losses and
loss adjustment expenses will be sufficient. 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.
Crusader generates a significant amount of cash as a result of its holdings of
unearned premium reserves, its reserves for loss 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 and
investments (excluding net unrealized gains or losses) at December 31, 2001,
were $94,720,698 compared to $98,234,187 at December 31, 2000, a 4% decrease.
Crusader's cash and investments at December 31, 2001, was $92,790,350 or 98% of
the total held by the Company, compared to $93,578,918 or 95% of the total held
by the Company at December 31, 2000.
14
The Company's investments are as follows:
December 31, 2001 December 31, 2000 December 31, 1999
----------------- ----------------- -----------------
Amount % Amount % Amount %
------ - ------ - ------ -
Fixed maturities (at amortized cost)
Certificates of deposit $ 400,000 - $ 400,000 - $ 200,000 -
U.S. treasury securities 5,459,019 6 7,995,324 9 10,056,163 10
Industrial and miscellaneous (taxable) 77,739,699 85 66,613,078 70 60,807,507 62
State and municipal (tax exempt) 8,213,141 9 19,789,675 21 28,078,605 28
---------- --- ---------- --- ---------- ---
Total fixed maturity investments 91,811,859 100 94,798,077 100 99,142,275 100
---------- === ---------- === ---------- ===
Short-term cash investments (at cost)
Certificates of deposit 225,000 8 225,000 7 425,000 7
Commercial paper - - 2,000,000 60 2,675,000 45
Bank money market accounts 2,050,006 72 417,280 12 2,055,254 35
U.S. gov't obligation money market fund 585,699 20 28,778 1 78,799 1
Short-term U.S. treasury - - 681,414 20 731,281 12
Bank savings accounts 2,917 - 2,882 - 2,839 -
--------- --- --------- --- --------- ---
Total short-term cash investments 2,863,622 100 3,355,354 100 5,968,173 100
--------- === --------- === --------- ===
Equity investments (at cost) 216 25,920 164,170
Total investments $94,675,697 $98,179,351 $105,274,618
========== ========== ===========
In accordance with Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
is required to classify its investments in debt and equity securities into one
of three categories: held-to-maturity, available-for-sale or trading securities.
Although all of the Company's investments are classified as available-for-sale,
the Company's investment guidelines place primary emphasis on buying and holding
high-quality investments to maturity.
The tax-exempt interest income earned (net of bond premium and discount
amortization) during the year ended December 31, 2001, was $752,189 compared to
$1,191,794 in the year ended December 31, 2000. In the year ended December 31,
1999, tax-exempt interest income earned totaled $1,473,922.
The Company's investment policy limits investments in any one company to
$2,000,000. This limitation excludes bond premiums paid in excess of par value
and U.S. government or U.S. government guaranteed issues. The Company's
investment guidelines on equity securities limit investments in equity
securities to an aggregate maximum of $2,000,000. All of the Company's fixed
maturity investments are high-grade investment quality, all state and municipal
tax exempt fixed maturity investments are pre-refunded issues, and all
certificates of deposit are FDIC insured.
Unico has a $2,000,000 line of credit with Union Bank of California. Interest on
this line is referenced as Bank's LIBOR rate plus 1.75% per annum and is payable
monthly. The agreement contains certain covenants including maintenance of
certain financial ratios. As of December 31, 2001, the Company does not meet the
covenant requiring a tangible net worth of at least $45,000,000. As of December
31, 2001 and 2000, no amounts were borrowed and the Company does not intend to
utilize its credit line during the remainder of its current term. This credit
line expires September 3, 2002, at which time it's expected to be renegotiated
and renewed.
There were no dividends paid by Crusader to Unico in 2001. Crusader paid
dividends of $1,500,000 in 2000 and $2,000,000 in 1999. The dividends paid in
2000 and 1999 were invested in short-term instruments and were ultimately used
to help fund the repurchase of shares of the Company's common stock discussed
below. As of December 31, 2001, the maximum dividend that could have been made
by Crusader to Unico without the prior approval of the California Department of
Insurance was $2,751,954.
The Company has previously announced that its Board of Directors had authorized
the repurchase in the open market from time to time of up to an aggregate of
945,000 shares of the common stock of the Company (See Note 17). During the year
ended December 31, 2001, the Company retired an aggregate of 240,358 shares of
its common stock at a cost of $1,387,397. Of this amount, $432,046 came from
cash on hand and the proceeds from the maturities of short-term investments and
$955,351 from the proceeds of the sale of U.S. treasury notes. As of
15
December 31, 2001, the Company has purchased and retired under the Board of
Directors authorization an aggregate of 868,958 shares of its common stock at a
cost of $5,517,465.
Crusader's statutory capital and surplus as of December 31, 2001, was
$27,519,538, a decrease of $12,106,731 (31%) from December 31, 2000. On March 9,
2002, subsequent to Crusader's statutory filing, the Job Creation and Workers
Assistance Act of 2002 was signed into law. This act was effective for tax years
ending in 2001 and provided that a net operating loss for tax year ending in
2001 or 2002 is carried back five years, rather than the previously allowed two
years. The income tax credit resulting from net operating loss carrybacks are
treated as current receivables while income tax credit resulting from the net
operating loss carryforwards, subject to limitations, are treated as deferred
tax assets and are limited to an aggregate amount no greater than 10% of
beginning surplus. As of December 31, 2001, Crusader reported to the California
Department of Insurance in its annual statutory filing, total deferred tax
assets of $7,243,071 of which $3,962,627 was admitted and included in surplus
and $3,280,444 was non-admitted and not included in surplus. This act allowed
Crusader to carryback its entire net operating loss and thus converted its net
operating loss carryforward of $3,934,772 to a current receivable. This reduced
the total deferred tax assets to $3,308,299 of which $2,087,678 were admitted
and $1,220,621 were non-admitted. Taking into consideration the Job Creation and
Workers Assistance Act of 2002, the primary effect of the Act was to increase
Crusader's surplus by $2,059,823.
Crusader's statutory capital and surplus as of December 31, 2000, was
$39,626,269, a decrease of $1,326,1877 (3%) from December 31, 1999.
Cash flow used by operations for the year ended December 31, 2001, was
$1,288,941, a slight decrease of $85,833 in cash used compared to the year ended
December 31, 2000. Cash flow used by operations for the year ended December 31,
2000, was $1,374,774, a decrease of $5,074,800 from the $3,700,026 of cash
provided by operations in the year ended December 31, 1999. The decline in cash
flows from operations in 2000 was primarily due an increase in loss and loss
adjustment payments of $4,985,797.
The Company has initiated an upgrade and replacement of its printing and forms
generation systems and expects to spend approximately $125,000 in the next
twelve months to complete this project. There are no other material commitments
for capital expenditures as of the date of this report.
Although material capital expenditures may also be funded through borrowings,
the Company believes that its cash and short-term investments at year end, net
of trust restriction of $1,529,996, statutory deposits of $2,725,000, and
dividend restriction between Crusader and Unico (See Item 1 - Business -
Insurance Company Operation - Holding Company Act) plus the cash to be generated
from operations, should be sufficient to meet its operating requirements during
the next twelve months without the necessity of borrowing funds.
Results of Operations:
---------------------
General
- -------
The Company had a net loss of $10,870,018 for the year ended December 31, 2001,
compared to net income of $439,797 for the year ended December 31, 2000, and
$5,131,366 for the year ended December 31, 1999. Total revenue for the year
ended December 31, 2001, was $42,116,906 compared to $38,367,949 for the year
ended December 31, 2000, and $40,734,257 for the year ended December 31, 1999.
For the year ended December 31, 2001, the Company had a loss before taxes of
$16,723,109 compared to income before taxes of $193,613 in the year ended
December 31, 2000, a decrease of $16,916,722. The decrease in pre-tax income was
primarily due to a decrease of $16,396,612 in the underwriting profit (net
earned premium less losses and loss adjustment expenses and policy acquisition
costs) from Crusader. The Company had a net loss for the year ended December 31,
2001, of $10,870,018 compared to net income of $439,797 for the year ended
December 31, 2000, a decrease in net income of $11,309,815.
For the year ended December 31, 2000, the Company had income before taxes of
$193,613 compared to income before taxes of $7,124,889 in the year ended
December 31, 1999, a decrease of $6,931,276. The decrease in pre-tax income was
primarily due to a decrease of $6,800,955 in the underwriting profit (net earned
premium less
16
losses and loss adjustment expenses and policy acquisition costs)
from Crusader. The Company had net income for the year ended December 31, 2000,
of $439,797 compared to net income of $5,131,366 for the year ended December 31,
2000, a decrease in net income of $4,691,569.
The progressive decrease in operating results both from year-to-year and
successive quarters during the two years ended December 31, 2001, is primarily
attributable to the successive increases to loss and loss adjustments expense
reserves related to prior periods, as discussed below under Insurance Company
Operation. In addition to increasing its estimates of losses and loss adjustment
expenses, the Company has taken various underwriting and pricing actions that it
believes addresses the underlying causes of the adverse development discussed
below and which has given rise to the successive periods of decline in operating
results. No assurance can be given that the actions taken will be successful or
that the Company's estimates of ultimate losses and loss adjustment expenses
will be sufficient. Changes in such estimates, if any, will be recorded in the
period they occur.
The effect of inflation on the net income of the Company during the years ended
December 31, 2001 and 2000 was not significant.
The Company derives revenue from various sources as discussed below:
Insurance Company Operation
Premium and loss information of Crusader are as follows:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Gross written premium $37,637,396 $33,259,948 $33,139,361
Net written premium (net of reinsurance ceded) $32,106,175 $26,406,565 $26,543,921
Earned premium before reinsurance ceded $35,409,174 $32,743,165 $34,693,113
Earned premium (net of reinsurance ceded) $29,893,844 $25,899,234 $28,109,361
Losses and loss adjustment expenses $41,677,016 $21,676,915 $17,027,190
Unpaid losses and loss adjustment expenses $60,534,295 $45,217,369 $41,592,489
Crusader's primary line of business is commercial multiple peril business
package policies. This line of business represented approximately 96% of
Crusader's total written premium for the year ended December 31, 2001, and 97%
of Crusaders total premium in the years ended December 31, 2000 and 1999.
The Company's future writings and growth are dependent on market conditions,
competition, and the Company's ability to introduce new and profitable products.
As of December 31, 2001, Crusader was licensed as an admitted insurance company
in the states of Arizona, California, Colorado, Idaho, Montana, Nevada, Ohio,
Oregon, and Washington and is approved as a non-admitted surplus lines writer in
other states.
Crusader's gross written premium by state is as follows:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
California $32,374,357 $28,513,822 $28,636,676
Ohio 1,269,026 753,264 489,266
Arizona 1,001,640 1,178,094 976,872
Washington 721,071 990,725 1,086,815
Pennsylvania 614,317 546,801 565,628
Montana 513,735 482,735 436,390
Oregon 401,960 509,971 697,033
Nevada 380,835 82,963 34,520
Texas 303,393 135,968 118,066
Idaho 32,769 38,037 -
Kentucky 24,293 27,568 98,095
---------- ---------- ----------
Total gross written premium $37,637,396 $33,259,948 $33,139,361
========== ========== ==========
17
For the year ended December 31, 2001, gross written premium increased by
$4,377,448 (13%) compared to the year ended December 31, 2000. Approximately 86%
of the Company's premium is written in the state of California, which accounted
for 88% of the increase in gross written premium. Although the Company increased
its rates on its liquor liability coverages outside of California and Nevada in
2001, it was not a material factor in the growth in gross written premium in
2001. The growth in written premium in 2001 was primarily the result of the
subsidence in the intensity of price-based competition in the property and
casualty insurance market that has resulted in the Company's products becoming
more competitive. The Company's policy count has increased approximately 4%
while gross written premium has increased 13%.
For the year ended December 31, 2000, gross written premium increased by
$120,587 compared to the year ended December 31, 1999. This slight increase was
primarily due to the subsidence in the intensity of price-based competition that
began in 2000.
Although the Company attempts to be competitive on price, it believes that
maintaining adequate rates on the insurance policies it sells is a better
business strategy than increasing total written premium by selling more policies
at inadequate rates.
Although it appears that the intensity of price-based competition has somewhat
subsided, the Company does not believe that it is in a "hard market." While some
of its competitors have gone out of business, others have recently raised rates
or adopted more restrictive rules. Those changes have not yet been large enough
to significantly redirect the flow of new business to the Company. The Company
cannot determine how long the existing market conditions will continue, nor in
which direction they might change.
The Company continues to believe that it can compete effectively and profitably
by offering better service and by marketing its policies through its current
independent agents and brokers. In pursuing its growth plan, the Company adopted
a geographic expansion plan several years ago. In 1992, 100% of the Company's
sales were in California. As of December 31, 2000, the Company had established
marketing relations and products in ten other states, decreasing the percentage
of its California business to 86%. The Company has no short-term plan to expand
into additional states, nor to expand its marketing channels. However, the
Company does plan to adopt "fine-tuning" changes to its existing rates, rules
and forms.
The Company writes annual policies and, therefore, earns written premium daily
over the one-year policy term. Premium earned before reinsurance increased
$2,666,009 (8%) in the year ended December 31, 2001, compared to the year ended
December 31, 2000, and decreased $1,949,948 (6%) in the year ended December 31,
2000, compared to the year ended December 31, 1999. The increase in earned
premium before reinsurance in 2001 was directly related to the increase in
written premium in the current year. The decrease in earned premium in the years
2000 and 1999 was directly related to the decrease in written premium in the
years 1999 and 1998.
Earned premium ceded decreased $1,328,601 (19%) to $5,515,330 or 16% of earned
premium before reinsurance in the year ended December 31, 2001, compared to
$6,843,931 or 21% of earned premium before reinsurance for the year ended
December 31, 2000. Earned premium ceded increased $260,179 (4%) to $6,843,931 or
21% of earned premium before reinsurance for the year ended December 31, 2000,
compared to $6,583,752 or 19% of earned premium before reinsurance for the year
ended December 31, 1999. Ceded premiums decreased in the year ended December 31,
2001, primarily as a result of a decrease in ceded premium ceded under the
Company's provisionally rated reinsurance contract. Premium ceded under the
Company's provisionally rated reinsurance contract, which was canceled on a
runoff basis effective December 31, 1997, is subject to adjustments based on the
amount of losses ceded, limited by a maximum percentage that can be charged by
the reinsurer. This decrease in ceded premiums was partially offset by an
increase in premium ceded to the Company's primary reinsurance contract as a
result of the related increase in earned premiums.
18
Ceded premiums increased in the year ended December 31, 2000, primarily due to
higher than anticipated loss experience on prior accident years that was subject
to the Company's provisionally rated reinsurance contract. The decrease in
earned ceded premium (excluding provisionally rated ceded premium) in 2000 and
1999 was primarily due to decreased earned premium before reinsurance.
The following table shows the changes in ceded premium:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Increase (decrease) in earned ceded premium (excluding
provisionally rated ceded premium) $276,761 $(447,593) $(800,074)
Increase (decrease) in provisionally rated ceded premium (1,605,362) 707,772 1,683,604
--------- ------- ---------
Net increase (decrease) in earned ceded premium $(1,328,601) $ 260,179 $ 883,530
========= ======= =======
Primarily due to ceded loss experience, Crusader's reinsurance cost is expected
to increase in 2002 due to a rate increase of approximately 61% on its excess of
loss treaties. In addition, reinsurance costs are expected to increase due to an
increase of approximately 11% on its catastrophe treaties. Without taking into
account premium growth, this rate increase, net of ceding commission, will cost
approximately $1,500,000. In addition, the annual aggregate deductible will
increase from $500,000 in 2001 to $750,000 in 2002. In 2002, the Company's
reinsurance coverage for terrorism, mold and cyber risk has been significantly
reduced. To the extent allowed by regulators, the Company intends to address
this change in its reinsurance coverage by modifying the coverage provided to
its policyholders.
The combined ratio is the sum of (1) the net ratio of losses and loss adjustment
expenses incurred (including a provision for incurred-but-not-reported losses
"IBNR") to net premiums earned ("loss ratio") and (2) the ratio of policy
acquisition and general operating costs to net premiums earned ("expense
ratio"). The following table shows the loss ratios, expense ratios, and combined
ratios of Crusader as derived from data prepared in accordance with generally
accepted accounting principles. As shown on the table below, the loss ratio
increased to 139.4% in 2001 from 83.7% in 2000 and 60.6% in 1999. This increase
in the loss ratio was primarily due to an increase in prior years' incurred
losses.
Generally, if the combined ratio is below 100%, an insurance company has an
underwriting profit; if it is above 100%, a company has an underwriting loss.
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Loss ratio 139.4% 83.7% 60.6%
Expense ratio 29.1% 32.1% 29.8%
----- ----- ----
Combined ratio 168.5% 115.8% 90.4%
===== ===== ====
Reserves for losses and loss adjustment expenses before reinsurance were
$60,534,295 at December 31, 2001, compared to $45,217,369 at December 31, 2000,
and $41,592,489 at December 31, 1999. The increase in reserves at December 31,
2001 and 2000 reflect both an increase in claim severities and adverse
development of prior years in the Company's Commercial Multiple Peril ("CMP")
and Other Liability lines of business.
The adverse development of prior years losses was primarily the result of an
increase in the Company's estimate of ultimate reported and unreported claims
for construction defects, non-California liquor liability and apartment house
habitability as described below.
Reserves for losses and loss adjustment expenses before reinsurance are as
follows:
Year ended December 31
----------------------
Line of Business 2001 2000 1999
- ------------------ --------------------- -------------------- --------------------
CMP $56,215,479 92.9% $40,830,294 90.3% $39,039,727 93.9%
Other Liability $4,004,449 6.6% $4,016,673 8.9% $2,377,509 5.7%
Other $314,367 0.5% $370,402 0.8% $175,253 0.4%
---------- ----- ---------- ----- ---------- -----
Total $60,534,295 100.0% $45,217,369 100.0% $41,592,489 100.0%
========== ===== ========== ===== ========== =====
19
In the years ended December 31, 2001 and 2000, the Company increased its
estimates of ultimate losses for both reported and unreported claims primarily
occurring from 1998 through 2000 and from 1993 through 1995 (the years most
impacted by construction defect claims). Adverse development of prior years'
losses of $19,326,349 as of December 31, 2001 and $4,270,631 as of December 31,
2000, was primarily the result of an increase in the Company's estimate of
ultimate reported and unreported claims for construction defect claims,
non-California liquor liability claims and apartment house habitability claims.
Construction defect claims arise from the liability of contractors for their
defective work in the construction of habitation structures (such as apartments,
condominiums and single-family dwellings) or commercial type structures. Liquor
liability claims arise from the liability of tavern owners related to the sale
of alcoholic beverages. Apartment house habitability claims arise from
uninhabitable conditions related to dilapidated structures and insect and vermin
infestation.
The increase in incurred losses and loss adjustment expenses recognized in 2001
and 2000 was primarily due to the following:
1 Higher than anticipated claim cost from business outside of California.
2 The effect on settlements of escalating jury awards.
3 The effect on settlements in apartment house habitability claims due to a
statute that provide for payment of plaintiff attorney fees without regard
to policy limits.
4 Increased development of losses due to the impact of changes in California
law that expanded coverage and increased loss exposure primarily on
construction defect claims for losses incurred prior to the Company's
revision in its policy form in 1995. For example:
Montrose Chemical Corp. v. Admiral Insurance Co. (1994),
-----------------------------------------------
Montrose Chemical Corp. v. Admiral Insurance Co. (1995),
-----------------------------------------------
Armstrong World Industries, Inc. v. Aetna Gas & Sur. Co. (1996)
----------------------------------------------------------
and James Pepperell, et al., v. Scottsdale Insurance Company (1998).
--------------------------------------------------------------
These four cases state that all insurance companies with completed
operations property damage coverage in force during a period of
continuing damage or property deterioration must provide coverage for
construction defect losses regardless as to whether or not the damage
first manifested during their policy period.
Pardee Construction Company v. Insurance Company of the West et al., (2000)
-------------------------------------------------------------------
This case states that an additional insured endorsement includes completed
operations property damage coverage even for projects that were completed
before the inception date of the endorsement.
Centex Golden Construction Co. v. Dale Tile Co. (2000)
-----------------------------------------------------
This case states that indemnity agreements in construction contracts
requires the subcontractor to defend the general contractor even though the
subcontractor's liability has not been established.
In 2000, the provision for incurred losses and loss adjustment expenses for
events of prior years turned from favorable to adverse. Estimates for ultimate
loss reserves are inherently difficult to determine because they are attempts to
quantify future results based on current trends. The effort to predict the
Company's ultimate losses and loss adjustment expenses has been made more
difficult in 2000 and 2001 because of the following:
1. The Company had written liquor liability outside of California since 1992.
The time allowed by statute to report a claim in these states ranges from 2
years to 3 years. Prior to 1998, the frequency and severity of the claims
seemed reasonably predictable. Before the statute of limitations expired,
claims occurring in 1998 that were reported to the Company in 2000 were
significantly higher than anticipated based on the Company's loss
experience for all prior years in which these coverages were offered. The
Company could not identify any reason for this change and was unable to
tell whether it was an aberration or a new trend. Although the Company
increased its reserves, they were not enough to cover the claims reported
in 2001 for losses occurring in 1999. Prior to 2001, the Company's loss
development studies included this line of business with its commercial
multiple peril package business. To better isolate the change in
development of its non-California liquor liability business, the Company
developed separate actuarial studies during 2001. Based on these studies,
the Company substantially increased its reserves for both its reported and
unreported claims on its non-California liquor liability business. In 2001,
the Company responded to the change in development in 2001 and 2000 by
either substantial increased rates or reducing coverages offered on this
business.
20
2. Prior to 1995, the Company was writing a wide variety of general
contractors and subcontractors in California. In 1995, California law
relating to contractors changed significantly as a consequence of various
California legal decisions. The effect of these changes was to expand
coverages and increase loss exposure. Although the Company modified its
policy forms and underwriting standards relating to its contractor business
in 1995, it could not change the exposure on the policies already written.
The assumptions made and the trends used by the Company in estimating its
reserves for losses and loss adjustment expenses in 2001 and 2000 have been
relatively untested by time and actual development of its reserves.
Although the Company increased its reserves in 2000, construction defect
claims on its contractor business for 1995 and prior continued to be
reported in 2001 in amounts greater than the Company anticipated. Prior to
2001, the Company included this line of business in its commercial multiple
peril business package development studies. To better isolate the effect of
the above changes, the Company developed separate actuarial studies on its
contractor line of business during 2001. Based on these studies, the
Company substantially increased its reserves for both its reported and
unreported claims on its contractor business.
3. In 2000 and 2001, the Company began experiencing adverse development on its
apartment house business due to the effect of settlements on habitability
claims. Those settlements were substantially influenced by a statute that
provides for the payment of plaintiff attorney fees without regard to
policy limits and the Montrose Chemical Corp. v. Admiral Insurance Company
decision of 1995. In 2000, the Company modified its underwriting criteria
to address this adverse development and intends to modify its policy form
to limit the statutory attorney fee exposure.
Primarily as a result of the underwriting losses in 2001 and 2000, the A.M. Best
Company recently lowered Crusader's rating from A (Excellent) to A- (Excellent).
A.M. Best remains concerned with the potential for further adverse loss reserve
development and the negative impact it would have on the Company's operating
performance and overall capitalization. As a result, A.M. Best views the rating
outlook as negative. The Company does not believe that the lowering of
Crusader's rating from A to A- will have a material adverse effect on the
Company.
Other Insurance Operations
- --------------------------
Health and Life Insurance Program
---------------------------------
Commission income from the health and life insurance sales of NIB and AIB is as
follows:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Commission income $2,582,290 $2,625,193 $2,668,582
NIB and AIB market health and life insurance through non-affiliated insurance
companies for individuals and groups. Approximately 94% of the health and life
commission income for the year ended December 31, 2001, and approximately 93% of
the health and life commission income for the year ended December 31, 2000, was
from the CIGNA HealthCare medical and dental plan programs. Revenues for the
year ended December 31, 2001, decreased $42,903 (2%) compared to the year ended
December 31, 2000. The decrease in commission income in the health and life
insurance programs is primarily a due to a decrease in premiums written in the
CIGNA HealthCare programs as a result of increased competition in the individual
and group healthcare market.
Revenues for the year ended December 31, 2000, decreased $43,389 (2%) compared
to the year ended December 31, 1999. The decrease in commission income in the
health and life insurance programs is primarily due to a one-time bonus
commission of $143,191 that the Company received from CIGNA in 1999. Excluding
the effect of the 1999 bonus commission, commission income for the year ended
December 31, 2000, increased $99,802 (4%) when compared to the prior year.
Since approximately 94% of the Company's health and life insurance income comes
from CIGNA programs, future growth is dependent of the competitiveness of
CIGNA's rates, products, and product enhancements.
21
Service Fee Income
------------------
Unifax sells and services insurance policies for Crusader. The service fee
charged to the policyholder by Unifax is recognized as income in the
consolidated financial statements. Service fee income of Unifax is as follows:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Service fee income $1,726,811 $1,654,735 $1,677,223
Policies written 18,114 17,351 17,225
Service fee income is primarily related to the number of policies written by
Unifax. Service fee income increased $72,076 (4%) and policies issued increased
by 763 (4%) in the year ended December 31, 2001, compared to the year ended
December 31, 2000. Service fee income decreased $22,488 (1%) in the year ended
December 31, 2000, compared to the year ended December 31,1999. Although the
number of policies issued in 2000 increased by 126 over those written in 1999
service fee income decreased. In 1999, Unifax voluntarily discontinued charging
service fees in several states outside of California which contributed to the
decline in revenue in 2000.
The Company is in the process of applying for a rate increase with the
California Department of Insurance to increase its California service fee from
$100 per policy to $165 per policy. There is no assurance that this rate
increase will be approved.
Daily Automobile Rental Insurance Program
-----------------------------------------
The daily automobile rental insurance program is produced by Bedford. Bedford
receives a commission and a claim administration fee from a non-affiliated
insurance company based on premium written. Commission and fee income from the
daily automobile rental insurance program are as follows:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Daily auto rental program commission
and claim administration fee $657,273 $741,662 $731,884
Contingent commission 10,145 69,979 28,735
-------- ------ -------
Total commission and fee income $667,418 $811,641 $760,619
======= ======= =======
Revenues during the year ended December 31, 2001, were $667,418, a decrease of
$144,223 (18%) compared to the same period of the prior year. Revenue for the
year ended December 31, 2000, increased by $51,022 (7%) compared to the year
ended December 31, 1999.
The daily automobile rental insurance program commission and fee income
(excluding contingent commission) decreased $84,389 (11%) in 2001 compared to
the year 2000. The decrease in commission income is primarily due to a 10%
decrease in written premium as a result of continued intense price competition
in the daily automobile rental insurance program. To avoid underwriting losses
for the non-affiliated insurance company that it represents, Bedford continues
to produce business only at rates which it believes to be adequate. The Company
cannot determine how long the existing market conditions will continue, nor in
which direction they might change.
Association Operation
---------------------
Membership and fee income from the association program of AAQHC is as follows:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Membership and fee income $398,677 $397,157 $396,958
Membership and fee income for the years ended December 31, 2001, 2000 and 1999
were relatively unchanged, as the membership base remained constant.
22
Other Commission and Fee Income
-------------------------------
Other commission and fee income are as follows:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Earthquake program commission income $51,029 $15,993 $22,421
Workers' compensation program
commission income $19,730 $44,818 $81,919
Commercial liability program
commission and fee income $62,839 $55,828 $22,280
Commercial and personal auto program
commission and fee income - - $4,363
Miscellaneous fee income $161 $128 $177
------- ------- --------
Total other commission and fee income $133,759 $116,767 $131,160
======= ======= =======
Unifax began producing commercial earthquake insurance policies in California
for non-affiliated insurance companies in 1999. Unifax receives a commission
from the insurance company based on premium written. Commission income on the
earthquake program for the year ended December 31, 2001, increased $35,036
(219%) compared to the prior year as a result of the commencement of writing
policies with a new non-affiliated insurance company in April of 2001. In
October of 2000, the non-affiliated company Unifax had been producing earthquake
policies for discontinued writing business in California. This resulted in a
decrease of commission income in the year ended December 31, 2000, of $6,428
(29%) compared to the prior year.
Unifax produces workers' compensation policies primarily in California for
non-affiliated insurers and receives a commission from them based on premium
written. Unifax intends to discontinue its sales of workers' compensation
insurance policies for non-affiliated insurers in 2002. The Company's decision
to discontinued selling this business was due to underwriting constraints of the
non-affiliated insurance companies that limited the types and classes of
business that they would accept. These constraints resulted in the decrease in
commission income in the year ended December 31, 2001 and 2000.
Unifax began producing commercial liability insurance policies in California for
non-affiliated insurance companies in 1999. Unifax received a commission from
the insurance company based on premium written and a service fee from the
policyholder. Effective December 2001 the company discontinued the program. The
Company took this action in order to better utilize its resources and focus on
those markets that offer the greatest potential for 2002 and beyond. Commission
and fee income on the commercial liability program increased $7,011 (13 %) in
the year ended December 31, 2001, compared to the prior year.
The commissions paid by Crusader to Unifax are eliminated as intercompany
transactions and are not reflected in commission income or commission expense.
Premium Finance Program
-----------------------
Premium finance charges and late fees earned from financing policies are as
follows:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Premium finance charges and
late fees earned $868,496 $837,902 $915,940
New loans 7,148 7,166 7,597
AAC provides premium financing primarily to Crusader policies produced by Unifax
in California. The growth of this program is dependent and directly related to
the growth of Crusader's written premium and AAC's ability to market its
competitive rates and service to finance those policies. Revenue increased
$30,594 (4%) in the year ended December 31, 2001, compared to the prior year
although there were slightly fewer loans financed in the current year. The
increase in revenue in 2001 is primarily due to the fact that the average policy
loan in 2001 was approximately 6% greater than the prior year. Although AAC
finances approximately 80% of all Unifax policies
23
financed, the percentage of all Unifax policies that are financed decreased from
approximately 50% in 2000 to approximately 49% in 2001. Although Unifax
increased the number of policies issued in 2001 by approximately 4% compared to
the prior year, AAC's new loans remained approximately the same.
Revenue for the year ended December 31, 2000, decreased $78,038 (9%) compared to
the year ended December 31, 1999. The decrease in revenues and loans in 2000 is
primarily due to the fact that fewer policies are being financed. Although AAC
finances approximately 80% of all Unifax policies which are financed, the
percentage of all Unifax policies which are financed decreased from
approximately 54% in 1999 to approximately 50% in 2000.
Investment Income and Net Realized Gains (Losses)
- ------------------------------------------------
Investment income and net realized gains (losses) are as follows:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Interest and dividend income
Insurance company operations $5,647,026 $5,764,094 $5,706,945
Other operations 156,387 335,984 283,942
--------- --------- ---------
Total interest and dividend income 5,803,413 6,100,078 5,990,887
Net realized investment gains (losses) 9,572 (135,389) 64,793
---------- --------- ---------
Total investment income and
realized gains (losses) $5,812,985 $5,964,689 $6,055,680
========= ========= =========
The Company continually evaluates the recoverability of its investment holdings.
When a decline in value of fixed maturities or equity securities is considered
other than temporary, a loss is recognized in the consolidated statement of
operations. During 2001, the Company realized a loss of $25,704 on one equity
security where a decline in market value was considered other than temporary.
The Company had recognized a loss on this equity security in 2000 of $138,250
due to a decline in market value at December 31, 2000.
Investment interest and dividends earned (excluding net realized gains)
decreased $296,665 (5%) in the year ended December 31, 2001, compared to the
year ended December 31, 2000, primarily as a result of a decrease in the average
invested assets in the Company's investment portfolio. In the year ended
December 31, 2001, the Company's average invested assets (at amortized value)
decreased $5,299,460 (5%) compared to the year ended December 31, 2000. The
decrease in average invested assets primarily resulted from the cash used from
operations and from the sale of U.S. treasury securities and other short-term
investments to fund the repurchase of the Company's common stock. There were no
losses on the sale of these securities. As of December 31, 2001 the cost of the
stock repurchase plan has been $5,517,465 (See Note 17). The Investment income
return based on average invested assets was 6.02% for the year ended December
31, 2001, compared to 6.00% for the year ended December 31, 2000. The mix of
taxable and tax-exempt securities in the portfolio affect the investment income
return percentage. Tax-exempt securities generally carry a lower yield than
taxable securities. These securities (at amortized value) decreased to
$8,213,141 (9% of total investments) at December 31, 2001, compared to
$19,789,675 (20% of total investments) December 31, 2000.
Investment interest and dividends earned (excluding net realized gains)
increased $109,191 (2%) in the year ended December 31, 2000, compared to the
year ended December 31, 1999, primarily as a result of an increase in return on
the Company's investment portfolio. Average invested assets in the year ended
December 31, 2000, (at amortized value) decreased $2,628,414 (3%) compared to
the year ended December 31, 1999. Investment income return based on average
invested assets was 6.0% for the year ended December 31, 2000, compared to 5.74%
for the year ended December 31, 1999. The mix of taxable and tax-exempt
securities in the portfolio affect the investment income return percentage.
Tax-exempt securities (at amortized value) decreased to $19,789,675 (20% of
total investments) at December 31, 2000, compared to $28,078,605 (27% of total
investments) at December 31, 1999.
24
Operating Expenses
- ------------------
Policy Acquisition Costs consist of commissions, premium taxes, inspection fees,
and certain other underwriting costs that are directly related to and vary with
the production of Crusader insurance policies. These costs include both Crusader
expenses and allocated expenses of other Unico subsidiaries. On certain
reinsurance treaties, Crusader receives a ceding commission from its reinsurer
that represents a reimbursement of the acquisition costs related to the premium
ceded. No ceding commission is received on provisionally rated ceded premium.
Policy acquisition costs, net of ceding commission, are deferred and amortized
as the related premiums are earned. The slight changes in the ratio of policy
acquisition cost to net earned premium in 2001, 2000, and 1999 are primarily due
to due to changes in provisionally rated ceded premium which affects net earned
premium. The provisionally rated reinsurance contract was cancelled on a run off
basis on December 31, 1997. Policy acquisition costs, net of ceding commission,
are as follows:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Policy acquisition costs $8,695,037 $8,303,917 $8,362,814
Ratio to net earned premium (GAAP ratio) 29% 32% 30%
Salaries and Employee Benefits increased $80,520 (2%) for the year ended
December 31, 2001, compared to the year ended December 31, 2000. Salaries and
employee benefits decreased $110,433 (3%) for the year ended December 31, 2000,
compared to the year ended December 31, 1999.
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Salaries and employee benefits $4,321,637 $4,241,117 $4,351,550
Commissions to Agents/Brokers (not including commissions on Crusader policies
that are reflected in policy acquisition costs) are generally related to gross
commission income from the health and life insurance program, the daily
automobile rental insurance program, the earthquake program and the commercial
liability program. Commissions to agents and brokers decreased $49,431 (4%) for
the year ended December 31, 2001, compared to the year ended December 31, 2000.
Commissions to agents and brokers increased $3,971 (0%) for the year ended
December 31, 2000, compared to the year ended December 31, 1999.
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Commission to agents/brokers $1,260,059 $1,309,490 $1,305,519
Other Operating Expenses generally do not change significantly with changes in
production. This is true for both increases and decreases in production.
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Other operating expenses $2,886,266 $2,642,897 $2,562,295
Income Taxes
- ------------
The income tax benefit for 2001 was $5,853,091 compared to an income tax benefit
of $246,184 for 2000. The effective combined income tax rates for 2001 and 2000
were (35%) and (127.2%), respectively. The pre-tax loss was significantly higher
in 2001 compared to 2000 which resulted in the difference in the effective tax
rates between 2001 and 2000. The Company's combined effective tax rate for 1999
was 28.0% due to the pre-tax net income for the year and to significantly larger
portion of tax-exempt interest in the income before taxes in 1999
25
than in 2000. The Income tax benefit for 2001 arises primarily from the
Company's ability to recover prior income taxes paid due to the carryback of
current period net operating losses. (See Note 16 - Taxes on Income)
New Accounting Standards
- ------------------------
Statement of Financial Accounting Standards No. 141 ("SFAS No. 141") "Business
Combinations" became effective January 1, 2002. SFAS No. 141 requires companies
to apply the purchase method of accounting for all business combinations
initiated after June 30, 2001 and prohibits the use of the pooling-of-interest
method.
Statement of Financial Accounting Standards No. 142 ("SFAS No. 142") "Goodwill
and Other Intangible Assets" is effective for fiscal years beginning after
December 15, 2001, and establishes how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. It also addresses how goodwill and other intangible assets should
be accounted for after they have been initially recognized in the financial
statements. Generally, it also requires that those assets meeting criteria for
classification as intangible with estimable useful lives will be amortized,
while intangible assets with indefinite useful lives and goodwill will not be
amortized. Previously, all goodwill was required to be amortized over the
estimable useful life, not to exceed 40 years. The Company does not have any
intangible assets recorded in its financial statements and thus is not currently
impacted by the adoption of SFAS 142.
Statement of Financial Accounting Standards No. 143 ("SFAS No. 143") "Asset
Retirement Obligations" is effective for fiscal years beginning after December
15, 2002, and establishes financial accounting and reporting for obligations
associated with the retirement of tangible long-live assets and the associated
retirement costs. It requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are to be capitalized as part of the carrying amount of the long lived
asset. The Company does not expect the adoption of SFAS No. 143 to have a
material impact on our financial statements.
Statement of Financial Accounting Standards No. 144 ("SFAS No. 144") "Accounting
for Impairment or Disposal of Long-Lived Assets" is effective for fiscal years
beginning after December 15, 2001, and establishes financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supercedes SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 3, "Reporting the Results
of Operations-Reporting the effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual or Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business. SFAS No. 144 establishes a single
accounting model, based on the framework established in SFAS No. 121 for
long-lived assets to be disposed of by sale. The Company does not expect the
adoption of SFAS No. 144 to have a material impact on our financial statements.
Significant Accounting Policies
- -------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. While
every effort is made to ensure the integrity of such estimates, actual results
could differ.
Management believes the Company's current critical accounting policies comprise
the following:
Losses and Loss Adjustment Expenses
-----------------------------------
The preparation of the Company's financial statements requires judgments and
estimates. The most significant is the estimate of loss reserves as required by
Statement of Financial Accounting Standards No 60 ("SFAS No. 60"), "Accounting
and Reporting by Insurance enterprises" and Statement of Financial Accounting
Standards No. 5 ("SFAS No. 5"), "Accounting for Contingencies". Estimating loss
reserves is a difficult process as there are many factors that can ultimately
affect the final settlement of a claim and, therefore, the reserve that is
needed. Changes in the regulatory and legal environment, results of litigation,
medical costs, the cost of repair materials and labor rates can all impact
ultimate claim costs. In addition, time can be a critical part of reserving
determinations since the longer
26
the span between the incidence of a loss and the payment or settlement of the
claim, the more variable the ultimate settlement amount can be. Accordingly,
short-tail claims, such as property damage claims, tend to be more reasonable
predictable than long-tail liability claims. The liability for unpaid losses and
loss adjustment expenses is based upon the accumulation of individual case
estimates for losses reported prior to the close of the accounting period plus
estimates based on experience and industry data for development of case
estimates and for unreported losses and loss adjustment expenses. Since the
emergence and disposition of claims are subject to uncertainties, the net
amounts that will ultimately be paid to settle claims may vary significantly
from the estimated amounts provided for in the accompanying consolidated
financial statements. Any adjustments to reserves are reflected in the operating
results of the periods in which they are made. Management believes that the
aggregate reserves for losses and loss adjustment expenses are reasonable and
adequate to cover the cost of claims, both reported and unreported.
Investments
-----------
In accordance with Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
is required to classify its investments in debt and equity securities into one
of three categories: held-to-maturity, available-for-sale or trading securities.
Although all of the Company's investments are classified as available-for-sale,
the Company's investment guidelines place primary emphasis on buying and holding
high-quality investments to maturity. Short-term investments are carried at
cost, which approximates market value. Investments in equity securities are
carried at market value. The unrealized gains or losses from fixed maturities
and equity securities are reported as accumulated other comprehensive income
(loss) which is a separate component of stockholders' equity, net of any
deferred tax effect. When a decline in value of a fixed maturity or equity
security is considered other than temporary, a loss is recognized in the
consolidated statements of operations. Realized gains and losses are included in
the consolidated statements of operations based on the specific identification
method.
Related Party Transaction
- -------------------------
The Company presently occupies a 46,000 square foot building located at 23251
Mulholland Drive, Woodland Hills, California, under a master lease expiring
March 31, 2007. The lease provides for an annual gross rent of $1,025,952. Erwin
Cheldin, the Company's president, chairman and principal stockholder, is the
owner of the building. On February 22, 1995, the Company signed an extension to
the lease with no increase in rent to March 31, 2007. The Company believes that
the terms of the lease at inception and at the time the lease extension was
signed were at least as favorable to the Company as could have been obtained
from non-affiliated third parties. The Company utilizes for its own operations
100% of the space it leases.
Forward Looking Statements
- --------------------------
Certain statements contained herein, including the Sections entitled "Business,"
"Legal Proceedings" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," that are not historical facts are forward
looking. These statements, which may be identified by forward looking words or
phrases such as "anticipate," "appears," "believe," "estimates," "expect,"
"intend," "may," "should," and "would," involve risks and uncertainties, many of
which are beyond the control of the Company. Such risks and uncertainties could
cause actual results to differ materially from these forward looking statements.
Factors which could cause actual results to differ materially include those
described under Item 1 - Business - "Competition"; premium rate adequacy
relating to competition or regulation; actual versus estimated claim experience;
success of the Company's underwriting and pricing actions that it believes
addresses the adverse development on its construction defect, apartment house
habitability and non-California liquor liability claims; possible reductions in
Crusader's A.M. Best rating; regulatory changes or developments; unforeseen
calamities; general market conditions; the Company's ability to introduce new
profitable products; and the Company's ability to expand geographically.
27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The Company's consolidated balance sheet includes a substantial amount of
invested assets whose fair values are subject to various market risk exposures
including interest rate risk and equity price risk.
The Company's invested assets at December 31, 2001 and 2000 consisted of the
following:
2001 2000
---- ----
Fixed maturity bonds (at amortized cost) $91,411,859 $94,398,077
Short-term cash investments (at cost) 2,863,622 3,355,354
Equity securities (at cost) 216 25,920
Certificates of deposit - over 1 year (at cost) 400,000 400,000
---------- ----------
Total invested assets $94,675,697 $98,179,351
========== ==========
The Company's interest rate risk is primarily in its fixed maturity bond
portfolio. As market interest rates decrease, the value of the portfolio
increases with the opposite holding true in rising interest rate environments.
In addition, the longer the maturity, the more sensitive the asset is to market
interest rate fluctuations. The Company limits this risk by investing in
securities with maturities no greater than eight years. In addition, although
fixed maturity bonds are classified as available-for-sale, the Company's
investment guidelines place primary emphasis on buying and holding high-quality
bonds to maturity. Since inception of the Company, only ten bonds have been sold
prior to their maturity or call date. Because fixed maturity bonds are primarily
held to maturity, the change in the market value of these bonds resulting from
interest rate movements are unrealized and no gains or losses are recognized in
the consolidated statements of operations. Unrealized gains and losses are
reported as separate components of stockholders' equity, net of any deferred tax
effect. As of December 31, 2001, the Company's unrealized gains (net of
unrealized losses) before income taxes on its fixed maturity bond portfolio was
$2,816,423. As of December 31, 2000, the Company's unrealized gains (net of
unrealized losses) before income taxes on its fixed maturity bond portfolio was
$184,553. Given a hypothetical parallel increase of 100 basis points in interest
rates, the fair value of the fixed maturity bond portfolio would decrease by
approximately $2.9 million. This decrease would not be reflected in the
statements of operations except to the extent that the securities were sold.
The Company's short-term investments and certificates of deposit have only
minimal interest rate risk. Due to the Company's small investment in equity
securities (approximately one half of one percent of total invested assets), the
Company has only minimal exposure to equity price risk.
28
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report 30
Consolidated Balance Sheets as of December 31, 2001, and
December 31, 2000 31
Consolidated Statements of Operations for the years ended
December 31, 2001, December 31, 2000, and December 31, 1999 32
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2001, December 31, 2000, and December 31, 1999 33
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 2001, December 31, 2000, and
December 31, 1999 34
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, December 31, 2000, and December 31, 1999 35
Notes to Consolidated Financial Statements 36
29
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Unico American Corporation:
We have audited the accompanying consolidated balance sheets of Unico American
Corporation and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, comprehensive income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Unico American
Corporation and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Los Angeles, California
March 26, 2002
30
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31 December 31
2001 2000
---- ----
ASSETS
Investments
Available for sale:
Fixed maturities, at market value (amortized cost: December 31,
2001 $91,811,859; December 31, 2000 $94,798,077) $94,628,282 $94,982,630
Equity securities at market (cost: December 31, 2001
$216; December 31, 2000 $25,920) 216 25,920
Short-term investments, at cost 2,863,622 3,355,354
---------- ----------
Total Investments 97,492,120 98,363,904
Cash 45,001 54,806
Accrued investment income 1,768,058 1,908,547
Premiums and notes receivable, net 6,248,327 5,807,731
Reinsurance recoverable:
Paid losses and loss adjustment expenses 732,054 393,198
Unpaid losses and loss adjustment expenses 10,748,080 10,671,343
Prepaid reinsurance premiums 37,683 29,531
Deferred policy acquisition costs 5,079,535 4,500,147
Property and equipment (net of accumulated depreciation) 267,426 114,107
Deferred income taxes 556,251 948,442
Income taxes receivable 5,398,939 -
Other assets 449,799 1,154,064
----------- -----------
Total Assets $128,823,273 $123,945,820
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Unpaid losses and loss adjustment expenses $60,534,295 $45,217,369
Unearned premiums 19,328,150 17,099,927
Advance premium and premium deposits 1,083,995 2,316,016
Accrued expenses and other liabilities 7,256,457 7,899,179
---------- ----------
Total Liabilities $88,202,897 $72,532,491
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, no par - authorized 10,000,000 shares, issued and outstanding
shares 5,481,288 at December 31, 2001, and 5,692,699
at December 31, 2000 $2,671,415 $2,789,494
Accumulated other comprehensive income gain 1,858,839 121,805
Retained earnings 36,090,122 48,502,030
---------- ----------
Total Stockholders' Equity $40,620,376 $51,413,329
---------- -----------
Total Liabilities and Stockholders' Equity $128,823,273 $123,945,820
=========== ===========
See accompanying notes to consolidated financial statements.
31
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
2001 2000 1999
---- ---- ----
REVENUES
Insurance Company Revenues
Premium earned $35,409,174 $32,743,165 $34,693,113
Premium ceded 5,515,330 6,843,931 6,583,752
---------- ---------- ----------
Net premium earned 29,893,844 25,899,234 28,109,361
Net investment income 5,647,026 5,764,094 5,706,945
Net realized investment gains (losses) 6,359 (137,897) 64,793
Other income 16,399 46,639 6,978
---------- ---------- ----------
Total Insurance Company Revenues 35,563,628 31,572,070 33,888,077
Other Revenues from Insurance Operations
Gross commissions and fees 5,508,955 5,605,493 5,634,542
Investment income 156,387 335,984 283,942
Net realized investment gains 3,213 2,508 -
Finance charges and late fees earned 868,496 837,902 915,940
Other income 16,227 13,992 11,756
---------- ---------- ----------
Total Revenues 42,116,906 38,367,949 40,734,257
---------- ---------- ----------
EXPENSES
Losses and loss adjustment expenses 41,677,016 21,676,915 17,027,190
Policy acquisition costs 8,695,037 8,303,917 8,362,814
Salaries and employee benefits 4,321,637 4,241,117 4,351,550
Commissions to agents/brokers 1,260,059 1,309,490 1,305,519
Other operating expenses 2,886,266 2,642,897 2,562,295
---------- ---------- ----------
Total Expenses 58,840,015 38,174,336 33,609,368
---------- ---------- ----------
Income (Loss) Before Taxes (16,723,109) 193,613 7,124,889
Income Tax Provision (Benefit) (5,853,091) (246,184) 1,993,523
---------- -------- ---------
Net Income (Loss) $(10,870,018) $439,797 $5,131,366
=========== ======= =========
PER SHARE DATA:
Basic Shares Outstanding 5,505,398 6,058,674 6,268,069
Basic Earnings (Loss) Per Share $(1.97) $0.07 $0.82
Diluted Shares Outstanding 5,505,398 6,101,692 6,358,607
Diluted Earnings (Loss) Per Share $(1.97) $0.07 $0.81
See accompanying notes to consolidated financial statements.
32
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31
2001 2000 1999
---- ---- ----
Net income (loss) $(10,870,018) $439,797 $5,131,366
Other changes in comprehensive income,
net of tax:
Unrealized gains (losses) on securities
classified as available-for-sale arising
during the period 1,743,127 1,299,381 (3,060,091)
Less: reclassification adjustment for
(gains) losses included in net income (6,093) 91,011 (25,010)
--------- --------- ---------
Comprehensive Income (Loss) $(9,132,984) $1,830,189 $2,046,265
=========== ========= =========
See accompanying notes to consolidated financial statements.
33
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
Accumulated
Common Shares Income Other
------------------------------- Comprehensive
Issued and Gains and Retained
Outstanding Amount (Losses) Earnings Total
----------- ------ ------ -------- -----
Balance - December 31, 1998 6,223,424 2,895,702 1,998,536 49,273,844 54,168,082
Net shares issued for exercise of
stock options 81,529 202,687 - - 202,687
Cash dividend paid ($0.25
per share) - - - (1,576,237) (1,576,237)
Change in comprehensive income,
net of deferred income tax - - (3,085,101) - (3,085,101)
Net income - - - 5,131,366 5,131,366
--------- --------- --------- ----------
Balance - December 31, 1999 6,304,953 3,098,389 (1,086,565) 52,828,973 54,840,797
Net shares issued for exercise of
stock options 16,307 13 - - 13
Shares canceled or adjusted 39 - - - -
Shares repurchased (628,600) (308,908) - (3,821,160) (4,130,068)
Cash dividend paid ($0.15 per
share) - - - (945,580) (945,580)
Change in comprehensive income,
net of deferred income tax - - 1,208,370 - 1,208,370
Net income - - - 439,797 439,797
--------- --------- ------- ----------
Balance - December 31, 2000 5,692,699 $2,789,494 $121,805 $48,502,030 $51,413,329
========= ========= ======= ========== ==========
Net shares issued for exercise of
stock options 28,827 37 - - 37
Shares canceled or adjusted 120 - - - -
Shares repurchased (240,358) (118,116) - (1,269,281) (1,387,397)
Cash dividend paid ($0.05 per
share) - - - (272,609) (272,609)
Change in comprehensive income,
net of deferred income tax - - 1,737,034 - 1,737,034
Net (loss) - - - (10,870,018) (10,870,018)
--------- --------- --------- ---------- ----------
Balance - December 31, 2001 5,481,288 $2,671,415 $1,858,839 $36,090,122 $40,620,376
========= ========= ========= ========== ==========
See accompanying notes to consolidated financial statements.
34
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income (loss) $(10,870,018) $439,797 $5,131,366
Adjustments to reconcile net income to net cash from operations
Depreciation and amortization 71,205 68,632 97,087
Bond amortization, net 349,597 526,030 684,548
Net realized (gain) loss on sale of securities (9,572) 135,389 (64,793)
Changes in assets and liabilities
Premium, notes and investment income receivable (300,107) (158,917) 387,552
Reinsurance recoverable (415,593) (7,080,367) (2,698,256)
Prepaid reinsurance premiums (8,152) 2,907 (12,986)
Deferred policy acquisitions costs (579,388) (161,930) 327,555
Other assets (4,694,674) (511,153) (61,293)
Reserve for unpaid losses and loss adjustment expenses 15,316,926 3,624,880 78,544
Unearned premium reserve 2,228,223 516,784 (1,553,752)
Advance premium and premium deposits (1,232,021) (255,174) 241,834
Accrued expenses and other liabilities (642,722) 1,508,042 989,912
Income taxes current/deferred (502,645) (29,694) 152,708
--------- --------- ---------
Net Cash Provided (Used) from Operations (1,288,941) (1,374,774) 3,700,026
--------- --------- ---------
Investing Activities
Purchase of fixed maturity investments (17,806,300) (9,736,357) (12,341,754)
Proceeds from maturity of fixed maturity investments 19,083,025 11,505,400 8,839,250
Proceeds from sale of fixed maturity investments 1,365,055 2,008,594 -
Purchase of equity securities - cost - - (3,758,378)
Proceeds from sale of equity securities - - 4,162,504
Net decrease in short-term investments 521,849 2,656,211 640,182
Additions to property and equipment (224,524) (34,072) (40,385)
--------- --------- ---------
Net Cash Provided (Used) by Investing Activities 2,939,105 6,399,776 (2,498,581)
--------- --------- ---------
Financing Activities
Proceeds from issuance of common stock 37 13 202,687
Repurchase of common stock (1,387,397) (4,130,068) -
Dividends paid to shareholders (272,609) (945,580) (1,576,237)
--------- --------- ---------
Net Cash (Used) by Financing Activities (1,659,969) (5,075,635) (1,373,550)
--------- --------- ---------
Net (decrease) in cash (9,805) (50,633) (172,105)
Cash at beginning of year 54,806 105,439 277,544
------ ------- -------
Cash at End of Year $45,001 $54,806 $105,439
====== ====== =======
Supplemental cash flow information
Cash paid during the period for:
Interest $75 $25,417 $1,492
Income taxes $65,584 $245,414 $2,114,042
See accompanying notes to consolidated financial statements.
35
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, health and life insurance through its agency
subsidiaries; and provides insurance premium financing, claim administration
services, 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, unless otherwise indicated. Unico was incorporated under the
laws of Nevada in 1969.
Principles of Consolidation
- ---------------------------
The 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 consolidated financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP"). As described in Note 14, the
Company's insurance subsidiary also files financial statements with regulatory
agencies prepared on a statutory basis of accounting that differs from generally
accepted accounting principles.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. While
every effort is made to ensure the integrity of such estimates, actual results
could differ.
Investments
- -----------
All of the Company's fixed maturity investments are classified as
available-for-sale and are stated at market value. Although classified as
available-for-sale, the Company's investment guidelines place primary emphasis
on buying and holding high-quality investments to maturity. Short-term
investments are carried at cost, which approximates market value. Investments in
equity securities are carried at market value. The unrealized gains or losses
from fixed maturities and equity securities are reported as accumulated other
comprehensive income (loss) which is a separate component of stockholders'
equity, net of any deferred tax effect. When a decline in value of a fixed
maturity or equity security is considered other than temporary, a loss is
recognized in the consolidated statements of operations. Realized gains and
losses are included in the consolidated statements of operations based on the
specific identification method.
The Company had net unrealized investment gains of $1,858,839 as of December 31,
2001, and net unrealized investment gains of $121,805 as of December 31, 2000.
These amounts are net of deferred taxes.
Property and Equipment
- ----------------------
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using accelerated depreciation methods over the
estimated useful lives of the related assets.
Income Taxes
- ------------
The provision for federal income taxes is computed on the basis of income as
reported for financial reporting purposes. Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes, and are measured using the enacted tax rates and laws expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Income tax expense provisions increase or
decrease in the same period in which a change in tax rates is enacted.
36
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
- -----------------------------------
The Company has used the following methods and assumptions in estimating its
fair value disclosures:
Investment Securities - Fair values for fixed maturity securities are
obtained from a national quotation service. The fair values for equity
securities are based on quoted market prices.
Cash and Short-Term Investments - The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Premiums and Notes Receivable - The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Earnings Per Share
- ------------------
Basic earnings per share excludes the impact of common share equivalents and is
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. Outstanding stock options 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.
Revenue Recognition
- -------------------
a. General Agency Operations
-----------------------------
Commissions and service fees due the Company are recognized as income on
the effective date of the insurance policies.
b. Insurance Company Operations
--------------------------------
Premiums are earned on a pro-rata basis over the terms of the policies.
Premiums applicable to the unexpired terms of policies in force are
recorded as unearned premiums. The Company earns a commission on policies
that are ceded to its reinsurers. This commission is considered earned on a
pro-rata basis over the terms of the policies.
c. Insurance Premium Financing Operations
------------------------------------------
Premium finance interest is charged to policyholders who choose to finance
insurance premiums. Interest is charged at rates that vary with the amount
of premium financed. Premium finance interest is recognized using a method
which approximates the interest (actuarial) method.
d. Insurance Claim Administration Operation
--------------------------------------------
Claim administration income is based on premium written by Bedford for
non-affiliated insurers. Income is recognized on the effective date of the
insurance policies and a liability is recognized for the estimated cost of
completing the administration of all current and future claims that are
covered by these policies.
Losses and Loss Adjustment Expenses
- -----------------------------------
The liability for unpaid losses and loss adjustment expenses is based upon the
accumulation of individual case estimates for losses reported prior to the close
of the accounting period plus estimates based on experience and industry data
for development of case estimates and for unreported losses and loss adjustment
expenses.
There is a high level of uncertainty inherent in the evaluation of the required
loss and loss adjustment expense reserves for the Company. The long-tailed
nature of liability claims and the volatility of jury awards exacerbates that
uncertainty. Management has selected target loss and loss expense ratios that it
believes are reasonable and reflective of anticipated ultimate experience. The
ultimate cost of claims is dependent upon future events, the outcomes of which
are affected by many factors. Company claim reserving procedures and settlement
philosophy, current and perceived social and economic inflation, current and
future court rulings and jury attitudes, improvements in medical technology, and
many other economic, scientific, legal, political, and social factors all can
have significant effects on the ultimate costs of claims. Changes in Company
operations and management philosophy also may cause actual developments to vary
from the past. Since the emergence and disposition of claims are subject to
uncertainties, the net amounts that will ultimately be paid to settle claims may
vary significantly from the estimated
37
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amounts provided for in the accompanying consolidated financial statements. Any
adjustments to reserves are reflected in the operating results of the periods in
which they are made. Management believes that the aggregate reserves for losses
and loss adjustment expenses are reasonable and adequate to cover the cost of
claims, both reported and unreported.
Restricted Funds:
- ----------------
Restricted Funds Restricted funds are as follows:
Year ended December 31
----------------------
2001 2000
---- ----
Restricted Funds:
Premium trust funds (1) $1,529,996 $2,755,572
Assigned to state agencies (2) 2,725,000 2,725,000
--------- ---------
Total restricted funds $4,254,996 $5,480,572
========= =========
(1) As required by law, the Company segregates from its operating
accounts the premiums collected from insurers which are payable to
insurance companies into separate trust accounts. These amounts are
included in cash and short-term investments.
(2) Included in fixed maturity investments are statutory deposits
assigned to and held by the California State Treasurer and the
Insurance Commissioner of the state of Nevada. These deposits are
required for writing certain lines of business in California and for
admission in states other than California.
Deferred Policy Acquisition Costs
- ---------------------------------
Policy acquisition costs consist of costs associated with the production of
insurance policies such as commissions, premium taxes, and certain other
underwriting expenses which vary with and are primarily related to the
production of the insurance policy. Policy acquisition costs are deferred and
amortized as the related premiums are earned and are limited to their estimated
realizable value based on the related unearned premiums plus investment income
less anticipated losses and loss adjustment expenses. Ceding commission
applicable to the unexpired terms of policies in force is recorded as unearned
ceding commission which is included in deferred policy acquisition costs.
Reinsurance
- -----------
The Company cedes reinsurance to provide for greater diversification of
business, to allow management to control exposure to potential losses arising
from large risks by reinsuring certain levels of risk in various areas of
exposure, to reduce the loss that may arise from catastrophes, and to provide
additional capacity for growth. Prepaid reinsurance premiums and reinsurance
receivables are reported as assets and represent ceded unearned premiums and
reinsurance recoverable on both paid and unpaid losses, respectively. Amounts
recoverable from reinsurers are estimated in a manner consistent with the claim
liability associated with the reinsured policies.
Segment Reporting
- -----------------
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
Disclosures about Segments of an Enterprise and Related Information, became
effective for fiscal years effective after December 15, 1997. SFAS No. 131
establishes standards for the way information about operating segments is
reported in financial statements. The Company has identified its insurance
company operation as its primary reporting segment. Revenues from this segment
comprised 84.4% of consolidated revenues in the year ended December 31, 2001,
82.3% of consolidated revenues in the prior year. The Company's remaining
operations constitute a variety of specialty insurance services, each with
unique characteristics and individually insignificant to consolidated revenues.
The insurance company operation is conducted through Crusader, which as of
December 31, 2001, was licensed as an admitted insurance carrier in the states
of Arizona, California, Colorado, Idaho, Montana, Nevada, Ohio, Oregon and
Washington. Crusader is a multiple-line property and casualty insurance company
which began
38
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
transacting business on January 1, 1985. As of December 31, 2001, 96% of
Crusader's business was commercial multiple peril business package insurance
policies. Commercial multiple peril policies provide a combination of property
and liability coverage for businesses. Commercial property coverages insure
against loss or damage to buildings, inventory and equipment from natural
disasters, including hurricanes, windstorms, hail, water, explosions, severe
winter weather and other events such as theft and vandalism, fires and storms
and financial loss due to business interruption resulting from covered property
damage. Commercial liability coverages insure against third party liability from
accidents occurring on the insured's premises or arising out of its operations,
such as injuries sustained from products sold or operation of the insured
premises. In addition to commercial multiple peril policies, Crusader also
writes separate policies to insure commercial property and commercial liability
risks on a mono-line basis.
Revenues, income before income taxes and assets by segment are as follows:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Revenues
Insurance company operation $35,563,628 $31,572,070 $33,888,077
---------- ---------- ----------
Other insurance operations 17,799,932 16,715,332 16,717,884
Intersegment elimination (1) (11,246,654) (9,919,453) (9,871,704)
---------- --------- ---------
Total other insurance operations 6,553,278 6,795,879 6,846,180
--------- --------- ---------
Total revenues $42,116,906 $38,367,949 $40,734,257
========== ========== ==========
Income (loss) before income taxes
Insurance company operation $(17,570,829) $(237,593) $6,921,533
Other insurance operations 847,720 431,206 203,356
---------- ------- ---------
Total income (loss) before income taxes $(16,723,109) $193,613 $7,124,889
=========== ======= =========
Assets
Insurance company operation $109,293,988 $108,959,681 $103,450,995
Intersegment eliminations (2) (1,647,653) (528,196) (479,933)
----------- ----------- -----------
Total insurance company operation 107,646,335 108,431,485 102,971,062
Other insurance operations 21,176,938 15,514,335 19,007,694
----------- ----------- -----------
Total assets $128,823,273 $123,945,820 $121,978,756
=========== =========== ===========
(1) Intersegment revenue eliminations reflect commissions paid by Crusader to Unifax.
(2) Intersegment asset eliminations reflect the elimination of Crusader receivables and Unifax payables.
Concentration of Risks
- ----------------------
In 2001 approximately 86% of Crusader's gross premium written was derived from
California. In 2001, approximately 94% of the $2,582,290 commission income from
the Company's health and life insurance program was from CIGNA HealthCare
medical and dental plan programs. At December 31, 2001, the Company's
reinsurance recoverable on paid and unpaid losses and loss adjustment expenses
of $11,480,134 were from Partners Reinsurance of the U.S. and General
Reinsurance Corporation, both California admitted companies rated A+ and A++
respectively by A.M. Best Company.
39
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
- ------------------------
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation" which is effective for fiscal years beginning after
December 15, 1995. The Company accounts for stock-based compensation under the
accounting methods prescribed by Accounting Principles Board (APB) Opinion No.
25, as allowed by SFAS No. 123. Disclosure of stock-based compensation
determined in accordance with SFAS No. 123 is presented in Note 15. The adoption
of this pronouncement did not have a material effect on the financial statements
of the Company.
New Accounting Standards
- ------------------------
Statement of Financial Accounting Standards No. 141 ("SFAS No. 141") "Business
Combinations" became effective January 1, 2002. SFAS No. 141 requires companies
to apply the purchase method of accounting for all business combinations
initiated after June 30, 2001 and prohibits the use of the pooling-of-interest
method.
Statement of Financial Accounting Standards No. 142 ("SFAS No. 142") "Goodwill
and Other Intangible Assets" is effective for fiscal years beginning after
December 15, 2001, and establishes how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. It also addresses how goodwill and other intangible assets should
be accounted for after they have been initially recognized in the financial
statements. Generally, it also requires that those assets meeting criteria for
classification as intangible with estimable useful lives will be amortized,
while intangible assets with indefinite useful lives and goodwill will not be
amortized. Previously, all goodwill was required to be amortized over the
estimable useful life, not to exceed 40 years. The Company does not have any
intangible assets recorded in its financial statements and thus is not currently
impacted by the adoption of SFAS 142.
Statement of Financial Accounting Standards No. 143 ("SFAS No. 143") "Asset
Retirement Obligations" is effective for fiscal years beginning after December
15, 2002, and establishes financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
retirement costs. It requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are to be capitalized as part of the carrying amount of the long-lived
asset. The Company does not expect the adoption of SFAS No. 143 to have a
material impact on our financial statements.
Statement of Financial Accounting Standards No. 144 ("SFAS No. 144") "Accounting
for Impairment or Disposal of Long-Lived Assets" is effective for fiscal years
beginning after December 15, 2001, and establishes financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supercedes SFAS No. 121) "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 3, "Reporting the Results
of Operations - Reporting the effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual or Infrequently Occurring Events and Transactions,"
for the disposal of a segment of a business. SFAS No. 144 establishes a single
accounting model based on the framework established in SFAS No. 121 for
long-lived assets to be disposed of by sale. The Company does not expect the
adoption of SFAS No. 144 to have a material impact on our financial statements.
NOTE 2 - ADVANCE PREMIUM AND PREMIUM DEPOSITS
- ---------------------------------------------
Some of the Company's health and life programs require payments of premium prior
to the effective date of coverage; and, accordingly, invoices are sent out as
early as two months prior to the coverage effective date. Insurance premiums
received for coverage months effective after the balance sheet date are recorded
as advance premiums. Deposit premiums represent funds received from the
Company's daily automobile rental program which guarantee the payment of
premiums for past coverage months. These deposits are required when information
such as gross receipts or number of rental cars is required to compute the
actual premium due, but is not available until after the coverage month.
40
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENTS
- --------------------
The Company manages its own investment portfolio. A summary of net investments
and related income is as follows:
Investment income is summarized as follows:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Fixed maturities $5,628,698 $5,848,248 $5,752,154
Equity securities - - 1,380
Short-term investments 174,720 251,930 238,017
--------- --------- ---------
Total investment income 5,803,418 6,100,178 5,991,551
Less investment expenses 5 100 664
--------- --------- ---------
Net investment income $5,803,413 $6,100,078 $5,990,887
========= ========= =========
Net realized investment gains and (losses) are summarized as follows:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Gross realized gains:
Fixed maturities $35,276 $ 2,861 $ -
Equity securities - - 190,169
Gross realized (losses):
Equity securities (25,704) (138,250) (125,376)
------ ------- -------
Net realized investment
gains (losses) $ 9,572 $(135,389) $64,793
===== ======= ======
A summary of the unrealized appreciation (depreciation) on investments carried
at market and the applicable deferred federal income taxes is shown below:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Gross unrealized appreciation:
Fixed maturities $3,030,903 $936,589 $363,627
Gross unrealized (depreciation):
Fixed maturities (214,480) (752,036) (1,911,768)
Equity securities - - (98,170)
--------- ------- ---------
Net unrealized appreciation
(depreciation) on investments 2,816,423 184,553 (1,646,311)
Deferred federal income tax
benefit (expense) (957,584) (62,748) 559,746
--------- ------ ---------
Net unrealized appreciation
(depreciation), net of
deferred income taxes $1,858,839 $121,805 $(1,086,565)
========= ======= ==========
The amortized cost and estimated market value of fixed maturity investments at
December 31, 2001, by contractual maturity are as follows. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without penalties.
Amortized Estimated
Cost Market Value
---- ------------
Due in one year or less $ 12,217,799 $ 12,414,410
Due after one year through five years 70,173,988 72,694,632
Due after five years through ten years 9,420,072 9,519,240
---------- ----------
Total fixed maturities $91,811,859 $94,628,282
========== ==========
41
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and estimated market values of investments in fixed maturities by categories are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
December 31, 2001
- -----------------
Available for sale:
Fixed maturities
----------------
Certificates of deposit $ 400,000 $ - $ - $ 400,000
U.S. treasury securities 5,459,019 343,358 - 5,802,377
State and municipal tax-exempt bonds 8,213,141 223,133 48 8,436,226
Industrial and miscellaneous taxable bonds 77,739,699 2,464,412 214,432 79,989,679
---------- --------- ------- ----------
Total fixed maturities $91,811,859 $3,030,903 $214,480 $94,628,282
========== ========= ======= ==========
December 31, 2000
- -----------------
Available for sale:
Fixed maturities
----------------
Certificates of deposit $ 400,000 $ - $ - $ 400,000
U.S. treasury securities 7,995,324 197,697 971 8,192,050
State and municipal tax-exempt bonds 19,789,675 244,759 - 20,034,434
Industrial and miscellaneous taxable bonds 66,613,078 494,133 751,065 66,356,146
---------- ------- ------- ----------
Total fixed maturities $94,798,077 $936,589 $752,036 $94,982,630
========== ======= ======= ==========
Short-term investments have an initial maturity of one year or less and consist
of the following:
Year ended December 31
----------------------
2001 2000
---- ----
Certificates of deposit $ 225,000 $ 225,000
Commercial paper - 2,000,000
Commercial bank money market accounts 2,050,006 417,280
U.S. government obligation money market fund 585,699 28,778
Short-term U.S. treasury note - 681,414
Savings account 2,917 2,882
--------- ---------
Total short-term investments $2,863,622 $3,355,354
========= =========
NOTE 4 - PROPERTY AND EQUIPMENT (NET OF ACCUMULATED DEPRECIATION)
- ----------------------------------------------------------------
Property and equipment consist of the following:
Year ended December 31
----------------------
2001 2000
---- ----
Furniture, fixtures, computer, office,
and transportation equipment $1,779,293 $2,354,072
Accumulated depreciation 1,511,867 2,239,965
--------- ---------
Net property and equipment $ 267,426 $ 114,107
======= =======
42
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - PREMIUMS AND NOTES RECEIVABLE, NET
- -------------------------------------------
Premiums and notes receivable are substantially secured by unearned premiums and
funds held as security for performance.
Year ended December 31
----------------------
2001 2000
---- ----
Premiums receivable $2,268,702 $1,931,311
Premium finance notes receivable 4,002,347 3,896,959
--------- ---------
Total premiums and notes receivable 6,271,049 5,828,270
Less allowance for doubtful accounts 22,722 20,539
--------- ---------
Net premiums and notes receivable $6,248,327 $5,807,731
========= =========
Bad debt expense for the fiscal year ended December 31, 2001, and the fiscal
year ended December 31, 2000, was $27,759 and $19,878, respectively. Premium
finance notes receivable represent the balance due to the Company's premium
finance subsidiary from policyholders who elect to finance their premiums over
the policy term. These notes are net of unearned finance charges.
NOTE 6 - NOTE PAYABLE - BANK
- ----------------------------
Unico has a $2,000,000 line of credit with Union Bank of California. Interest on
this line is referenced as Bank's LIBOR rate plus 1.75% per annum and is payable
monthly. The agreement contains certain covenants including maintenance of
certain financial ratios. As of December 31, 2001, the Company does not meet the
covenant requiring a tangible net worth of at least $45,000,000. As of December
31, 2001 and 2000, no amounts were borrowed and the Company does not intend to
utilize its credit line during the remainder of its current term. This credit
line expires September 3, 2002, at which time it's expected to be renegotiated
and renewed.
NOTE 7 - UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
- ---------------------------------------------------
The following table provides an analysis of the roll forward of Crusader's
losses and loss adjustment expenses, including a reconciliation of the ending
balance sheet liability for the periods indicated:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Reserve for unpaid losses and loss adjustment expenses
at beginning of year - net of reinsurance $34,546,026 $37,628,165 $40,374,232
---------- ---------- ----------
Incurred losses and loss adjustment expenses
Provision for insured events of current year 22,350,667 17,406,284 18,268,710
Increase (decrease) in provision for events of prior years (*) 19,326,349 4,270,631 (1,241,520)
---------- ---------- ----------
Total losses and loss adjustment expenses 41,677,016 21,676,915 17,027,190
---------- ---------- ----------
Payments
Losses and loss adjustment expenses attributable to
insured events of the current year 5,595,410 6,013,830 4,380,090
Losses and loss adjustment expenses attributable to
insured events of prior years 20,841,417 18,745,224 15,393,167
---------- ---------- ----------
Total payments 26,436,827 24,759,054 19,773,257
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses
at end of year - net of reinsurance $49,786,215 $34,546,026 $37,628,165
Reinsurance recoverable on unpaid losses and loss
adjustment expenses at end of year 10,748,080 10,671,343 3,964,324
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses at
end of year per balance sheet - gross of reinsurance $60,534,295 $45,217,369 $41,592,489
========== ========== ==========
43
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reserves for losses and loss adjustment expenses by line of business before
reinsurance are as follows:
Year ended December 31
----------------------
Line of Business 2001 2000 1999
- ----------------- --------------------- -------------------- --------------------
CMP $56,215,479 92.9% $40,830,294 90.3% $39,039,727 93.9%
Other Liability $4,004,449 6.6% $4,016,673 8.9% $2,377,509 5.7%
Other $314,367 0.5% $370,402 0.8% $175,253 0.4%
---------- ----- ---------- ----- ---------- -----
Total $60,534,295 100.0% $45,217,369 100.0% $41,592,489 100.0%
========== ====== ========== ===== ========== =====
(*) In the years ended December 31, 2001 and 2000, the Company increased its
estimates of ultimate losses for both reported and unreported claims primarily
occurring from 1998 through 2000 and from 1993 through 1995 (the years most
impacted by construction defect claims). Adverse development of prior years'
losses of $19,326,349 as of December 31, 2001 and $4,270,631 as of December 31,
2000, was primarily the result of an increase in the Company's estimate of
ultimate reported and unreported claims for construction defect claims,
non-California liquor liability claims and apartment house habitability claims.
Construction defect claims arise from the liability of contractors for their
defective work in the construction of habitation structures (such as apartments,
condominiums and single-family dwellings) or commercial type structures. Liquor
liability claims arise from the liability of tavern owners related to the sale
of alcoholic beverages. Apartment house habitability claims arise from
uninhabitable conditions related to dilapidated structures and insect and vermin
infestation.
1 Higher than anticipated claim cost from business outside of California.
2 The effect on settlements of escalating jury awards.
3 The effect on settlements in apartment house habitability claims due to a
statute that provide for payment of plaintiff attorney fees without regard
to policy limits.
4 Increased development of losses due to the impact of changes in California
law that expanded coverage and increased loss exposure primarily on
construction defect claims for losses incurred prior to the Company's
revision in its policy form in 1995. For example:
Montrose Chemical Corp. v. Admiral Insurance Co. (1994),
-----------------------------------------------
Montrose Chemical Corp. v. Admiral Insurance Co. (1995),
-----------------------------------------------
Armstrong World Industries, Inc. v. Aetna Gas & Sur. Co. (1996)
----------------------------------------------------------
and James Pepperell, et al., v. Scottsdale Insurance Company (1998).
--------------------------------------------------------------
These four cases state that all insurance companies with completed
operations property damage coverage in force during a period of
continuing damage or property deterioration must provide coverage for
construction defect losses regardless as to whether or not the damage
first manifested during their policy period.
Pardee Construction Company v. Insurance Company of the West et al., (2000)
-------------------------------------------------------------------
This case states that an additional insured endorsement includes completed
operations property damage coverage even for projects that were completed
before the inception date of the endorsement.
Centex Golden Construction Co. v. Dale Tile Co. (2000)
-----------------------------------------------------
This case states that indemnity agreements in construction contracts
requires the subcontractor to defend the general contractor even though the
subcontractor's liability has not been established.
44
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - DEFERRED POLICY ACQUISITION COSTS
- ------------------------------------------
Deferred policy acquisition costs consist of commissions (net of ceding
commission), premium taxes, inspection fees, and certain other underwriting
costs which are related to and vary with the production of Crusader Insurance
Company policies. Policy acquisition costs are deferred and amortized as the
related premiums are earned. Deferred acquisition costs are reviewed to
determine if they are recoverable from future income, including investment
income.
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Deferred policy acquisition costs at beginning of year $4,500,147 $4,338,217 $4,665,772
Policy acquisition costs incurred during year 9,274,425 8,465,847 8,035,259
Policy acquisition costs amortized during year (8,695,037) (8,303,917) (8,362,814)
--------- --------- ---------
Deferred policy acquisition costs at end of year $5,079,535 $4,500,147 $4,338,217
========= ========= =========
NOTE 9 - LEASE COMMITMENT TO RELATED PARTY
- ------------------------------------------
The Company presently occupies a 46,000 square foot building located at 23251
Mulholland Drive, Woodland Hills, California, under a master lease expiring
March 31, 2007. The total rent expense under this lease agreement was $1,025,952
for the year ended December 31, 2001; $1,025,952 for the year ended December 31,
2000; and $1,025,952 for the year ended December 31, 1999.
The lease provides for the following minimum annual rental commitments:
Year ending
December 31, 2002 $1,025,952
December 31, 2003 $1,025,952
December 31, 2004 $1,025,952
December 31, 2005 $1,025,952
December 31, 2006 (through March 31, 2007) $1,282,440
---------
Total minimum payments $5,386,248
=========
Erwin Cheldin, the Company's president, chairman, and principal stockholder, is
the owner of the building. On February 22, 1995, the Company signed an extension
to the lease with no increase in rent to March 31, 2007. The Company believes
that the terms of the lease at inception and at the time the lease extension was
signed were at least as favorable to the Company as could have been obtained
from non-affiliated third parties. The Company utilizes for its own operations
100% of the space it leases.
NOTE 10 - ACCRUED EXPENSES AND OTHER LIABILITIES
- ------------------------------------------------
Accrued expenses and other liabilities consist of the following:
Year ended December 31
----------------------
2001 2000
---- ----
Premium payable $5,487,753 $6,192,201
Unearned claim administration income 300,000 300,000
Profit sharing contributions 292,900 395,305
Accrued salaries 469,690 475,740
Security purchases payable
(settlement date in 2001) - 140,625
Other 706,114 395,308
--------- ---------
Total accrued expenses and
other liabilities $7,256,457 $7,899,179
========= =========
45
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENT AND 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. The
Company is also required to resort to legal proceedings from time to time in
order to enforce collection of premiums, commissions, or fees for the services
rendered to customers or to their agents. These routine items of litigation do
not materially affect the Company and are handled on a routine basis by the
Company through its general counsel.
Likewise, the Company is sometimes named as a cross-defendant in litigation
which is principally directed against that insurer who has issued a policy of
insurance directly or indirectly through the Company. Incidental actions are
sometimes brought by customers or others which relate to disputes concerning the
issuance or non-issuance of individual policies. These items are also handled on
a routine basis by the Company's general counsel, and they do not materially
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 operation or financial position.
On September 13, 2000, the City of Los Angeles audited Unico (parent company
only) for the years 1997, 1998 and 1999 with respect to its Los Angeles business
license gross receipts tax. The audit resulted in an assessment of $97,681 in
gross receipts tax, interest of $24,196, and penalties of $39,072, resulting in
a total amount claimed due of $160,949. The assessment was based on the city's
position that expenses of Unico's subsidiaries that are paid by Unico (parent
company) are subject to the gross receipts business tax when those expenses are
reimbursed by the subsidiaries to Unico. The Company disagreed with the audit
findings and appealed the matter. A formal hearing was held on January 3, 2001.
The Company received the decision of the board of review that resulted in a
revised gross receipts tax of $46,589 and a reduction in the interest assessment
of $13,500. The Company is awaiting its request that all penalties be waived. As
of December 31, 2001, the Company has expensed the revised tax due and recorded
the interest expense adjustment.
NOTE 12 - REINSURANCE
- ---------------------
A reinsurance transaction occurs when an insurance company transfers (cedes) a
portion of its exposure on business written by it to a reinsurer which assumes
that risk for a premium (ceded premium). Reinsurance does not legally discharge
the Company from primary liability under its policies. If the reinsurer fails to
meet its obligations, the Company must nonetheless pay its policy obligations.
The Company's reinsurance agreements help protect Crusader against liabilities
in excess of certain retentions, including major or catastrophic losses which
may occur from any one or more of the property and/or casualty risks which
Crusader insures. The Company continually monitors and evaluates the liquidity
and financial strength of its reinsurers to determine their ability to fulfill
obligations assumed under the reinsurance contracts. The Company has no
reinsurance recoverable balances in dispute.
Since 2000, Crusader had its primary reinsurance agreements with Partner
Reinsurance Company of the U.S., a California admitted reinsurer rated A+ by
A.M. Best Company. In 1999, Crusader had its primary reinsurance agreements with
General Reinsurance Corporation, a California admitted reinsurers rated A++ by
A.M. Best Company. These reinsurance agreements help protect Crusader against
liabilities in excess of certain retentions, including major or catastrophic
losses that may occur from any one or more of the property and/or casualty risks
which Crusader insures. Crusader also has additional catastrophe reinsurance
from various other reinsurance companies of which 90% of the premium is ceded to
participating catastrophe reinsurers that are admitted in California. Any
catastrophe loss ceded to the reinsurer not admitted in California requires the
reinsurer to immediately obtain a non-cancelable (Evergreen) letter of credit
covering their ceded outstanding loss including any IBNR. On July 1, 1997,
Crusader increased its retention from $150,000 to $250,000 per risk.
Concurrently, Crusader maintained catastrophe and clash covers (subject to a
maximum occurrence and annual aggregate) to help protect the Company from one
loss occurrence affecting multiple policies. Beginning January 1, 1998, an
annual aggregate deductible of $750,000 commenced on losses ceded to its
reinsurance treaty covering losses between $250,000 and $500,000. Beginning
January 1, 2000, an annual aggregate deductible of $500,000 commenced on losses
ceded to its reinsurance treaty covering losses between $250,000 and $500,000.
Prior to January 1, 1998, National Reinsurance Corporation charged a provisional
rate on exposures up to $500,000 that
46
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
was subject to adjustment and was based on the amount of losses ceded, limited
by a maximum percentage that could be charged. That provisional rated treaty was
cancelled on a runoff basis and replaced by a flat rated treaty on January 1,
1998.
On most of the premium that Crusader cedes to the reinsurer, the reinsurer pays
a commission to Crusader which includes a reimbursement of the cost of acquiring
the portion of the premium which is ceded. Crusader does not currently assume
any reinsurance. The Company intends to continue obtaining reinsurance although
the availability and cost may vary from time to time. The unpaid losses ceded to
the reinsurer are recorded as an asset on the balance sheet.
The effect of reinsurance on premiums written, premiums earned, and incurred
losses is as follows:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Premiums written:
Direct business $37,637,396 $33,259,948 $33,139,361
Reinsurance assumed - - -
Reinsurance ceded (5,531,221) (6,853,383) (6,595,440)
---------- ---------- ----------
Net premiums written $32,106,175 $26,406,565 $26,543,921
========== ========== ==========
Premiums earned:
Direct business $35,409,174 $32,743,165 $34,693,113
Reinsurance assumed - - -
Reinsurance ceded (5,515,330) (6,843,931) (6,583,752)
---------- ---------- ----------
Net premiums earned $29,893,844 $25,899,234 $28,109,361
========== ========== ==========
Incurred losses and loss
adjustment expenses:
Direct $52,939,238 $34,225,322 $23,189,173
Assumed - - -
Ceded (11,262,222) (12,548,407) (6,161,983)
---------- ---------- ----------
Net incurred losses and
loss adjustment expenses $41,677,016 $21,676,915 $17,027,190
========== ========== ==========
NOTE 13 - PROFIT SHARING PLAN
- -----------------------------
During the fiscal year ended March 31, 1986, the Company adopted the Unico
American Corporation Profit Sharing Plan. Employees who are at least 21 years of
age and have been employed by the Company for at least two years are
participants in the Plan. Pursuant to the terms of the Plan, the Company
annually contributes to the account of each participant an amount equal to a
percentage of the participant's eligible compensation as determined by the Board
of Directors. Participants are entitled to receive benefits under the plan upon
the later of the following: the date 60 days after the end of the plan year in
which the participant's retirement occurs or one year and 60 days after the end
of the plan year following the participant's termination with the Company.
However, the participant's interest must be distributed in its entirety no later
than April 1 of the calendar year following the calendar year in which the
participant attains age 70 1/2 or otherwise in accordance with the Treasury
Regulations promulgated under the Internal Revenue Code of 1954 as amended.
Employer contributions to the plan were as follows:
Year ended December 31, 2001 $554,111
Year ended December 31, 2000 $624,388
Year ended December 31, 1999 $653,389
47
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - STATUTORY CAPITAL AND SURPLUS
- ---------------------------------------
Crusader is required to file an annual statement with insurance regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory). Statutory accounting practices differ in certain
respects from generally accepted accounting principles. The more significant of
these differences for statutory accounting are (a) premium income is taken into
earnings over the periods covered by the policies, whereas the related
acquisition and commission costs are expensed when incurred; (b) all bonds are
recorded at amortized cost, regardless of trading activity; (c) non-admitted
assets are charged directly against surplus; (d) loss reserves and unearned
premium reserves are stated net of reinsurance; and (e) federal income taxes are
recorded when payable and deferred taxes, subject to limitations, are recognized
but only to the extent that they do not exceed 10% of statutory surplus.
Additionally, the cash flow presentation is not consistent with generally
accepted accounting principles and a reconciliation from net income to cash
provided by operations is not presented. Comprehensive income is not presented
under statutory accounting. The NAIC's project to codify accounting practices
was approved by the NAIC in March 1998. The approval included a provision for
commissioners' discretion in determining appropriate statutory accounting for
insurers in their states. Consequently, prescribed and permitted accounting
practices may continue to differ from state to state. Codification became
effective on January 1, 2001. The primary effect of Codification on Crusader was
the recognition, subject to limitations, of deferred tax assets previously not
allowed. As of December 31, 2001, Crusader reported to the California Department
Insurance in its annual statutory filing, total deferred tax assets of
$7,243,071 of which $3,962,627 was admitted and included in surplus and
$3,280,444 non-admitted and not included in surplus. The admitted deferred tax
assets of $3,962,627 would not have been allowed prior to codification. On March
9, 2002, subsequent to Crusader's statutory filing, the Job Creation and Workers
Assistance Act of 2002 was signed into law. This act was effective for tax years
ending in 2001 and provided that a net operating loss for tax year ending in
2001 or 2002 is carried back five years, rather than the previously allowed two
years. The income tax credit resulting from net operating loss carrybacks are
treated as current receivables while income tax credit resulting from net
operating loss carryforwards, subject to limitations, are treated as deferred
tax assets and are limited to an aggregate amount no greater than 10% of
beginning surplus. This act allowed Crusader to carryback its entire net
operating loss and thus converted its net operating loss carryforward of
$3,934,772 to a current receivable. Taking into consideration the Job Creation
and Workers Assistance Act of 2002, Crusader's admitted deferred tax assets were
$2,087,678 and its non-admitted deferred tax assets were $1,220,621. Taking into
consideration the Job Creation and Workers Assistance Act of 2002, the primary
effect of Codification on Crusader was to increase its surplus by recognizing
admitted deferred tax assets of $2,087,678.
The Company is unable to predict how insurance rating agencies will interpret or
react to any such changes resulting from Codification. No assurance can be given
that future legislative or regulatory changes resulting from such activities
will not adversely affect the Company and its subsidiaries.
Crusader Insurance Company statutory capital and surplus are as follows:
As of December 31, 2001 $27,519,538
As of December 31, 2000 $39,626,269
Crusader Insurance Company statutory net income (loss) is as follows:
Year ended December 31, 2001 $(12,110,967)
Year ended December 31, 2000 $214,787
Year ended December 31, 1999 $5,404,526
The Company believes that Crusader's statutory capital and surplus were
sufficient to support the insurance premiums written based on guidelines
established by the NAIC.
Crusader is restricted in the amount of dividends it may pay to its parent in
any twelve (12) month period without prior approval of the California Department
of Insurance. Presently, without prior approval, Crusader may pay a dividend in
any twelve (12) month period to its parent equal to the greater of (a) 10% of
Crusader's statutory policyholders' surplus or (b) Crusader's statutory net
income for the preceding calendar year. The maximum dividend that may be made
without prior approval as of December 31, 2001, is $2,751,954. There were no
48
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
dividends paid by Crusader to Unico in 2001. Crusader paid dividends of
$1,500,000 in 2000 and $2,000,000 in 1999.
In December 1993, the National Association of Insurance Commissioners ("NAIC")
adopted a Risk-Based Capital ("RBC") Model Law for property and casualty
companies. The RBC Model Law is intended to provide standards for calculating a
variable regulatory capital requirement related to a company's current
operations and its risk exposures (asset risk, underwriting risk, credit risk
and off-balance sheet risk). These standards are intended to serve as a
diagnostic solvency tool for regulators that establishes uniform capital levels
and specific authority levels for regulatory intervention when an insurer falls
below minimum capital levels. The RBC Model Law specifies four distinct action
levels at which a regulator can intervene with increasing degrees of authority
over a domestic insurer if its RBC is equal to or less than 200% of its computed
authorized control level RBC. A company's RBC is required to be disclosed in its
statutory annual statement. The RBC is not intended to be used as a rating or
ranking tool nor is it to be used in premium rate making or approval. Taking
into consideration the Job Creation and Workers Assistance Act of 2002 discussed
below, Crusader adjusted capital at December 31, 2001 was 458% of authorized
control level risk-based capital.
Insurance Regulatory Information System ("IRIS") was developed by a committee of
state insurance regulators primarily to assist state insurance departments in
executing their statutory mandate to oversee the financial condition of
insurance companies. IRIS helps those companies that merit highest priority in
the allocation of the regulators' resources on the basis of 12 financial ratios
that are calculated annually. The analytical phase is a review of annual
statements and the financial ratios. The ratios and trends are valuable in
pointing to companies likely to experience financial difficulties, but are not
themselves indicative of adverse financial condition. The ratio and benchmark
comparisons are mechanically produced and are not intended to replace the state
insurance departments' own in-depth financial analysis or on-site examinations.
An unusual range of ratio results has been established from studies of the
ratios of companies that have become insolvent or have experienced financial
difficulties. In the analytical phase, all companies that receive four or more
financial ratio values outside the usual range are analyzed in order to identify
those companies that appear to require immediate regulatory action.
Subsequently, a more comprehensive review of the ratio results and an insurer's
annual statement is performed to confirm that an insurer's situation calls for
increased or close regulatory attention.
In 2001, the Company was outside the usual values of 5 of the 12 IRIS ratio
tests, primarily as a result of adverse losses and loss adjustment expenses
development. The IRIS ratio test outside the usual values were the Two Year
Overall Operating Ratio, Change in Surplus, One Year Reserve Development to
Surplus, Two Year Reserve Development to Surplus, and Estimated Current Reserve
Deficiency to Surplus.
NOTE 15 - STOCK PLANS
- ---------------------
The Company's 1985 stock option plan provided for the grant of incentive stock
options to officers and key employees. The plan covered an aggregate of
1,500,000 shares of the Company's common stock (subject to adjustment in the
case of stock splits, reverse stock splits, stock dividends, etc.). As of
December 31, 2001, there were 11,415 options outstanding, and all are currently
exercisable. Options granted under this plan had a life of either 5 or 10 years
and had a vesting period from immediate to 9 years. All options were granted at
fair market value. There are no additional options available for future grant
under the 1985 plan.
The Company's 1999 Omnibus Stock Plan that covers 500,000 shares of the
Company's common stock (subject to adjustment in the case of stock splits,
reverse stock splits, stock dividends, etc.) was approved by shareholders June
4, 1999. On August 26, 1999, the Company granted 135,000 incentive stock options
of which 30,000 were terminated and 105,000 were outstanding as of December 31,
2001. These options expire 10 years from the date of the grant and were not
exercisable prior to September 1, 2000. Options covering 10,000 or less shares
become exercisable at the rate of 2,500 shares per year commencing September 1,
2000; and options covering more than
49
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10,000 shares become exercisable at the rate of 5,000 shares per year commencing
September 1, 2000. At December 31, 2001, there were 70,000 options under the
1999 stock option plan were exercisable.
The Company applies APB Opinion No. 25 in accounting for its incentive stock
option plans. Accordingly, no compensation cost has been recognized in the
accompanying statements of operations. Had compensation cost for the Company
plans been determined based on the fair value at the grant dates consistent with
the method of SFAS No. 123, the Company's 2001 net income would have been
reduced by $27,174; 2000 net income would have been reduced by $74,654 and 1999
net income would have been reduced $210,107. In addition, 2001 earnings per
share (basic and diluted) would have been reduced by $0.00, 2000 earnings per
share (basic and diluted) would have been reduced by $0.01 and 1999 earnings per
share (basic and diluted) would have been reduced by $0.03. Calculations of the
fair value under the method prescribed by SFAS No. 123 were made using the
Black-Scholes Option-Price Model with the following weighted average assumptions
used for the 1999 grant: dividend yield 2.46%, expected volatility of 43%,
expected lives of 10 years, and risk-free interest rates of 6.09%. No options
were granted during 2001.
The changes in the number of common shares under option are summarized as
follows:
Weighted Average
Options Exercise Price
------- --------------
Outstanding at December 31, 1998 194,546 $3.592
Options granted 135,000 $9.250
Options exercised (93,131) $3.691
Options terminated - -
-------
Outstanding at December 31, 1999 236,415 $6.780
Options granted - -
Options exercised (30,140) $3.500
Options terminated (2,500) $9.250
-------
Outstanding at December 31, 2000 203,775 $7.239
Options granted - -
Options exercised (59,860) $3.500
Options terminated (27,500) $9.250
-------
Outstanding at December 31, 2001 116,415 $8.686
=======
The weighted average fair value of options granted during 1999 was $4.30. No
options were granted in 2001 or 2000. Options exercisable were 81,145 at
December 31, 2001, at a weighted average exercise price of $8.44; 121,275 at
December 31, 2000, at a weighted average exercise price of $5.87; 101,415 at
December 31, 1999, at a weighted average exercise price of $3.50.
The following table summarizes information regarding the stock options
outstanding at December 31, 2001:
Weighted Weighted Weighted
Average Average Average
Number of Remaining Exercise Price Exercise Price
Exercise Options Contractual Life of Outstanding Number of Options of Exercisable
Price Outstanding (Years) Options Exercisable Options
----- ----------- ----- ------- ----------- -------
$3.50 11,415 0.37 $3.50 11,415 $3.50
$9.25 105,000 7.65 $9.25 70,000 $9.25
50
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - TAXES ON INCOME
- -------------------------
The provision for taxes on income consists of the following:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Current provision:
Federal $(5,375,381) $(253,899) $1,668,332
State 24,935 37,409 21,577
--------- ------- ---------
Total federal and state (5,350,446) (216,490) 1,689,909
Deferred (502,645) (29,694) 303,614
--------- ------- ---------
Provision for taxes $(5,853,091) $(246,184) $1,993,523
========= ======= =========
The income tax provision reflected in the consolidated statements of operations
is less than the expected federal income tax on income as shown in the table
below:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Computed tax expense (benefit) $(5,685,857) $65,828 $2,422,462
Tax effect of:
Tax exempt income (217,383) (344,428) (425,963)
Dividend exclusion - - (279)
Other 19,220 (5,910) (23,334)
State income tax expense 30,929 38,326 20,637
-------- ------- ---------
Tax per financial statements $(5,853,091) $(246,184) $1,993,523
========= ======= =========
On March 9, 2002, the Job Creation and Workers Assistance Act of 2002 was signed
into law. This act was effective for tax years ending in 2001 and provided that
a net operating loss for tax years ending in 2001 or 2002 is carried back five
years, rather than the previously allowed two years. This act allowed the
Company to carryback its entire net operating loss. The carryback of our current
Federal tax benefit was allocated as follows:
Tax year ended Amount Applied
- -------------- --------------
December 31, 1996 $(2,145,554)
December 31, 1997 (2,900,437)
December 31, 1998 (352,948)
---------
Total Federal income tax carryback (5,398,939)
Adjustment to prior year tax provision 23,558
---------
Current Federal income tax provision $(5,375,381)
=========
The components of the net federal income tax asset included in the financial
statements as required by the assets and liability method are as follows:
Year ended December 31
----------------------
2001 2000
---- ----
Deferred tax assets:
Discount on loss reserves $1,950,452 $1,385,505
Unearned premiums 1,310,128 1,159,690
Other 169,793 189,883
--------- ---------
Total deferred tax assets $3,430,373 $2,735,078
--------- ---------
Deferred tax liabilities:
Deferred acquisition costs $1,727,043 $1,530,051
Discount on salvage and subrogation 8,400 8,027
Unrealized gain on investments 957,584 62,748
Other 181,095 185,810
--------- ---------
Total deferred tax liabilities $2,874,122 $1,786,636
--------- ---------
Net deferred tax assets $556,251 $948,442
======= =======
51
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax assets will be realized. The amount of the
deferred tax assets considered realizable could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
The Company and its wholly owned subsidiaries file consolidated Federal and
combined California income tax returns. Pursuant to the a tax allocation
agreement, Crusader Insurance Company and American Acceptance Corporation are
allocated taxes or (in the case of losses) tax credits at current corporate
rates based on their own taxable income or loss.
As a California insurance company, Crusader is obligated to pay a premium tax on
gross premiums written in the states of Arizona, California, Colorado, Idaho,
Montana, Nevada, Ohio, Oregon, and Washington. The premium tax is in lieu of
state franchise taxes; thus, the above provision for state taxes does not
include the premium tax.
NOTE 17 - REPURCHASE OF COMMON STOCK - EFFECT ON STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------
The Company has previously announced that its Board of Directors had authorized
the repurchase in the open market from time to time of up to an aggregate of
945,000 shares of the common stock of the Company. During the year ended
December 31, 2001, the Company retired an aggregate of 240,358 shares of its
common stock at a cost of $1,387,397 of which $118,116 was allocated to capital
and $1,269,281 was allocated to retained earnings. As of December 31, 2001, the
Company had purchased and retired under the Board of Directors authorization an
aggregate of 868,958 shares of its common stock at a cost of $5,517,465.
NOTE 18 - EARNINGS PER SHARE
- ----------------------------
A reconciliation of the numerator and denominator used in the basic and diluted
earnings per share calculation is presented below:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Basic Earnings (Loss) Per Share
- -------------------------------
Net income (loss) numerator $(10,870,018) $439,797 $5,131,366
========== ======= =========
Weighted average shares outstanding denominator 5,505,398 6,058,674 6,268,069
========= ======== =========
Per share amount $(1.97) $0.07 $0.82
Diluted Earnings (Loss) Per Share
- ---------------------------------
Net income (loss) numerator $(10,870,018) $439,797 $5,131,366
========== ======= =========
Weighted average shares outstanding 5,505,398 6,058,674 6,268,069
* Effect of diluted securities - 43,018 90,538
--------- --------- ---------
Diluted shares outstanding denominator 5,505,398 6,101,692 6,358,607
========= ========= =========
Per share amount $(1.97) $0.07 $0.81
*In loss periods options are excluded from the calculation of diluted EPS, as
the inclusion of such options would have an antidilutive effect.
52
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------
Summarized unaudited quarterly financial data for each of the calendar years
2001 and 2000 is set forth below:
Comparable Period by Quarter Ended
----------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Calendar Year 2001
------------------
Total revenues $9,647,868 $10,640,987 $10,524,205 $11,303,846
Income (loss) before taxes (11,835) (1,735,416) (5,309,802) (9,666,056)
Net income (loss) 52,104 (1,096,725) (3,508,550) (6,316,847)
Earnings (loss) per share: Basic $0.01 $(0.20) $(0.64) $(1.16)
Diluted $0.01 $(0.20) $(0.64) $(1.16)
Calendar Year 2000
------------------
Total revenues $9,929,286 $9,680,120 $9,253,451 $9,505,092
Income (loss) before taxes 828,315 808,470 126,105 (1,569,277)
Net income (loss) 635,009 612,072 155,430 (962,714)
Earnings (loss) per share: Basic $0.10 $0.10 $0.03 $(0.17)
Diluted $0.10 $0.10 $0.03 $(0.17)
53
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
--------------------
None
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Information in response to Item 10 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
Item 11. Executive Compensation
- --------------------------------
Information in response to Item 11 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Information in response to Item 12 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Information in response to Item 13 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
54
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) Financial Statements and Schedules Filed as a Part of this Report:
1. Financial statements:
The consolidated financial statements for the fiscal year ended December
31, 2001, are contained herein as listed in the index to consolidated
financial statements on page 25.
2. Financial schedules:
Index to Consolidated Financial Statements
------------------------------------------
Independent Auditors' Report on Financial Statement Schedules
Schedule II - Condensed Financial Information of Registrant
Schedule III - Supplemental Insurance Information
Schedules other than those listed above are omitted, since they are not
applicable, not required, or the information required to be set forth is
included in the consolidated financial statements or notes.
3. Exhibits:
3.1 Articles of Incorporation of Registrant, as amended. (Incorporated
herein by reference to Exhibit 3.1 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1984).
3.2 By-Laws of Registrant, as amended. (Incorporated herein by reference
to Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1991).
10.1 Unico American Corporation Profit Sharing Plan & Trust. (Incorporated
herein by reference to Exhibit 10.1 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1985). (*)
10.2 Unico American Corporation Employee Incentive Stock Option Plan
(1985). (Incorporated herein by reference to Exhibit 10.3 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1985). (*)
10.3 Amendment to Unico American Corporation Incentive Stock Option Plan
(1985). (Incorporated herein by reference to Exhibit 10.4 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1987). (*)
10.4 The Lease dated July 31, 1986, between Unico American Corporation and
Cheldin Management Company. (Incorporated herein by reference to
Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1987).
10.5 The Lease Amendment #1 dated February 22, 1995, between Unico
American Corporation and Cheldin Management amending the lease dated
July 31, 1986. (Incorporated herein by reference to Exhibit 10.5 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1995).
10.6 2000 Omnibus Stock Plan of Unico American Corporation (Incorporated
herein by reference to Exhibit A to Registrant's Proxy Statement for
its Annual Meeting of Shareholders held June 4, 2000). (*)
10.7 Employment Agreement between the Company and Roger Platten dated
November 27, 1996. (Incorporated herein by reference to Exhibit 10.1
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000). (*)
55
10.8 Employment Agreement between the Company and Cary Cheldin dated
November 27, 1996. (Incorporated herein by reference to Exhibit 10.2
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000). (*)
10.9 Amendment to Employment Agreement between the Company and Cary
Cheldin dated January 10, 2000. (Incorporated herein by reference to
Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000). (*)
10.10 Agreement to modify employment and general release of all claims
between the Company and Roger Platten dated December 21, 2000.
(Incorporated herein by reference to Exhibit 10.10 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 2000). (*)
10.11 New employment agreement between the Company and Roger Platten dated
December 21, 2000. (Incorporated herein by reference to Exhibit 10.11
to Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000). (*)
10.12 Stock purchase agreement between the Company and Roger Platten dated
December 21, 2000. (Incorporated herein by reference to Exhibit 10.12
to Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000). (*)
21 Subsidiaries of Registrant. (Incorporated herein by reference to
Exhibit 22 to Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1984).
(*) Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K:
------------------------
None.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
Date: March 26, 2002 UNICO AMERICAN CORPORATION
By: /s/ ERWIN CHELDIN
------------------
Erwin Cheldin
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ ERWIN CHELDIN Chairman of the Board, March 26, 2002
----------------- President and Chief
Executive Officer,
(Principal Executive Officer)
/s/ LESTER A. AARON Treasurer, Chief Financial March 26, 2002
------------------- Officer and Director
(Principal Accounting and
Principal Financial Officer)
/s/ CARY L. CHELDIN Executive Vice President March 26, 2002
------------------- and Director
/s/ GEORGE C. GILPATRICK Vice President, Secretary March 26, 2002
------------------------ and Director
/s/ DAVID A. LEWIS Director March 26, 2002
------------------
/s/ WARREN D. ORLOFF Director March 26, 2002
--------------------
/s/ DONALD B. URFRIG Director March 26, 2002
--------------------
57
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Unico American Corporation:
Under date of March 26, 2002, we reported on the consolidated balance sheets of
Unico American Corporation and subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of operations, comprehensive income,
changes in stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2001, as contained in the annual report on
Form 10-K for the year 2001. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedules as listed under Item 14(a)2. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG LLP
Los Angeles, California
March 26, 2002
58
SCHEDULE II
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS - PARENT COMPANY ONLY
December 31 December 31
2001 2000
---- ----
ASSETS
------
Investments
Available for sale:
Fixed maturities, at market value (amortized cost December 31, 2001 $0;
December 31, 2000 $1,499,575) $ - $1,499,063
Short-term investments 8,878 117,816
----- ---------
Total Investments 8,878 1,616,879
Cash 19,427 16,406
Accrued investment and other income 250 22,252
Investments in subsidiaries 57,535,001 68,429,823
Property and equipment (net of accumulated depreciation) 267,426 114,107
Income taxes receivable 5,398,939 -
Other assets 218,873 197,297
---------- ----------
Total Assets $63,448,794 $70,396,764
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
- -----------
Accrued expenses and other liabilities $364,789 $1,073,593
Payables to subsidiaries (net of receivables) (1) 22,463,629 17,909,842
---------- ----------
Total Liabilities $22,828,418 $18,983,435
---------- ----------
STOCKHOLDERS' EQUITY
- --------------------
Common stock $2,671,415 $2,789,494
Net unrealized investment gains 1,858,839 121,805
Retained earnings 36,090,122 48,502,030
---------- ----------
Total Stockholders' Equity $40,620,376 $51,413,329
---------- ----------
Total Liabilities and Stockholders' Equity $63,448,794 $70,396,764
========== ==========
(1) The Company and its wholly owned subsidiaries file consolidated Federal and
combined California income tax returns. Pursuant to the a tax allocation
agreement, Crusader Insurance Company and American Acceptance Corporation
are allocated taxes or (in the case of losses) tax credits at current
corporate rates based on their own taxable income or loss. The payable to
subsidiaries include their income tax receivable or liability included in
the consolidated return.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
59
SCHEDULE II (continued)
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS - PARENT COMPANY ONLY
FOR THE YEARS ENDED DECEMBER 31
2001 2000 1999
---- ---- ----
REVENUES
- --------
General and administrative expenses allocated to $5,273,146
subsidiaries (*) $ - $2,081,837
Net investment income 54,764 138,487 143,215
Net realized investment gains 3,212 2,508 -
Other income 12,974 13,497 10,755
------ --------- ---------
Total Revenue 70,950 2,236,329 5,427,116
EXPENSES
- --------
General and administrative expenses (*) 46,146 4,782,663 5,356,474
------ --------- ---------
Income (loss) before equity in net income of subsidiaries 24,804 (2,546,334) 70,642
Equity in net income (loss) of subsidiaries (10,894,822) 2,986,131 5,060,724
---------- --------- ---------
Net Income (Loss) $(10,870,018) $439,797 $5,131,366
========== ======= =========
(*) In 2001, the parent company transferred most of their employees and the
related salaries, payroll taxes, and administrative expenses directly to
its subsidiaries. In the year ended 2000, the parent company did not
allocate any of its salaries or payroll taxes to its subsidiaries.
The Company and its subsidiaries file a consolidated federal income tax return.
Unico received cash dividends of $250,000 from American Acceptance Corporation
in the year ended December 31, 2001; $1,500,000 from Crusader and $500,000 from
American Acceptance Corporation in the year ended December 31, 2000; and
$2,000,000 from Crusader in the year ended December 31, 1999.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
60
SCHEDULE II (continued)
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS - PARENT COMPANY ONLY
FOR THE YEARS ENDED DECEMBER 31
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income (loss) $(10,870,018) $439,797 $5,131,366
Adjustments to reconcile net income to net cash
from operations
Undistributed equity in net (income) loss of subsidiaries 10,894,822 (2,986,131) (5,060,724)
Net realized (gain) on sale of securities (3,212) (2,508) -
Depreciation and amortization 70,940 67,615 96,334
Accrued expenses and other liabilities (708,804) 279,835 (153,869)
Accrued investment and other income 22,002 23,829 (17,114)
Income taxes receivable (5,398,939) - -
Other assets (21,576) (111,740) 18,575
--------- --------- ------
Net cash provided (used) from operations (6,014,785) (2,289,303) 14,568
--------- --------- ------
Cash flows from investing activities
Purchase of fixed maturity investments - (998,340) (1,498,875)
Proceeds from maturity of fixed maturity investments 650,000 1,000,000 -
Proceeds from sale of fixed maturity investments 853,055 1,001,250 -
(Increase) decrease in short-term investments 108,938 (17,816) 1,650,000
Additions to property and equipment (224,524) (34,072) (40,385)
--------- ------- -------
Net cash provided by investing activities 1,387,469 951,022 110,740
--------- ------- -------
Cash flows from financing activities
Proceeds from issuance of common stock 37 13 202,687
Repurchase of common stock (1,387,397) (4,130,068) -
Dividends paid to shareholders (272,609) (945,580) (1,576,237)
Net change in payables and receivables
from subsidiaries 6,290,306 6,402,586 1,255,114
--------- --------- ---------
Net cash provided (used) by financing activities 4,630,337 1,326,951 (118,436)
--------- --------- ---------
Net increase (decrease) in cash 3,021 (11,330) 6,872
Cash at beginning of year 16,406 27,736 20,864
------ ------ ------
Cash at end of year $19,427 $16,406 $27,736
====== ====== ======
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
61
SCHEDULE III
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Future Benefits, Amortization
Deferred Benefits, Claims, of Deferred
Policy Losses, Net Losses and Policy Other
Acquisition and Loss Unearned Premium Investment Settlement Acquisition Operating Premium
Cost Expenses Premiums Revenue Income Expenses Costs Costs Written
---------- ----------- ----------- ----------- ---------- ----------- ----------- --------- ------------
Year Ended
December 31, 2001
Property &
Casualty $5,079,535 $60,534,295 $19,328,150 $29,893,844 $5,647,026 $41,677,016 $8,695,037 $1,687,754 $32,106,175
Year Ended
December 31, 2000
Property &
Casualty $4,500,147 $45,217,369 $17,099,927 $25,899,234 $5,764,094 $21,676,915 $8,303,917 $1,440,011 $26,406,565
Year Ended
December 31, 1999
Property &
Casualty $4,338,217 $41,592,489 $16,583,143 $28,109,361 $5,706,945 $17,027,190 $8,362,814 $1,949,865 $26,543,921
62