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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period from April 1, 2002 to June 30, 2002
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)
No Change
(Former name, former address and former fiscal year,
if changed since last report)
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
5,489,533
Number of shares of common stock outstanding as of August 9, 2002
1
PART 1 - FINANCIAL INFORMATION
------------------------------
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30 December 31
2002 2001
---- ----
ASSETS
Investments
Available for sale:
Fixed maturities, at market value
(amortized cost: June 30, 2002
$92,733,683; December 31, 2001
$91,811,859) $96,254,058 $94,628,282
Equity securities at market
(cost: June 30, 2002 $0;
December 31, 2001 $216) - 216
Short-term investments, at cost 5,442,907 2,863,622
----------- ----------
Total Investments 101,696,965 97,492,120
Cash 48,873 45,001
Accrued investment income 1,704,999 1,768,058
Premiums and notes receivable, net 6,369,352 6,248,327
Reinsurance recoverable:
Paid losses and loss adjustment expenses 960,896 732,054
Unpaid losses and loss adjustment expenses 15,219,263 10,748,080
Prepaid reinsurance premiums 50,059 37,683
Deferred policy acquisition costs 5,337,508 5,079,535
Property and equipment
(net of accumulated depreciation) 360,604 267,426
Deferred income taxes 206,445 556,251
Income taxes receivable 1,958,962 5,398,939
Other assets 236,910 449,799
----------- -----------
Total Assets $134,150,836 $128,823,273
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
- -----------
Unpaid losses and loss adjustment expenses $69,451,988 $60,534,295
Unearned premiums 20,713,142 19,328,150
Advance premium and premium deposits 1,486,188 1,083,995
Accrued expenses and other liabilities 5,216,972 7,256,457
--------- ----------
Total Liabilities $96,868,290 $88,202,897
---------- ----------
STOCKHOLDERS' EQUITY
- --------------------
Common stock, no par - authorized
10,000,000 shares; issued and
outstanding shares 5,489,533 at
June 30, 2002, and 5,481,288 at
December 31, 2001 $ 2,700,272 $ 2,671,415
Accumulated other comprehensive income 2,323,448 1,858,839
Retained earnings 32,258,826 36,090,122
---------- ----------
Total Stockholders' Equity $37,282,546 $40,620,376
---------- ----------
Total Liabilities and Stockholders' Equity $134,150,836 $128,823,273
=========== ===========
See notes to unaudited consolidated financial statements.
2
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES
- --------
Insurance Company Revenues
Premium earned $9,788,073 $8,680,327 $19,041,046 $16,989,613
Premium ceded 1,532,697 1,093,666 3,193,927 2,770,489
--------- --------- --------- ---------
Net premium earned 8,255,376 7,586,661 15,847,119 14,219,124
Net investment income 1,368,413 1,391,162 2,758,078 2,800,178
Net realized investment (loss) - - (216) (23,520)
Other income 6,400 11,733 8,647 14,753
--------- --------- --------- ----------
Total Insurance Company Revenues 9,630,189 8,989,556 18,613,628 17,010,535
Other Revenues from Insurance Operations
Gross commissions and fees 1,449,013 1,388,032 2,888,000 2,748,799
Investment income 20,616 40,303 27,187 98,621
Net realized investment gains - 3,212 - 3,212
Finance charges and late fees earned 219,891 216,414 438,817 421,207
Other income 8,746 3,470 12,816 6,481
---------- ---------- ---------- ----------
Total Revenues 11,328,455 10,640,987 21,980,448 20,288,855
---------- ---------- ---------- ----------
EXPENSES
- --------
Losses and loss adjustment expenses 12,496,657 8,210,872 18,826,220 13,676,767
Policy acquisition costs 2,278,819 2,138,850 4,429,110 4,167,089
Salaries and employee benefits 1,051,456 1,116,585 2,038,677 2,230,290
Commissions to agents/brokers 303,610 316,810 606,219 639,817
Other operating expenses 735,034 593,286 1,480,905 1,322,143
---------- ---------- ---------- ----------
Total Expenses 16,865,576 12,376,403 27,381,131 22,036,106
---------- ---------- ---------- ----------
(Loss) Before Taxes (5,537,121) (1,735,416) (5,400,683) (1,747,251)
Income Tax (Benefit) (1,874,249) (638,691) (1,843,863) (702,630)
--------- --------- --------- ---------
Net (Loss) $(3,662,872) $(1,096,725) $(3,556,820) $(1,044,621)
========= ========= ========= =========
PER SHARE DATA
- --------------
Basic Shares Outstanding 5,488,089 5,453,219 5,485,090 5,550,799
Basic (Loss) Per Share $(0.67) $(0.20) $(0.65) $(0.19)
Diluted Shares Outstanding 5,488,089 5,453,219 5,485,090 5,550,799
Diluted (Loss) Per Share $(0.67) $(0.20) $(0.65) $(0.19)
See notes to unaudited consolidated financial statements.
3
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net (Loss) $(3,662,872) $(1,096,725) $(3,556,820) $(1,044,621)
Other changes in comprehensive income, net of tax:
Unrealized gains (losses) on securities classified
as available-for-sale arising during the period 1,253,350 (249,647) 464,466 746,880
Less: reclassification adjustment for (gains)
and losses included in net income (loss) - (2,120) 143 13,403
--------- --------- --------- ---------
Comprehensive (Loss) $(2,409,522) $(1,348,492) $(3,092,211) $(284,338)
========= ========= ========= ========
See notes to unaudited consolidated financial statements.
4
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
--------------------------------
2002 2001
---- ----
Cash Flows from Operating Activities:
Net (Loss) $(3,556,820) $(1,044,621)
Adjustments to reconcile net income to net cash from operations
Depreciation 37,397 45,511
Bond amortization, net 190,995 196,338
Net realized loss on sale of securities 216 20,308
Changes in assets and liabilities
Premium, notes and investment income receivable (57,966) (291,374)
Reinsurance recoverable (4,700,025) (372,458)
Prepaid reinsurance premiums (12,376) (32,792)
Deferred policy acquisition costs (257,973) (313,228)
Other assets 212,890 (763,263)
Reserve for unpaid losses and loss adjustment expenses 8,917,693 396,707
Unearned premium reserve 1,384,992 1,501,237
Funds held as security and advanced premiums 402,193 65,977
Accrued expenses and other liabilities (2,039,485) (599,220)
Income taxes current/deferred 110,463 129,179
Federal income tax recoverable 3,439,977 -
--------- ---------
Net Cash Provided (Used) from Operations 4,072,171 (1,061,699)
--------- ---------
Investing Activities
Purchase of fixed maturity investments (6,217,820) (4,154,470)
Proceeds from maturity of fixed maturity investments 5,105,000 6,872,180
Net (increase) decrease in short-term investments (2,579,285) 249,833
Additions to property and equipment (130,575) (189,432)
--------- ---------
Net Cash Provided (Used) by Investing Activities (3,822,680) 2,778,111
--------- ---------
Financing Activities
Proceeds from issuance of common stocks 28,858 -
Repurchase of common stock - (1,383,186)
Dividends paid to shareholders (274,477) (272,633)
-------- ---------
Net Cash (Used) by Financing Activities (245,619) (1,655,819)
-------- ---------
Net increase in cash 3,872 60,593
Cash at beginning of period 45,001 54,806
------ -------
Cash at End of Period $48,873 $115,399
====== =======
Supplemental Cash Flow Information Cash paid during the period for:
Interest - $ 75
Income taxes $30,000 $10,000
See notes to unaudited consolidated financial statements.
5
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
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 accompanying unaudited consolidated financial statements include the
accounts of Unico American Corporation and its subsidiaries. All significant
inter-company accounts and transactions have been eliminated in consolidation.
Basis of Presentation
- ---------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles (GAAP) for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three and six months ended June 30, 2002, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. Quarterly financial statements should be read in conjunction with the
financial statements and related notes in the Company's 2001 Annual Report on
Form 10-K as filed with the Securities and Exchange Commission.
NOTE 2 - INCENTIVE STOCK PLANS
- ------------------------------
The Company's 1985 Stock Option Plan provided for the grant of incentive stock
options to officers and key employees. The Plan covers 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 June 30, 2002, all
options available under this plan have been exercised or terminated. There are
no additional options available for future grant under the 1985 Plan.
The Company's 1999 Omnibus Stock Plan also provides, among other things, for the
grant of incentive options to officers and key employees. The Plan covers an
aggregate of 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
June 30, 2002, there were options covering 105,000 shares of common stock
outstanding under this Plan. Options covering 70,000 of these shares of common
stock were exercisable.
NOTE 3 - 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 six months ended
June 30, 2002, the Company did not repurchase any shares of the Company's common
stock. As of June 30, 2002, 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. The cost of the shares repurchased by the Company
has been allocated $427,024 to capital stock and $5,090,441 to retained
earnings.
6
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 4 - EARNINGS PER SHARE
- ---------------------------
The following table represents the reconciliation of the numerators and
denominators of the Company's basic earnings per share and diluted earnings per
share computations reported on the Consolidated Statements of Operations for the
three and six months ended June 30, 2002 and 2001:
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Basic (Loss) Per Share
- ----------------------
Net (loss) numerator $(3,662,872) $(1,096,725) $(3,556,820) $(1,044,621)
========== =========== ========= ===========
Weighted average shares outstanding denominator 5,488,089 5,453,219 5,485,090 5,550,799
========= ========= ========= =========
Basic (Loss) Per Share $(0.67) $(0.20) $(0.65) $(0.19)
Diluted (Loss) Per Share
- ------------------------
Net (loss) numerator $(3,662,872) $(1,096,725) $(3,556,820) $(1,044,621)
========= ========= ========= =========
Weighted average shares outstanding 5,488,089 5,453,219 5,485,090 5,550,799
Effect of diluted securities* - - - -
--------- --------- --------- ---------
Diluted shares outstanding denominator 5,488,089 5,453,219 5,485,090 5,550,799
========= ========= ========= =========
Diluted (Loss) Per Share $(0.67) $(0.20) $(0.65) $(0.19)
*In loss periods, options are excluded from the calculation of diluted EPS, as
the inclusion of such options would have an antidilutive effect.
NOTE 5 - 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 adopted SFAS No. 131 and has identified
its insurance company operation, Crusader Insurance Company (Crusader), as its
primary reporting segment. Revenues from this segment comprised 85% of
consolidated revenues for the three months and the six months ended June 30,
2002, and 84% of revenues for the three and the six months ended June 30, 2001.
The Company's remaining operations constitute a variety of specialty insurance
services, each with unique characteristics and individually insignificant to
consolidated revenues.
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues
- --------
Insurance company operation $9,630,189 $8,989,556 $18,613,628 $17,010,535
Other insurance operations 4,837,211 4,524,309 9,474,668 8,802,162
Intersegment elimination (1) (3,138,945) (2,872,878) (6,107,848) (5,523,842)
--------- --------- --------- ---------
Total other insurance operations 1,698,266 1,651,431 3,366,820 3,278,320
--------- --------- --------- ---------
Total Revenues $11,328,455 $10,640,987 $21,980,448 $20,288,855
========== ========== ========== ==========
Income (Loss) Before Income Taxes
- ---------------------------------
Insurance company operation $(5,955,492) $(2,134,389) $(6,215,880) $(2,307,685)
Other insurance operations 418,371 398,973 815,197 560,434
--------- --------- --------- ---------
Total (Loss) Before Income Taxes $(5,537,121) $(1,735,416) $(5,400,683) $(1,747,251)
========= ========= ========= =========
7
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
NOTE 5 - SEGMENT REPORTING (continued)
- -------------------------------------
As of June 30
-------------
2002 2001
---- ----
Assets
- ------
Insurance company operation $117,742,774 $106,352,408
Intersegment eliminations (2) (1,023,652) (1,298,145)
----------- -----------
Total insurance company operation 116,719,122 105,054,263
Other insurance operations 17,431,714 18,320,225
----------- -----------
Total Assets $134,150,836 $123,374,488
=========== ===========
(1) Intersegment revenue eliminations reflect commission paid by Crusader to
Unifax Insurance Systems, Inc., (Unifax) a wholly owned subsidiary of the
Company.
(2) Intersegment asset eliminations reflect the elimination of Crusader
receivables and Unifax payables.
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
(a) 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.
Crusader generates a significant amount of cash as a result of its holdings of
unearned premium reserves, 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. As of June 30,
2002, the Company had cash and investments of $98,225,463 (at amortized cost) of
which $95,719,666 (97%) were investments of Crusader.
As of the quarter ended June 30, 2002, the Company had invested $92,733,683 (at
amortized cost) or 94% of its invested assets in fixed maturity obligations. 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.
The Company's investments in fixed maturity obligations of $92,733,683 (at
amortized cost) include $7,156,320 (8%) of pre-refunded state and municipal
tax-exempt bonds, $9,527,053 (10%) of U.S. treasury securities, $75,650,310
(82%) of high-quality industrial and miscellaneous bonds, and $400,000 of
certificates of deposit. The tax-exempt interest income earned for the three
months and the six months ended June 30, 2002, was $95,092 and $191,615,
respectively.
The balance of the Company's investments are in high-quality, short-term
investments that include, bank money market accounts, certificates of deposit,
commercial paper and a short-term treasury money market fund.
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
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.
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. No shares were repurchased in
the six months ended June 30, 2002.
Although material capital expenditures may also be funded through borrowings,
the Company believes that its cash and short-term investments at June 30, 2002,
net of trust restriction of $855,103, statutory deposits of $2,725,000, and the
dividend restriction between Crusader and Unico 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.
In 2001, the Company initiated an upgrade and replacement of its printing and
forms generation systems. As of the date of this report, the project has been
completed. There are no other material commitments for capital expenditures as
of the date of this report.
9
(b) Results of Operations:
- --------------------------
All comparisons made in this discussion are comparing the three months and six
months ended June 30, 2002, to the three months and six months ended June 30,
2001, unless otherwise indicated.
The Company had a net loss of $3,662,872 for the three months ending June 30,
2002, compared to a net loss of $1,096,725 for the three months ended June 30,
2001, an increase in net loss of $2,566,147. For the six months ended June 30,
2002, the company had a net loss of $3,556,820 compared to a net loss of
$1,044,621 for the six months ended June 30, 2001, an increase in net loss of
$2,512,199. Total revenues increased $687,468 (6%) to $11,328,455 for the three
months and $1,691,593 (8%) to $21,980,448 for the six months ended June 30,
2002, when compared to total revenues of $10,640,987 for the three months and
$20,288,855 for the six months ended June 30, 2001.
Premium written, before reinsurance, increased $880,294 (9%) to $10,495,708 for
the three months and $1,935,189 (10%) to $20,426,038 for the six months ended
June 30, 2002, compared to written premium of $9,615,414 for the three months
and $18,490,849 for the six months ended June 30, 2001. The Company primarily
writes commercial multiple peril business package policies. This line of
business represents approximately 97% of Crusader's total written premium for
the three months and six months ended June 30, 2002.
Written premium in California increased $1,571,920 (20%) to $9,614,997 in the
three months and $2,931,723 (19%) to $18,464,951 in the six months ended June
30, 2002, compared to the three and six month periods of the prior year.
Premiums written outside of California decreased $691,626 (44%) to $880,711 in
the three months and $996,534 (34%) to $1,961,087 in the six months ended June
30, 2002, compared to the three and six month periods of the prior year. The
increase in written premium in the state of California was primarily the result
of the continued subsidence in priced-based competition in the property casualty
insurance market that has resulted in the Company's products becoming more
competitive. The Company cannot determine how long the existing market
conditions in California will continue, nor in which direction they might
change.
The decrease in written premium outside of California was primarily attributable
to rate increases and coverage restrictions implemented in the third quarter of
2001 which made the Company's products less competitive. Primarily as a result
of losses from liquor and premise liability coverages, much of the Company's
business outside of California has not been profitable. In August 2002, the
Company placed moratoriums on a substantial amount of non-California business
until further studies can be completed regarding underwriting and pricing. The
Company estimates that approximately one-half of non-California business in
force at June 30, 2002, will be cancelled or non-renewed during the next twelve
months.
Crusader's written premium by state is as follows:
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
Increase Increase
2002 2001 (Decrease) 2002 2001 (Decrease)
---- ---- -------- ---- ---- --------
California $9,614,997 $8,043,077 $1,571,920 $18,464,951 $15,533,228 $2,931,723
Ohio 131,463 385,195 (253,732) 414,695 696,346 (281,651)
Arizona 162,322 353,151 (190,829) 399,902 633,782 (233,880)
Montana 159,283 192,317 (33,034) 281,880 308,592 (26,712)
Pennsylvania 100,751 156,229 (55,478) 276,502 400,006 (123,504)
Oregon 89,824 109,412 (19,588) 229,988 242,448 (12,460)
Washington 93,351 179,604 (86,253) 184,766 295,078 (110,312)
Nevada 111,611 115,208 (3,597) 120,855 127,803 (6,948)
Texas 14,695 70,359 (55,664) 28,286 233,015 (204,729)
Idaho 17,411 6,018 11,393 24,213 15,707 8,506
Kentucky 4,844 (4,844) - 4,844 (4,844)
---------- --------- ------- ---------- ---------- ---------
Total $10,495,708 $9,615,414 $880,294 $20,426,038 $18,490,849 $1,935,189
========== ========= ======= ========== ========== =========
10
PREMIUM EARNED, before reinsurance, increased $1,107,746 (13%) to $9,788,073 for
the three months and $2,051,433 (12%) to $19,041,046 for the six months ended
June 30, 2002, compared to $8,680,327 for the three months and $16,989,613 for
the six months ended June 30, 2001. The Company writes annual policies and
therefore earns written premium over the one-year policy term. The increase in
earned premium is a direct result of the related increase in written premium
previously discussed.
PREMIUM CEDED increased $439,031 (40%) to $1,532,697 for the three months and
$423,438 (15%) to $3,193,927 for the six months ended June 30, 2002, compared to
premium ceded of $1,093,666 for the three months and $2,770,489 for the six
months ended June 30, 2001. Earned premium ceded consists of both premium ceded
under the Company's current reinsurance contracts and premium ceded to the
Company's provisionally rated reinsurance contracts. The change in premium ceded
between the three and six month periods ended June 30, 2002, and June 30, 2001,
is as follows:
Three Months Ended Six Months Ended
June 30, 2002 June 30,2002
------------- ------------
Increase in premium ceded under
current reinsurance contracts $ 619,500 $ 1,191,317
(Decrease) in provisionally rated
premium ceded (180,469) (767,879)
------- -------
Net increase in premium ceded $439,031 $423,438
======= =======
The increase in premium ceded under current reinsurance contracts is primarily
due to rate increases effective January 1, 2002, and the increase in earned
premium on which these rates are based. Premium ceded under the provisionally
rated contract, which was canceled on a runoff basis effective December 31,
1997, is subject to adjustment based on the amount of losses ceded, limited by a
maximum percentage that can be charged by the reinsurer.
NET INVESTMENT INCOME, excluding realized investment gains, decreased $42,436
(3%) to $1,389,029 for the three months and $113,534 (4%) to $2,785,265 for the
six months ended June 30, 2002, compared to investment income of $1,431,465 for
the three months and $2,898,799 for the six months ended June 30, 2001. The
decrease in investment income is primarily due to a general lowering of yields
on new and reinvested assets due to current market conditions.
GROSS COMMISSION AND FEE INCOME increased $60,981 (4%) to $1,449,013 for the
three months and $139,201 (5%) to $2,888,000 for the six months ended June 30,
2002, compared to commission and fee income of $1,388,032 for the three months
and $2,748,799 for the six months ended June 30, 2001. The increase in
commission income in the three and six months ended June 30, 2002, was primarily
due to an increase in commission and fees earned by the daily automobile rental
program and the health and life insurance programs. The increase in gross
commission and fee income for the three and six months ended June 30, 2002,
compared to the three and six months ended June 30, 2001, are as follows:
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002
------------- -------------
Service fee income $ 8,983 $ 22,103
Health and life insurance program 27,947 36,270
Other commission and fee income (7,075) (14,868)
Workers' compensation program 3,362 391
Daily automobile rental insurance program:
Excluding contingent commission 27,764 38,503
Contingent commission - 56,802
------ -------
Net increase in commission and fee income $60,981 $139,201
====== =======
The Company's filing with regulatory authorities for a rate increase of its
California service fee from $100 per policy to $165 per policy was approved in
June 2002 and will be implemented for policies effective in late August 2002.
The Company wrote 8,487 California policies in the six months ended June 30,
2002, and 16,723 in the year ended December 31, 2001.
11
LOSSES AND LOSS ADJUSTMENT EXPENSES were 151% of net premium earned for the
three months and 119% of net premium earned for the six months ended June 30,
2002, compared to 108% of net premium earned for the three months and 96% of net
premium earned for the six months ended June 30, 2001. This increase was
primarily due to an increase in incurred losses of prior years of approximately
$5,393,000 (adverse development) in the three months and $6,333,000 (adverse
development) in the six months ended June 30, 2002, compared to an increase in
incurred losses of prior years of approximately $2,992,000 (adverse development)
in the three months and $3,877,000 (adverse development) in the six months ended
June 30, 2001.
In the years ended December 31, 2001 and 2000, the Company significantly
increased its estimates of ultimate losses for both reported and unreported
claims primarily occurring from 1998 through 2000 and from 1993 though 1995 (the
years most impacted by construction defect claims). As of December 31, 2001, the
Company had instituted various underwriting changes to address the prior adverse
development. However, development in the first and second quarter of 2002
indicated that the underwriting changes implemented through December 31, 2001,
were not sufficient to fully address the development of losses primarily
occurring subsequent to 1999 on the Company's special risk class of business and
on business outside of California.
Primarily as a result of losses from liquor and premise liability coverages,
much of the Company's business outside of California continued to develop
adversely and was not profitable for the Company. Although the Company either
significantly increased rates or reduced coverages offered on this business in
the third quarter of 2001, adverse loss development trends and declining sales
on this business caused the Company to conclude that further steps were needed.
Therefore, in August 2002 the Company placed moratoriums on a substantial
amount of that business until further studies could be completed regarding
underwriting and pricing. Direct written premium on non-California business was
approximately $5,263,000 in the year ended December 31, 2001, and approximately
$1,961,000 in the six months ended June 30, 2002. The Company estimates that
approximately one-half of non-California business in force at June 30, 2002,
will be cancelled or non-renewed during the next twelve months.
The Company is also in the process of increasing its rates on its special risk
class of business. This class of business represents risks written within
current underwriting programs that have a higher degree of exposure and require
special pricing and underwriting. Direct written premium on this business was
approximately $1,087,000 in the six months ended June 30, 2002, compared to
$1,386,000 in the six months ended June 30, 2001. Direct written premium on this
business was approximately $2,922,000 in the year ended December 31, 2001, and
$2,851,000 in the year ended December 31, 2000. The Company believes that the
decrease in written premium in the six months ended June 30, 2002, compared to
the six months ended June 30, 2001, was primarily due to more selective
underwriting. However, based upon the most recent loss development analysis, the
Company believes that premium rate increases for this business are also
necessary. Accordingly, the Company is in the process of substantially
increasing its rates on this business. Such rate changes are required to be
filed with and approved by regulatory authorities, and there is no assurance
that these filings will be approved or how long they will take to implement. The
Company cannot determine the effect any rate increases will have on sales;
however, it believes that maintaining an adequate rate is more important than
maintaining market share.
As disclosed in the Company's December 31, 2001 Annual Report, the Company has
experienced adverse development on its apartment house business due to the
effect of settlements on habitability claims. Those settlements were
substantially influenced by a California statute that provides for the payment
of plaintiff attorney fees without regard to policy limits and by 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 on June 24, 2002, the Company received approval from regulatory authorities
to modify its policy form to limit the statutory attorney fee exposure. This
modified policy form will apply to policies effective on and after September 7,
2002.
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 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 reasonably 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
12
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.
Primarily as a result of the underwriting losses in 2001 and 2000, the A.M. Best
Company lowered Crusader's rating from A (Excellent) to A- (Excellent) effective
March 26, 2002, based on financial information as of December 31, 2001. At the
time the rating was lowered, A.M. Best remained 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, and viewed
that rating outlook as negative. The Company anticipates that the continued
adverse development in the six months ended June 30, 2002, may impact Crusader's
rating by the A.M. Best Company. A downgrade by the A.M. Best Company may have a
negative impact on Crusader's sales.
POLICY ACQUISITION COSTS consist of commissions, premium taxes, inspection fees,
and certain other underwriting costs, which are related to the production of
Crusader insurance policies. These costs include both Crusader expenses and
allocated expenses of other Unico subsidiaries. Crusader's reinsurers pay
Crusader a ceding commission, which is primarily a reimbursement of the
acquisition cost related to the ceded premium. Policy acquisition costs, net of
ceding commission, are deferred and amortized as the related premiums are
earned. These costs were 28% of net premium earned for the three months and six
months ended June 30, 2002, and 28% of net earned premium for the three months
and 29% of net earned premium for the six months ended June 30, 2001.
SALARIES AND EMPLOYEE BENEFITS decreased $65,129 (6%) to $1,051,456 for the
three months and decreased $191,613 (9%) to $2,038,677 for the six months ended
June 30, 2002, compared to salary and employee benefits of $1,116,585 for the
three months and $2,230,290 for the six months ended June 30, 2001.
COMMISSIONS TO AGENTS/BROKERS decreased $13,200 (4%) to $303,610 for the three
months and $33,598 (5%) to $606,219 for the six months ended June 30, 2002,
compared to commission expense of $316,810 for the three months and $639,817 for
the six months ended June 30, 2001.
OTHER OPERATING EXPENSES increased $141,748 (24%) to $735,034 for the three
months and $158,762 (12%) to $1,480,905 for the six months ended June 30, 2002,
compared to operating expenses of $593,286 for the three months and $1,322,143
for the six months ended June 30, 2001.
INCOME TAX PROVISION was an income tax benefit of $1,874,249 (34% of pre-tax
loss) for the three months and an income tax benefit of $1,843,863 (34% of
pre-tax loss) for the six months ended June 30, 2002, compared to an income tax
benefit of $638,691 (37% of pre-tax loss) in the three months and an income tax
benefit of $702,630 (40% of pre-tax loss) in the six months ended June 30, 2001.
This increase in tax benefit was primarily due the pre-tax loss of $5,537,121 in
the three months and $5,400,683 in the six months ended June 30, 2002, compared
to the pre-tax loss of $1,735,416 in the three months and $1,747,251 in the six
months ended June 30, 2001. The income tax benefit as of June 30, 2002, arose
primarily from the Company's ability to recover prior income taxes paid due to
the carryback of current period net operating losses.
The effect of inflation on net income of the Company during the three and six
months ended June 30, 2002, and the three and six months ended June 30, 2001,
was not significant.
Forward Looking Statements
- --------------------------
Certain statements contained herein, including the section entitled
"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," "believe," "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 underwriting actions not being
effective, rate increases for coverages not being approved or sufficient,
premium rate adequacy not being competitive, actual versus estimated claim
experience, regulatory changes or developments, unforeseen calamities, general
market conditions, the Company's ability to introduce new profitable products,
and the effect of the Company's decision not to expand geographically.
13
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company's consolidated balance sheets include 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 consist of the following:
June 30 December 31 Increase
2002 2001 (Decrease)
---- ---- --------
Fixed maturity bonds (at amortized value) $92,333,683 $91,411,859 $ 921,824
Short-term cash investments (at cost) 5,442,907 2,863,622 2,579,285
Equity securities (at cost) - 216 (216)
Certificates of deposit (over 1 year,
at cost) 400,000 400,000 -
---------- ---------- ---------
Total invested assets $98,176,590 $94,675,697 $3,500,893
========== ========== =========
There have been no material changes in the composition of the Company's invested
assets or market risk exposures since the end of the preceding fiscal year end.
PART II - OTHER INFORMATION
- ---------------------------
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------
(c) During the quarter ended June 30, 2002, the Company issued 5,000 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 one employee of the Company in exchange for $17,500.00
in cash. These shares were acquired for investment 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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
- --------------------------------------------------------
(a) On May 31, 2002, the Company held its Annual Meeting of Stockholders.
(b) Proxies for the meeting were solicited pursuant to Regulation 14 under the
Securities Exchange Act of 1934; there was no solicitation in opposition to
nominees of the Board of Directors as listed in the Proxy Statement and all
such nominees were elected.
(c) At the meeting, the following persons were elected by the vote indicated as
directors to serve until the next annual meeting of shareholders and until
their successors are duly elected and qualified. There were 23,266 broker
non-votes.
Name For Against or Withheld
---- --- -------------------
Erwin Cheldin 4,650,486 53,011
Lester A. Aaron 4,651,286 52,211
Cary L. Cheldin 4,650,886 52,611
George C. Gilpatrick 4,651,286 52,211
David A. Lewis 4,700,786 2,711
Warren D. Orloff 4,700,786 2,711
Donald B. Urfrig 4,702,286 1,211
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:
- ------------------------------------------------------
99.1 Certification of Chief Executive Officer under Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
None.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned there unto authorized.
UNICO AMERICAN CORPORATION
Date: August 14, 2002 By: /s/ ERWIN CHELDIN
------------------
Erwin Cheldin
Chairman of the Board, President and Chief
Executive Officer, (Principal Executive Officer)
Date: August 14, 2002 By: /s/ LESTER A. AARON
-------------------
Lester A. Aaron
Treasurer, Chief Financial Officer, (Principal
Accounting and Principal Financial Officer)
15
EXHIBIT INDEX
-------------
Exhibit No. Description
- ---------- -------------
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
16