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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Under Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2003 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-3978
UNICO AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 95-2583928
(State or other jurisdiction (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, Including Area Code)
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
--- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
---- ---
5,489,533
Number of shares of common stock outstanding as of August 11, 2003
1
PART 1 - FINANCIAL INFORMATION
------------------------------
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30 December 31
2003 2002
---- ----
ASSETS
- ------
Investments
Available for sale:
Fixed maturities, at market value (amortized cost: June 30,
2003 $91,487,677; December 31, 2002 $93,649,468) $96,371,686 $98,373,350
Short-term investments, at cost 16,005,131 9,024,382
----------- -----------
Total Investments 112,376,817 107,397,732
Cash 61,483 19,766
Accrued investment income 1,382,406 1,470,333
Premiums and notes receivable, net 8,202,697 6,699,909
Reinsurance recoverable:
Paid losses and loss adjustment expenses 362,069 2,805,048
Unpaid losses and loss adjustment expenses 18,296,690 21,308,339
Prepaid reinsurance premiums 49,689 95,304
Deferred policy acquisition costs 6,761,453 5,947,010
Property and equipment (net of accumulated depreciation) 334,240 354,194
Deferred income taxes 361,068 57,951
Income taxes receivable 981,153 1,590,970
Other assets 272,655 940,049
----------- -----------
Total Assets $149,442,420 $148,686,605
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
- -----------
Unpaid losses and loss adjustment expenses $73,722,054 $74,905,284
Unearned premiums 28,493,805 24,381,583
Advance premium and premium deposits 1,478,168 1,607,272
Notes payable-related parties - 750,000
Accrued expenses and other liabilities 6,439,360 8,633,476
----------- -----------
Total Liabilities $110,133,387 $110,277,615
----------- -----------
STOCKHOLDERS' EQUITY
- --------------------
Common stock, no par - authorized 10,000,000 shares; issued and outstanding
shares 5,489,533 at June 30, 2003, and 5,489,533 at
December 31, 2002 $2,700,272 $2,700,272
Accumulated other comprehensive income 3,223,446 3,117,762
Retained earnings 33,385,315 32,590,956
---------- ----------
Total Stockholders' Equity $39,309,033 $38,408,990
---------- ----------
Total Liabilities and Stockholders' Equity $149,442,420 $148,686,605
=========== ===========
See notes to unaudited consolidated financial statements.
2
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2003 2002 2003 2002
---- ---- ---- ----
REVENUES
- --------
Insurance Company Revenues
Premium earned $12,648,631 $9,788,073 $24,073,551 $19,041,046
Premium ceded 3,915,105 1,532,697 7,379,201 3,193,927
--------- --------- ---------- ----------
Net premium earned 8,733,526 8,255,376 16,694,350 15,847,119
Net investment income 1,213,867 1,368,413 2,480,785 2,758,078
Net realized investment (loss) - - - (216)
Other income 23,926 6,400 42,696 8,647
--------- --------- ---------- ----------
Total Insurance Company Revenues 9,971,319 9,630,189 19,217,831 18,613,628
Other Revenues from Insurance Operations
Gross commissions and fees 2,069,423 1,449,013 4,006,932 2,888,000
Investment income 13,077 20,616 26,162 27,187
Finance charges and late fees earned 230,829 219,891 451,007 438,817
Other income 7,368 8,746 6,675 12,816
---------- ---------- ---------- ----------
Total Revenues 12,292,016 11,328,455 23,708,607 21,980,448
---------- ---------- ---------- ----------
EXPENSES
- --------
Losses and loss adjustment expenses 6,995,682 12,496,657 13,675,845 18,826,220
Policy acquisition costs 1,870,052 2,278,819 3,653,943 4,429,110
Salaries and employee benefits 1,286,275 1,051,456 2,479,685 2,038,677
Commissions to agents/brokers 382,315 303,610 784,893 606,219
Other operating expenses 886,095 735,034 1,882,564 1,480,905
---------- ---------- ---------- ----------
Total Expenses 11,420,419 16,865,576 22,476,930 27,381,131
---------- ---------- ---------- ----------
Income (Loss) Before Taxes 871,597 (5,537,121) 1,231,677 (5,400,683)
Income Tax Provision (Benefit) 310,321 (1,874,249) 437,318 (1,843,863)
------- --------- -------- ---------
Net Income (Loss) $561,276 $(3,662,872) $794,359 $(3,556,820)
======= ========= ======== =========
PER SHARE DATA
- --------------
Basic Shares Outstanding 5,489,533 5,488,089 5,489,533 5,485,090
Basic Earnings (Loss) Per Share $0.10 $(0.67) $0.14 $(0.65)
Diluted Shares Outstanding 5,526,420 5,488,089 5,516,691 5,485,090
Diluted Earnings (Loss) Per Share $0.10 $(0.67) $0.14 $(0.65)
See notes to unaudited consolidated financial statements.
3
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2003 2002 2003 2002
---- ---- ---- ----
Net Income (Loss) $561,276 $(3,662,872) $794,359 $(3,556,820)
Other changes in comprehensive income, net of tax:
Unrealized gains on securities classified
as available-for-sale arising during the period 130,254 1,253,350 105,684 464,466
Less: reclassification adjustment for
losses included in net income (loss) - - - 143
------- --------- ------- ---------
Comprehensive Income (Loss) $691,530 $(2,409,522) $900,043 $(3,092,211)
======= ========= ======= =========
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,
2003 2002
---- ----
Cash Flows from Operating Activities:
Net Income (Loss) $794,359 $(3,556,820)
Adjustments to reconcile net income to net cash from operations
Depreciation 44,590 37,397
Bond amortization, net 155,941 190,995
Net realized loss on sale of securities - 216
Changes in assets and liabilities
Premium, notes and investment income receivable (1,414,861) (57,966)
Reinsurance recoverable 5,454,628 (4,700,025)
Prepaid reinsurance premiums 45,615 (12,376)
Deferred policy acquisition costs (814,443) (257,973)
Other assets 667,394 212,890
Reserve for unpaid losses and loss adjustment expenses (1,183,230) 8,917,693
Unearned premium reserve 4,112,222 1,384,992
Funds held as security and advanced premiums (129,104) 402,193
Accrued expenses and other liabilities (2,194,116) (2,039,485)
Income taxes current/deferred (357,561) 110,463
Federal income tax recoverable 609,817 3,439,977
--------- ---------
Net Cash Provided from Operations 5,791,251 4,072,171
--------- ---------
Investing Activities
Purchase of fixed maturity investments (15,134,149) (6,217,820)
Proceeds from maturity of fixed maturity investments 17,140,000 5,105,000
Net (increase) in short-term investments (6,980,749) (2,579,285)
Additions to property and equipment (24,636) (130,575)
--------- ---------
Net Cash (Used) by Investing Activities (4,999,534) (3,822,680)
--------- ---------
Financing Activities
Proceeds from issuance of common stocks - 28,858
Repayment of notes payable - related parties (750,000) -
Dividends paid to shareholders - (274,477)
------- --------
Net Cash (Used) by Financing Activities (750,000) (245,619)
------- -------
Net increase in cash 41,717 3,872
Cash at beginning of period 19,766 45,001
------ ------
Cash at End of Period $61,483 $48,873
====== ======
Supplemental Cash Flow Information Cash paid during the period for:
Interest 24,055 -
Income taxes $185,060 $30,000
See notes to unaudited consolidated financial statements.
5
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
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 accounting principles generally accepted in the United States
of America (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 six months ended June 30, 2003, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. Quarterly financial statements should be read in conjunction
with the consolidated financial statements and related notes in the Company's
2002 Annual Report on Form 10-K as filed with the Securities and Exchange
Commission.
NOTE 2 - INCENTIVE STOCK PLANS
- ------------------------------
The Company's 1999 Omnibus Stock Plan 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.). Shareholders approved the plan on June 4, 1999.
On August 26, 1999, the Company granted 135,000 incentive stock options of which
40,000 were terminated, 95,000 were outstanding, and 85,000 were exercisable as
of June 30, 2003. On December 18, 2002, the Company granted an additional
182,000 incentive stock options under the Company's 1999 Omnibus Stock Plan. All
options expire 10 years from the date of the grant. Options granted as of June
30, 2003, are exercisable as follows:
Grant Date Grant Date
Date Exercisable August 26, 1999 December 18, 2002 Total
- ---------------- --------------- ----------------- -----
Currently Exercisable 85,000 - 85,000
September 1, 2003 10,000 - 10,000
January 1, 2004 - 57,000 57,000
January 1, 2005 - 57,500 57,500
January 1, 2006 - 37,500 37,500
January 1, 2007 - 30,000 30,000
------ ------- -------
Total 95,000 182,000 277,000
====== ======= =======
The Company applies Accounting Principles Board Opinion No. 25 (APB 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's stock-based compensation plan been reflected
in the accompanying consolidated financial statements based on the fair value at
the grant dates for option awards consistent with the method of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), the Company's net income
would have been reduced to the pro forma amounts indicated below:
6
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
NOTE 2 - INCENTIVE STOCK PLANS (continued)
- -----------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss)
As reported $561,276 $(3,662,872) $794,359 $(3,556,820)
Pro forma $548,366 $(3,675,699) $768,539 $(3,582,473)
Income (loss) per share
As reported $0.10 $(0.67) $0.14 $(0.65)
Pro forma $0.10 $(0.67) $0.14 $(0.65)
Income (loss) per share - assuming dilution:
As reported $0.10 $(0.67) $0.14 $(0.65)
Pro forma $0.10 $(0.67) $0.14 $(0.65)
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 and 2002 grants:
2002 1999
Grant Grant
----- -----
Dividend yield 1.40% 2.46%
Expected volatility 34% 43%
Expected lives 10 Years 10 Years
Risk-free interest rates 4.05% 6.09%
Fair value of options granted $1.32 $4.30
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, 2003, the Company did not repurchase or retire any shares of the
Company's common stock. As of June 30, 2003, the Company had repurchased 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 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, 2003 and 2002:
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2003 2002 2003 2002
---- ---- ---- ----
Basic Earnings (Loss) Per Share
- -------------------------------
Net income (loss) numerator $561,276 $(3,662,872) $794,359 $(3,556,820)
======= ========= ======= =========
Weighted average shares outstanding denominator 5,489,533 5,488,089 5,489,533 5,485,090
========= ========= ========= =========
Basic Earnings (Loss) Per Share $0.10 $(0.67) $0.14 $(0.65)
7
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
NOTE 4 - EARNINGS PER SHARE (continued)
- ---------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2003 2002 2003 2002
---- ---- ---- ----
Diluted Earnings (Loss) Per Share
- ---------------------------------
Net income (loss) numerator $561,276 $(3,662,872) $794,359 $(3,556,820)
======= ========= ======= =========
Weighted average shares outstanding 5,489,533 5,488,089 5,489,533 5,485,090
Effect of dilutive securities 36,887 - 27,158 -
--------- --------- --------- ---------
Diluted shares outstanding denominator 5,526,420 5,488,089 5,516,691 5,485,090
========= ========= ========= =========
Diluted Earnings (Loss) Per Share $0.10 $(0.67) $0.14 $(0.65)
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 81% of
consolidated revenues for the three and six months ended June 30, 2003, and 85%
of revenues for the three and six months ended June 30, 2002. The Company's
remaining operations constitute a variety of specialty insurance services, each
with unique characteristics and individually insignificant to consolidated
revenues.
Revenues, income before income taxes, and assets by segment are as follows:
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2003 2002 2003 2002
---- ---- ---- ----
Revenues
- --------
Insurance company operation $9,971,319 $9,630,189 $19,217,831 $18,613,628
-
Other insurance operations 6,750,716 4,837,211 12,212,584 9,474,668
Intersegment elimination (1) (4,430,019) (3,138,945) (7,721,808) (6,107,848)
--------- --------- --------- ---------
Total other insurance operations 2,320,697 1,698,266 4,490,776 3,366,820
--------- --------- --------- ---------
Total Revenues $12,292,016 $11,328,455 $23,708,607 $21,980,448
========== ========== ========== ==========
Income (Loss) Before Income Taxes
- ---------------------------------
Insurance company operation $(464,183) $(5,955,492) $(373,497) $(6,215,880)
Other insurance operations 1,335,780 418,371 1,605,174 815,197
------- --------- --------- ---------
Total Income (Loss) Before Income Taxes $871,597 $(5,537,121) $1,231,677 $(5,400,683)
======= ========== ========= =========
As of June 30
-------------
2003 2002
---- ----
Assets
- ------
Insurance company operation $129,582,467 $117,742,774
Intersegment eliminations (2) (2,874,758) (1,023,652)
----------- -----------
Total insurance company operation 126,707,709 116,719,122
Other insurance operations 22,734,711 17,431,714
------------ -----------
Total Assets $149,442,420 $134,150,836
=========== ===========
(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,
2003, the Company had cash and investments of $107,554,291 (at amortized cost)
of which $103,931,814 (97%) were investments of Crusader.
As of the quarter ended June 30, 2003, the Company had invested $91,487,677 (at
amortized cost) or 85% 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 $91,487,677 (at
amortized cost) include $3,739,571 (4%) of pre-refunded state and municipal
tax-exempt bonds, $8,619,780 (10%) of U.S. treasury securities, $12,000,000
(13%) of U.S. government agency securities, $66,728,326 (73%) of industrial and
miscellaneous securities, and $400,000 of certificates of deposit. The
tax-exempt interest income earned for the three months and the six months ended
June 30, 2003, was $34,878 and $70,182, respectively.
The balance of the Company's investments is in 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 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. The maximum
investment authorized in any one issuer is $2,000,000 and any one U.S.
government agency is $3,000,000. 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 P2 and/or a Standard & Poor's rating of A1.
All of the Company's fixed maturity investment securities are rated and readily
marketable and could be liquidated without any material financial impact.
On November 15, 2002, the Company borrowed $500,000 from Erwin Cheldin, a
director and the Company's principal shareholder, president and chief executive
officer, and $250,000 from The Cary and Danielle Cheldin Family Trust. Cary L.
Cheldin is a director and the Company's executive vice president. In the quarter
ended June 30, 2003, the Company repaid the above-mentioned notes in full.
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 3). No shares were
repurchased in the six months ended June 30, 2003.
Although material capital expenditures may also be funded through borrowings,
the Company believes that its cash and short-term investments as of the date of
this report, net of trust restriction of $1,118,584, statutory deposits of
$2,825,000, other deposits of $752,658, 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.
9
Although premium written by Crusader is earned over the one-year policy term,
statutory accounting principles require that the related policy acquisition cost
be expensed immediately. Under GAAP the policy acquisition costs are deferred
and amortized over the one-year policy term. Therefore, as written premium
increases, Crusader's statutory surplus decreases as a result of the policy
acquisition cost being expensed before the related premium is earned. Crusader's
written premium is expected to continue to increase in the quarter ended
September 30, 2003. In August 2003, an adverse binding arbitration decision on a
1993 claim exceeded Crusader's reinsurance coverage. As a result of this
decision, the Company will incur adverse development on this claim, net of
reinsurance, of approximately $2,000,000 or approximately $1,320,000 net of
taxes. The adverse development on this claim will be recognized in the quarter
ending September 30, 2003. As of June 30, 2003, Crusader's statutory surplus was
$25,729,783. The Company's plan is to maintain Crusader's statutory surplus at a
minimum of $25,000,000. Due to the adverse decision on the 1993 claim and the
decrease in statutory surplus due to the increase in written premium, the
Company anticipates that Crusader's statutory surplus will fall below
$25,000,000. As a result, Unico intends to contribute additional funds to
Crusader by September 30, 2003, both through available cash and borrowed funds,
in order to maintain Crusader's statutory surplus at or above $25,000,000.
State of California Regulatory Proceedings
- ------------------------------------------
On June 27, 2002, Crusader filed a lawsuit against California Insurance
Commissioner Harry Low over a Market Conduct Report that was made public by that
Commissioner. The report, which was adopted by the Commissioner on June 17,
2002, was based on an examination conducted by the California Department of
Insurance around May 10, 2001. Crusader brought an action to correct what it
concluded were inaccuracies in the report. The Insurance Commissioner responded
to Crusader's lawsuit with a demurrer that was overruled by the Los Angeles
Superior Court on September 30, 2002. Thereafter, on October 24, 2002, the
Insurance Commissioner ordered Crusader to appear before the Office of
Administrative Hearing to show cause why the Insurance Commissioner should not
issue an order requiring the Company to pay penalties on the violations alleged
in the report. This matter was resolved prior to the hearing without penalty or
assessment against the Company.
(b) Results of Operations:
- --------------------------
All comparisons made in this discussion are comparing the three months and six
months ended June 30, 2003, to the three months and six months ended June 30,
2002, unless otherwise indicated.
The Company had a net income of $561,276 for the three months ending June 30,
2003, compared to net loss of $3,662,872 for the three months ended June 30,
2002, an increase in net income of $4,224,148. For the six months ended June 30,
2003, the Company had a net income of $794,359 compared to a net loss of
$3,556,820 for the six months ended June 30, 2002, an increase in net income of
$4,351,179. Total revenues increased $963,561 (9%) to $12,292,016 for the three
months and $1,728,159 (8%) to $23,708,607 for the six months ended June 30,
2003, when compared to total revenues of $11,328,455 for the three months and
$21,980,448 for the six months ended June 30, 2002.
In August 2003, an adverse binding arbitration decision on a 1993 claim exceeded
Crusader's reinsurance coverage. As a result of this decision, the Company will
incur adverse development on this claim, net of reinsurance, of approximately
$2,000,000 or approximately $1,320,000 net of taxes. The adverse development on
this claim will be recognized in the quarter ending September 30, 2003, and may
result in the Company incurring a net loss for that quarter.
Premium written, before reinsurance, increased $5,730,368 (55%) to $16,226,076
for the three months and $7,759,735 (38%) to $28,185,773 for the six months
ended June 30, 2003, compared to written premium of $10,495,708 for the three
months and $20,426,038 for the six months ended June 30, 2002. The Company
primarily writes commercial multiple peril business package policies. This line
of business represents approximately 98% of Crusader's total written premium for
the three months and six months ended June 30, 2003.
10
Crusader's written premium by state is as follows:
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
Increase Increase
2003 2002 (Decrease) 2003 2002 (Decrease)
---- ---- -------- ---- ---- --------
California $16,203,703 $9,614,997 $6,588,706 $28,164,372 $18,464,951 $9,699,421
Arizona 19,523 162,322 (142,799) 28,312 399,902 (371,590)
Montana (1,022) 159,283 (160,305) 17,369 281,880 (264,511)
Nevada 15,172 111,611 (96,439) 13,123 120,855 (107,732)
Idaho (320) 17,411 (17,731) 1,591 24,213 (22,622)
Texas 318 14,695 (14,377) 318 28,286 (27,968)
Washington - 93,351 (93,351) (2,894) 184,766 (187,660)
Pennsylvania (690) 100,751 (101,441) (4,371) 276,502 (280,873)
Oregon (4,152) 89,824 (93,976) (11,993) 229,988 (241,981)
Ohio (6,456) 131,463 (137,919) (20,054) 414,695 (434,749)
---------- ---------- --------- ---------- ---------- ---------
Total $16,226,076 $10,495,708 $5,730,368 $28,185,773 $20,426,038 $7,759,735
========== ========== ========= ========== ========== =========
The growth in written premium in the three and six months ended June 30, 2003,
was the result of an increase in written premium in California. The increase in
premium in California is 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. In addition, the
Company has increased rates on some of its California products, is in the
process of filing for rate increases on some of its California products, and is
waiting for regulatory approval of rate increases on some of its products that
have already been filed with California regulatory authorities. The Company
believes that a "hard market" cycle exists in California. Industrywide
underwriting losses, decreases in investment yield, and increases in reinsurance
cost have all contributed to the change from the "soft market" to the "hard
market." The Company is also benefiting from the fact that some of its
competitors have gone out of business and others have recently raised rates or
adopted more restrictive rules. The Company cannot determine how long the
existing market conditions will continue, nor in which direction they might
change.
The Company's average gross written premium per policy issued is as follows:
Six Months
Ended Gross Written Policies Average Gross
June 30 Premium Issued Written Premium
------- ------- ------- ---------------
2003 $28,185,773 10,229 $2,755
2002 $20,426,038 9,113 $2,241
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. As a result of these moratoriums, written premium
outside California was $22,373 in the three months ended June 30, 2003, compared
to written premium of $880,711 in the three months ended June 30, 2002. Written
premium outside California was $21,401 in the six months ended June 30, 2003,
compared to written premium of $1,961,087 in the six months ended June 30, 2002.
The Company has no short-term plan to expand into additional states, nor to
expand its marketing channels. Instead, the Company intends to allocate its
resources toward improving its California business rates, rules, and forms.
PREMIUM EARNED before reinsurance increased $2,860,558 (29%) to $12,648,631 for
the three months and $5,032,505 (26%) to $24,073,551 for the six months ended
June 30, 2003, compared to $9,788,073 for the three months and $19,041,046 for
the six months ended June 30, 2002. 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 $2,382,408 (155%) to $3,915,105 for the three months
ended and $4,185,274 (131%) to $7,379,201 for the six months ended June 30,
2003, compared to ceded premium of $1,532,697 in the three months and $3,193,927
for the six months ended June 30, 2002. 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.
11
The change in premium ceded between the three and six months ended
June 30, 2003, and June 30, 2002, is as follows:
Three Months Ended Six Months Ended
June 30, 2003 June 30,2003
------------- ------------
Increase in premium ceded under current reinsurance contracts $2,325,955 $4,361,905
Increase (decrease) in provisionally rated premium ceded 56,453 (176,631)
--------- ----------
Net increase in premium ceded $2,382,408 $4,185,274
========= =========
The increase in ceded premium is primarily due to rate increases on reinsurance
contracts effective January 1, 2003. The rate increases are primarily due to the
Company's ceded loss experience and to the hardening of the reinsurance
marketplace and to 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 $162,085
(12%) to $1,226,944 for the three months and $278,318 (10%) to $2,506,947 for
the six months ended June 30, 2003, compared to investment income of $1,389,029
for the three months and $2,785,265 for the six months ended June 30, 2002. The
decrease in investment income is primarily due to a lowering of yields on new
and reinvested assets.
At June 30, 2003, the Company held securities with unrealized appreciation of
$4,888,402 and securities with unrealized depreciation of $4,393. The Company
does not deem the unrealized depreciation to be significant or indicative of an
other-than-temporary decline, either individually, or in the aggregate. At
December 31, 2002, the Company held investments with unrealized appreciation of
$4,828,956 and securities with unrealized depreciation of $105,074. The
securities with unrealized depreciation at June 30, 2003, consisted of two fixed
maturity investments with a total par value of $1,515,000 compared to four fixed
maturity investments with a total par value of $4,015,000 as of December 31,
2002. As of both June 30, 2003, and December 31, 2002, only one of the
securities with unrealized depreciation was rated below investment grade.
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 the six months ended June 30, 2003, the Company had no
investments with a decline in market value that was considered other than
temporary. No investments were sold in the six months ended June 30, 2003.
GROSS COMMISSION AND FEE INCOME increased $620,410 (43%) to $2,069,423 for the
three months and $1,118,932 (39%) to $4,006,932 for the six months ended June
30, 2003, compared to commission and fee income of $1,449,013 for the three
months and $2,888,000 for the six months ended June 30, 2002.
The increase in gross commission and fee income for the three and six months
ended June 30, 2003, compared to the three and six months ended June 30, 2002,
are as follows:
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- ------------------------
Increase Increase
2003 2002 (Decrease) 2003 2002 (Decrease)
---- ---- -------- ---- ---- --------
Policy fee income $897,716 $458,645 $439,071 $1,637,797 $887,166 $750,631
Health and life insurance program 864,571 677,105 187,466 1,754,223 1,335,508 418,715
Other commission and fee income 136,490 121,907 14,583 268,823 226,441 42,382
Workers' compensation program 78 8,134 (8,056) 874 9,886 (9,012)
Daily automobile rental insurance program:
Excluding contingent commission 170,568 183,222 (12,654) 345,215 362,052 (16,837)
Contingent commission - - - - 66,947 (66,947)
--------- --------- ------- --------- --------- ---------
Gross commission and fee income $2,069,423 $1,449,013 $620,410 $4,006,932 $2,888,000 $1,118,932
========= ========= ======= ========= ========= =========
12
The increase in policy fee income was primarily due to an increase in the policy
fee from $100 to $165 per policy written in California by Unifax. This increase
was implemented for policies effective on and after the later part of August
2002. The increase in health and life insurance program commission and fee
income is primarily due to an increase in premium written. This increase in
health and life insurance income is primarily due to both increased marketing
efforts and the fact that in November 2002 CIGNA terminated their contract with
another administrator and approximately 2,000 affected members were transitioned
into the Company's health and life insurance program effective January 1, 2003.
Beginning in April 2003, CIGNA discontinued its individual and family health
insurance programs to new policyholders in the state of California. Beginning
November 1, 2003, CIGNA will terminate approximately 200 policyholders a month
through September 1, 2004, and approximately 800 policyholders on October 1,
2004. Beginning April 2003, the Company's membership association and heath and
life insurance subsidiaries began assisting affected policyholders with the
purchase of new health coverage through other insurance carriers. These
subsidiaries have secured both commission and override commission relationships
with other carriers including Health Net and Nationwide (formerly CalFarm) and
are continuing their efforts to diversify and offer a wider variety of products
to its customers. Overall, the commissions/overrides from other carriers are
generally higher than the commission structure paid by CIGNA.
Due to CIGNA's decision, some policyholders have decided to terminate their
policy prior to the date issued by CIGNA. As of June 30, 2003, approximately 450
policyholders have terminated their CIGNA policies. Of this amount, the Company
has placed approximately 175 policyholders with other carriers. The Company
cannot determine the percentage of affected policyholders that will leave
through normal attrition or that will not be accepted by the Company's other
insurance carriers due to preexisting health conditions.
LOSSES AND LOSS ADJUSTMENT EXPENSES were 80% of net premium earned for the three
months and 82% of net premium earned for the six months ended June 30, 2003,
compared to 151% of net premium earned for the three months and 119% of net
premium earned for the six months ended June 30, 2002. The increase in incurred
losses of prior years was approximately $161,000 (adverse development) in the
three months and $656,000 (adverse development) in the six months ended June 30,
2003, compared 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. The adverse development in
the three and six months ended June 30, 2003, was primarily from continued
losses due to the impact of changes in California case law that expanded
coverage and increased loss exposure primarily on construction defect claims for
losses occurring in or prior to the Company's revision of its policy forms in
1995.
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
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.
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 21% of net premium earned for the three months and 22%
of net premium earned for the six months ended June 30, 2003, and 28% of net
earned premium for the three and six months ended June 30, 2002. The decrease in
policy acquisition costs is primarily the result of an increase in the ceding
commission rate paid to Crusader on the reinsurance contract effective January
1, 2003.
13
SALARIES AND EMPLOYEE BENEFITS increased $234,819 (22%) to $1,286,275 for the
three months and $441,008 (22%) to $2,479,685 for the six months ended June 30,
2003, compared to salary and employee benefits of $1,051,456 for the three
months and $2,038,677 for the six months ended June 30, 2002. Factors that
affected the increase include the hiring of higher-level employees, general
salary increases (less than 6%), and increases in employee benefits costs.
COMMISSIONS TO AGENTS/BROKERS increased $78,705 (26%) to $382,315 for the three
months and $178,674 (29%) to $784,893 for the six months ended June 30, 2003,
compared to commission expense of $303,610 for the three months and $606,219 for
the six months ended June 30, 2002. The increase is primarily the result of an
increase in premiums written in the health and life insurance program.
OTHER OPERATING EXPENSES increased $151,061 (21%) to $886,095 for the three
months and $401,659 (27%) to $1,882,564 for the six months ended June 30, 2003,
compared to $735,034 for the three months and $1,480,905 for the six months
ended June 30, 2002. The increase is primarily the result of increased legal
expenses of $103,000 for the three months and $292,000 for the six months ended
June 30, 2003. The increase in legal fees was primarily attributable to
litigation by the Company against a former stock transfer agent for the recovery
of approximately $225,000 in damages and litigation by the Company against
several surplus lines brokers for illegal exportation of insurance. In addition
to the remedies sought by the Company in these matters, the Company is also
seeking recovery of a significant portion of the legal fees incurred in the
litigation. There is no assurance that the Company will be successful in
recovering any damages or legal fees.
INCOME TAX PROVISION was an expense of $310,321 (36% of pre-tax income) for the
three months and $437,318 (36% of pre-tax income) for the six months ended June
30, 2003, compared to an income tax benefit of $1,874,249 in the three months
and an income tax benefit of $1,843,863 for the six months ended June 30, 2002.
This change was primarily due to a pre-tax income of $871,597 (including
tax-exempt investment income of $34,878) in the three months and $1,231,677
(including tax-exempt investment income of $70,182) in the six months ended June
30, 2003, compared to pre-tax loss of $5,537,121 (including tax-exempt
investment income of $95,092) in the three months and a pre-tax loss of
$5,400,683 (including tax-exempt investment income of $191,615) in the six
months ended June 30, 2002.
The effect of inflation on net income of the Company during the three and six
months ended June 30, 2003, and the three and six months ended June 30, 2002,
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 sufficient, premium rate
adequacy relating to competition or regulation, actual versus estimated claim
experience, regulatory changes or developments, unforeseen calamities, general
market conditions, and the Company's ability to introduce new profitable
products.
ITEM 3 - 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 consist of the following:
June December 31 Increase
2003 2002 (Decrease)
---- ---- --------
Fixed maturity bonds (at amortized value) $91,087,677 $93,249,468 $(2,161,791)
Short-term cash investments (at cost) 16,005,131 9,024,382 6,980,749
Certificates of deposit (over 1 year, at cost) 400,000 400,000 -
----------- ----------- ---------
Total invested assets $107,492,808 $102,673,850 $4,818,958
=========== =========== =========
14
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.
ITEM 4 - CONTROLS AND PROCEDURES
- --------------------------------
An evaluation was carried out by the Company's management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
June 30, 2003 (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities
Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the design and operation of these
disclosure controls and procedures were effective.
During the period covered by this report, there have been no changes in the
Company's internal control over financial reporting that have materially
affected or are reasonably likely to materially affect the Company's internal
control over financial reporting.
PART II - OTHER INFORMATION
- ---------------------------
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
- --------------------------------------------------------
(a) On May 30, 2003, 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 stockholders and until
their successors are duly elected and qualified. There were 23,266 broker
non-votes.
Name For Against or Withheld
---- --- -------------------
Erwin Cheldin 4,660,895 302,093
Lester A. Aaron 4,661,027 301,961
Cary L. Cheldin 4,660,995 301,993
George C. Gilpatrick 4,661,027 301,961
David A. Lewis 4,939,330 23,658
Warren D. Orloff 4,939,330 23,658
Donald B. Urfrig 4,939,330 23,619
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 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.
32.2 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.
(b) Reports on Form 8-K:
On May 15, 2003, the Company filed a Form 8-K reporting under Item 9
pursuant to which the Company provided under Item 12 its earnings press
release for the quarter ended March 31, 2003.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNICO AMERICAN CORPORATION
Date: August 14, 2003 By: /s/ ERWIN CHELDIN
-----------------
Erwin Cheldin
Chairman of the Board, President and Chief
Executive Officer, (Principal Executive Officer)
Date: August 14, 2003 By: /s/ LESTER A. AARON
-------------------
Lester A. Aaron
Treasurer, Chief Financial Officer, (Principal
Accounting and Principal Financial Officer)
16
EXHIBIT INDEX
Exhibit No. Description
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
32.1 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)
32.2 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)