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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 September 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 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, 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 November 6, 2003
1
PART 1 - FINANCIAL INFORMATION
------------------------------
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30 December 31
2003 2002
---- ----
ASSETS
- ------
Investments
Available for sale:
Fixed maturities, at market value (amortized cost:
September 30, 2003 $100,851,155; December 31, 2002 $93,649,468) $104,941,002 $98,373,350
Short-term investments, at cost 10,749,654 9,024,382
----------- -----------
Total Investments 115,690,656 107,397,732
Cash 57,918 19,766
Accrued investment income 1,305,967 1,470,333
Premiums and notes receivable, net 8,839,128 6,699,909
Reinsurance recoverable:
Paid losses and loss adjustment expenses 1,576,122 2,805,048
Unpaid losses and loss adjustment expenses 17,497,289 21,308,339
Prepaid reinsurance premiums 83,527 95,304
Deferred policy acquisition costs 7,503,696 5,947,010
Property and equipment (net of accumulated depreciation) 312,287 354,194
Deferred income taxes 719,040 57,951
Income taxes receivable 148,221 1,590,970
Other assets 189,239 940,049
----------- -----------
Total Assets $153,923,090 $148,686,605
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
- -----------
Unpaid losses and loss adjustment expenses $74,063,892 $74,905,284
Unearned premiums 32,203,061 24,381,583
Advance premium and premium deposits 1,498,977 1,607,272
Notes payable-related parties 1,500,000 750,000
Accrued expenses and other liabilities 6,605,836 8,633,476
----------- -----------
Total Liabilities $115,871,766 $110,277,615
----------- -----------
STOCKHOLDERS' EQUITY
- --------------------
Common stock, no par - authorized 10,000,000 shares; issued and outstanding
shares 5,489,533 at September 30, 2003, and 5,489,533 at December 31, 2002 $2,700,272 $2,700,272
Accumulated other comprehensive income 2,699,299 3,117,762
Retained earnings 32,651,753 32,590,956
---------- ----------
Total Stockholders' Equity $38,051,324 $38,408,990
---------- ----------
Total Liabilities and Stockholders' Equity $153,923,090 $148,686,605
=========== ===========
See notes to unaudited consolidated financial statements.
2
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
REVENUES
- --------
Insurance Company Revenues
Premium earned $14,173,992 $10,386,227 $38,247,543 $29,427,273
Premium ceded 4,459,577 1,474,213 11,838,778 4,668,140
--------- --------- ---------- ----------
Net premium earned 9,714,415 8,912,014 26,408,765 24,759,133
Net investment income 1,168,185 1,323,731 3,648,970 4,081,809
Net realized investment (loss) - - - (216)
Other income 27,771 19,098 70,467 27,745
---------- ---------- ---------- ----------
Total Insurance Company Revenues 10,910,371 10,254,843 30,128,202 28,868,471
Other Revenues from Insurance Operations
Gross commissions and fees 2,054,803 1,585,100 6,061,735 4,473,100
Investment income 12,063 15,132 38,225 42,319
Finance charges and late fees earned 247,323 220,547 698,330 659,364
Other income 4,246 4,692 10,921 17,508
---------- ---------- ---------- ----------
Total Revenues 13,228,806 12,080,314 36,937,413 34,060,762
---------- ---------- ---------- ----------
EXPENSES
- --------
Losses and loss adjustment expenses 9,710,516 7,208,018 23,386,361 26,034,238
Policy acquisition costs 2,132,412 2,364,701 5,786,355 6,793,811
Salaries and employee benefits 1,289,615 1,198,074 3,769,300 3,236,751
Commissions to agents/brokers 374,531 298,838 1,159,424 905,057
Other operating expenses 746,186 731,784 2,628,750 2,212,689
---------- ---------- ---------- ----------
Total Expenses 14,253,260 11,801,415 36,730,190 39,182,546
---------- ---------- ---------- ----------
Income (Loss) Before Taxes (1,024,454) 278,899 207,223 (5,121,784)
Income Tax Provision (Benefit) (290,892) 132,554 146,426 (1,711,309)
------- ------- ------- ---------
Net Income (Loss) $(733,562) $146,345 $60,797 $(3,410,475)
======= ======= ====== =========
PER SHARE DATA
- --------------
Basic Shares Outstanding 5,489,533 5,489,533 5,489,533 5,486,571
Basic Earnings (Loss) Per Share $(0.13) $0.03 $0.01 $(0.62)
Diluted Shares Outstanding 5,489,533 5,489,533 5,523,397 5,486,571
Diluted Earnings (Loss) Per Share $(0.13) $0.03 $0.01 $(0.62)
See notes to unaudited consolidated financial statements.
3
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
Net Income (Loss) $(733,562) $146,345 $60,797 $(3,410,475)
Other changes in comprehensive income, net of tax:
Unrealized gains (losses) on securities classified
as available-for-sale arising during the period (524,147) 797,952 (418,463) 1,262,418
Less: reclassification adjustment for
losses included in net income - - - 143
--------- ------- ------- ---------
Comprehensive Income (Loss) $(1,257,709) $944,297 $(357,666) $(2,147,914)
========= ======= ======= =========
See notes to unaudited consolidated financial statements.
4
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
---- ----
Cash Flows from Operating Activities:
Net Income (Loss) $60,797 $(3,410,475)
Adjustments to reconcile net income to net cash from operations
Depreciation 66,543 64,332
Bond amortization, net 239,228 290,656
Net realized loss on sale of securities - 216
Changes in assets and liabilities
Premium, notes and investment income receivable (1,974,853) (284,789)
Reinsurance recoverable 5,039,976 (5,298,006)
Prepaid reinsurance premiums 11,777 (2,382)
Deferred policy acquisition costs (1,556,686) (585,182)
Other assets 750,810 (436,394)
Reserve for unpaid losses and loss adjustment expenses (841,392) 8,489,276
Unearned premium reserve 7,821,478 3,583,518
Funds held as security and advanced premiums (108,295) 528,073
Accrued expenses and other liabilities (2,027,640) (2,007,925)
Income taxes current/deferred (445,517) 82,638
Federal income tax recoverable 1,442,749 3,554,350
--------- ---------
Net Cash Provided from Operations 8,478,975 4,567,906
--------- ---------
Investing Activities
Purchase of fixed maturity investments (34,261,666) (10,302,696)
Proceeds from maturity of fixed maturity investments 26,815,000 12,846,100
Net (increase) in short-term investments (1,719,521) (6,702,163)
Additions to property and equipment (24,636) (149,797)
--------- ---------
Net Cash (Used) by Investing Activities (9,190,823) (4,308,556)
--------- ---------
Financing Activities
Proceeds from issuance of common stocks - 28,858
Proceeds from notes payable - related parties 1,500,000 -
Repayment of notes payable - related parties (750,000) -
Dividends paid to shareholders - (274,477)
------- -------
Net Cash Provided (Used) by Financing Activities 750,000 (245,619)
------- -------
Net increase in cash 38,152 13,731
Cash at beginning of period 19,766 45,001
------ ------
Cash at End of Period $57,918 $58,732
====== ======
Supplemental Cash Flow Information Cash paid during the period for:
Interest 24,058 -
Income taxes $245,520 $75,636
See notes to unaudited consolidated financial statements.
5
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine months ended September 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 95,000 were exercisable as
of September 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
September 30, 2003, are exercisable as follows:
Grant Date Grant Date
Date Exercisable August 26, 1999 December 18, 2002 Total
- ---------------- --------------- ----------------- -----
Currently Exercisable 95,000 - 95,000
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 in the following
table:
6
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
NOTE 2 - INCENTIVE STOCK PLANS (continued)
- -----------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss)
As reported $(733,562) $146,345 $60,797 $(3,410,475)
Pro forma $(746,472) $133,518 $22,068 $(3,448,955)
Income (loss) per share
As reported $(0.13) $0.03 $0.01 $(0.62)
Pro forma $(0.14) $0.02 $0.00 $(0.63)
Income (loss) per share - assuming dilution:
As reported $(0.13) $0.03 $0.01 $(0.62)
Pro forma $(0.14) $0.02 $0.00 $(0.63)
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 nine months ended
September 30, 2003, the Company did not repurchase or retire any shares of the
Company's common stock. As of September 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 nine months ended September 30, 2003 and 2002:
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2003 2002 2002 2003
---- ---- ---- ----
Basic Earnings (Loss) Per Share
Net income (loss) numerator $(733,562) $146,345 $60,797 $(3,410,475)
======= ======= ====== =========
Weighted average shares outstanding denominator 5,489,533 5,489,533 5,489,533 5,486,571
========= ========= ========= =========
Basic Earnings (Loss) Per Share $(0.13) $0.03 $0.01 $(0.62)
7
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
NOTE 4 - EARNINGS PER SHARE (continued)
- --------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2003 2002 2002 2003
---- ---- ---- ----
Diluted Earnings (Loss) Per Share
Net income (loss) numerator $(733,562) $146,345 $60,797 $(3,410,475)
======= ======= ====== =========
Weighted average shares outstanding 5,489,533 5,489,533 5,489,533 5,486,571
Effect of diluted securities* - - 33,864 -
--------- --------- --------- ---------
Diluted shares outstanding denominator 5,489,533 5,489,533 5,523,397 5,486,571
========= ========= ========= =========
Diluted Earnings (Loss) Per Share $(0.13) $0.03 $0.01 $(0.62)
*In loss periods options are excluded from the calculation of diluted EPS, as
the inclusion of such options would have an antidilutive effect. Therefore, all
options were excluded from the calculation of diluted EPS for the three months
ended September 30, 2003, and for the nine months ended September 30, 2002.
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 nine months ended September 30, 2003,
and 85% of revenues for the three and nine months ended September 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 Nine Months Ended
September 30 September 30
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues
Insurance company operation $10,910,371 $10,254,843 $30,128,202 $28,868,471
Other insurance operations 7,226,921 5,502,237 19,439,505 14,976,905
Intersegment elimination (1) (4,908,486) (3,676,766) (12,630,294) (9,784,614)
--------- --------- ---------- ---------
Total other insurance operations 2,318,435 1,825,471 6,809,211 5,192,291
--------- --------- --------- ---------
Total Revenues $13,228,806 $12,080,314 $36,937,413 $34,060,762
========== ========== ========== ==========
Income (Loss) Before Income Taxes
Insurance company operation $(2,640,464) $(583,000) $(3,013,961) $(6,798,880)
Other insurance operations 1,616,010 861,899 3,221,184 1,677,096
---------- -------- --------- ---------
Total Income (Loss) Before Income Taxes $(1,024,454) $278,899 $207,223 $(5,121,784)
========= ======= ======= =========
8
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
NOTE 5 - SEGMENT REPORTING (continued)
- -------------------------------------
As of September 30
------------------
2003 2002
---- ----
Assets
Insurance company operation $130,582,167 $119,108,739
Intersegment eliminations (2) (3,164,423) (1,449,894)
----------- -----------
Total insurance company operation 127,417,744 117,658,845
Other insurance operations 26,505,346 19,540,634
----------- -----------
Total Assets $153,923,090 $137,199,479
=========== ===========
(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.
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 September
30, 2003, the Company had cash and investments of $111,658,727 (at amortized
cost) of which $108,990,197 (98%) were cash and investments of Crusader.
As of the quarter ended September 30, 2003, the Company had invested
$100,851,155 (at amortized cost) or 90% 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 $100,851,155 (at
amortized cost) include $2,705,301 (3%) of pre-refunded state and municipal
tax-exempt bonds, $23,338,784 (23%) of U.S. treasury securities, $12,000,000
(12%) of U.S. government agency securities, $62,307,070 (62%) of industrial and
miscellaneous securities, and $500,000 of certificates of deposit. The
tax-exempt interest income earned for the three months and the nine months ended
September 30, 2003, was $25,775 and $95,957, respectively.
The balance of the Company's investments is in short-term investments that
include bank money market accounts, certificates of deposit, commercial paper, a
U.S. Treasury bill, 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
9
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 adverse financial impact.
On September 30, 2003, Unico made a capital contribution of $2,500,000 to its
Crusader subsidiary. This contribution was made to ensure that Crusader's
capital remained above $25,000,000. Without this capital contribution,
Crusader's statutory surplus was expected to decrease below $25,000,000 due to
the following:
1. 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.
2. 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 incurred adverse development on this claim, net of
reinsurance, of approximately $2,000,000 or approximately $1,320,000
net of taxes.
The funding of Unico's capital contribution to Crusader was derived from
available cash from the Company's other operations and the proceeds of two
notes. On September 29, 2003, the Company borrowed $1,000,000 from Erwin
Cheldin, a director and the Company's principal shareholder, president and chief
executive officer, and $500,000 from The Cary and Danielle Cheldin Family Trust.
Cary L. Cheldin is a director and the Company's executive vice president. The
notes are due and payable upon demand of lender (on no less than fourteen days'
notice) and, if no demand is made, then the notes are payable in full on
September 28, 2007. The notes may be prepaid at any time without penalty. The
notes are unsecured and bear interest as follows: Interest on the $1,000,000
note is 5% and is adjustable on April 1, 2004, and every third month thereafter
by adding a margin of one percentage point to the prime rate; Interest on the
$500,000 note is 7% per annum. Interest is payable monthly on both notes.
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 nine months ended September 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 $1,009,323, 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.
(b) Results of Operations:
- --------------------------
All comparisons made in this discussion are comparing the three months and nine
months ended September 30, 2003, to the three months and nine months ended
September 30, 2002, unless otherwise indicated.
The Company had a net loss of $733,562 for the three months ending September 30,
2003, compared to net income of $146,345 for the three months ended September
30, 2002, a decrease in net income of $879,907. For the nine months ended
September 30, 2003, the Company had a net income of $60,797 compared to a net
loss of $3,410,475 for the nine months ended September 30, 2002, an increase in
net income of $3,471,272. Total revenues increased $1,148,492 (10%) to
$13,228,806 for the three months and $2,876,651 (8%) to $36,937,413 for the nine
months ended September 30, 2003, when compared to total revenues of $12,080,314
for the three months and $34,060,762 for the nine months ended September 30,
2002.
Premium written, before reinsurance, increased $5,298,493 (42%) to $17,883,248
for the three months and $13,058,228 (40%) to $46,069,021 for the nine months
ended September 30, 2003, compared to written premium of $12,584,755 for the
three months and $33,010,793 for the nine months ended September 30, 2002. 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 nine months ended September 30, 2003.
10
Crusader's written premium by state is as follows:
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
Increase Increase
2003 2002 (Decrease) 2003 2002 (Decrease)
---- ---- -------- ---- ---- --------
California $17,886,425 $11,612,841 $6,273,584 $46,050,797 $30,077,792 $15,973,005
Arizona (2,053) 166,290 (168,343) 26,259 566,192 (539,933)
Montana - 111,992 (111,992) 17,369 393,872 (376,503)
Nevada (835) 84,307 (85,142) 12,288 205,162 (192,874)
Idaho - 12,282 (12,282) 1,591 36,495 (34,904)
Texas - (1,451) 1,451 318 26,835 (26,517)
Washington - 119,225 (119,225) (2,894) 303,991 (306,885)
Pennsylvania - 100,935 (100,935) (4,371) 377,437 (381,808)
Oregon - 119,677 (119,677) (11,993) 349,665 (361,658)
Ohio (289) 258,657 (258,946) (20,343) 673,352 (693,695)
---------- ---------- --------- ---------- ---------- ----------
Total $17,883,248 $12,584,755 $5,298,493 $46,069,021 $33,010,793 $13,058,228
========== ========== ========= ========== ========== ==========
The growth in written premium in the three and nine months ended September 30,
2003, was due to an increase in written premium in California. This increase in
California written premium 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. Industry-wide
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:
Nine Months Ended Gross Written Policies Average Gross
September 30 Premium Issued Written Premium
------------ ------- ------ ---------------
2003 $46,069,021 15,964 $2,886
2002 $33,010,793 13,997 $2,358
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 ($3,177) in the three months ended September 30, 2003,
compared to written premium of $971,914 in the three months ended September 30,
2002. Written premium outside of California was $18,224 in the nine months ended
September 30, 2003, compared to written premium of $2,933,001 in the nine months
ended September 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 $3,787,765 (36%) to $14,173,992 for
the three months and $8,820,270 (30%) to $38,247,543 for the nine months ended
September 30, 2003, compared to $10,386,227 for the three months and $29,427,273
for the nine months ended September 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. Average premium earned per policy increased to
$2,954 for the nine months ended September 30, 2003 compared to $2,465 for the
nine months ended September 30, 2002.
11
Premium ceded increased $2,985,364 (203%) to $4,459,577 for the three months
ended and $7,170,638 (154%) to $11,838,778 for the nine months ended September
30, 2003, compared to ceded premium of $1,474,213 in the three months and
$4,668,140 for the nine months ended September 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.
The change in premium ceded between the three and nine months ended September
30, 2003, and September 30, 2002, is as follows:
Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2003
------------------ ------------------
Increase in premium ceded under current reinsurance contracts $2,725,823 $7,087,728
Increase in provisionally rated premium ceded 259,541 82,910
---------- ---------
Net increase in premium ceded $2,985,364 $7,170,638
========= =========
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 or losses, decreased
$158,615 (12%) to $1,180,248 for the three months and $436,933 (11%) to
$3,687,195 for the nine months ended September 30, 2003, compared to investment
income of $1,338,863 for the three months and $4,124,128 for the nine months
ended September 30, 2002. The decrease in investment income is primarily due to
lower yields on new and reinvested assets resulting from current market
conditions. In addition, as a result of lower yields, the Company has shortened
its maturity on new and reinvested fixed maturity bonds. The weighted average
maturity of the Company's fixed maturity bonds is 1.9 years at September 30,
2003, compared to 2.3 years as of December 31, 2002.
At September 30, 2003, the Company held securities with unrealized appreciation
of $4,106,672 and securities with unrealized depreciation of $16,825. 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 September 30, 2003,
consisted of six fixed maturity investments with a total par value of $8,490,000
of which $3,100,000 was invested in U.S. Treasury notes and $3,000,000 was
invested in U.S. government agency securities, compared to four fixed maturity
investments with a total par value of $4,015,000 as of December 31, 2002. Only
one of the securities with unrealized depreciation was rated below investment
grade as of both September 30, 2003, and December 31, 2002.
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 nine months ended September 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 nine months ended September 30, 2003.
GROSS COMMISSION AND FEE INCOME increased $469,703 (30%) to $2,054,803 for the
three months and $1,588,635 (36%) to $6,061,735 for the nine months ended
September 30, 2003, compared to commission and fee income of $1,585,100 for the
three months and $4,473,100 for the nine months ended September 30, 2002.
12
The increase in gross commission and fee income for the three and nine months
ended September 30, 2003, compared to the three and nine months ended September
30, 2002, are as follows:
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
Increase Increase
2003 2002 (Decrease) 2003 2002 (Decrease)
---- ---- -------- ---- ---- --------
Policy fee income $917,466 $600,128 $317,338 $2,555,265 $1,487,294 $1,067,971
Health and life insurance program 957,422 794,157 163,265 2,964,294 2,334,335 629,959
Other commission and fee income 5,960 5,926 34 22,133 27,697 (5,564)
Workers' compensation program 98 967 (869) 971 10,853 (9,882)
Daily automobile rental insurance program:
Excluding contingent commission 173,857 183,922 (10,065) 519,072 545,974 (26,902)
Contingent commission - - - - 66,947 (66,947)
--------- --------- ------- --------- --------- ---------
Gross commission and fee income $2,054,803 $1,585,100 $469,703 $6,061,735 $4,473,100 $1,588,635
========= ========= ======= ========= ========= =========
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 September 30, 2003,
approximately 1,150 policyholders have terminated their CIGNA policies. Of this
amount, the Company has placed approximately 450 policyholders with other
carriers. The Company cannot determine the percentage of affected policyholders
who will leave through normal attrition or who will not be accepted by the
Company's other insurance carriers due to preexisting health conditions.
LOSSES AND LOSS ADJUSTMENT EXPENSES were 100% of net premium earned for the
three months and 89% of net premium earned for the nine months ended September
30, 2003, compared to 81% of net premium earned for the three months and 105% of
net premium earned for the nine months ended September 30, 2002. The increase in
incurred losses of prior years was approximately $2,116,000 (adverse
development) in the three months and $2,772,000 (adverse development) in the
nine months ended September 30, 2003, compared to an increase in incurred losses
of prior years of approximately $804,000 (adverse development) in the three
months and $7,137,000 (adverse development) in the nine months ended September
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 incurred adverse development on this claim, net of reinsurance, of
approximately $2,000,000. The adverse development in the three and nine months
ended September 30, 2003, was primarily due to the aforementioned and 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.
13
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 22% of net premium earned for the three and nine months
ended September 30, 2003, and 27% of net earned premium for the three and nine
months ended September 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.
SALARIES AND EMPLOYEE BENEFITS increased $91,541 (8%) to $1,289,615 for the
three months and $532,549 (17%) to $3,769,300 for the nine months ended
September 30, 2003, compared to salary and employee benefits of $1,198,074 for
the three months and $3,236,751 for the nine months ended September 30, 2002.
Factors that affected the increase include the hiring of higher-level employees,
general salary increases (less than 6%), increases in employee benefits costs,
and the composition of employees whose salaries and employee benefits are
capitalized to policy acquisition cost versus those being directly expensed.
COMMISSIONS TO AGENTS/BROKERS increased $75,693 (25%) to $374,531 for the three
months and $254,367 (28%) to $1,159,424 for the nine months ended September 30,
2003, compared to commission expense of $298,838 for the three months and
$905,057 for the nine months ended September 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 $14,402 (2%) to $746,186 for the three months
and $416,061 (19%) to $2,628,750 for the nine months ended September 30, 2003,
compared to $731,784 for the three months and $2,212,689 for the nine months
ended September 30, 2002. The increase for the nine months ended September 30,
2003 is primarily the result of increased legal expenses of $276,000. 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 a benefit of $290,892 for the three months and an
expense of $146,426 for the nine months ended September 30, 2003, compared to an
income tax expense of $132,554 in the three months and an income tax benefit of
$1,711,309 for the nine months ended September 30, 2002. The effective federal
and state combined income tax rates for the three months and nine months ended
September 30, 2003 were 28% and 71%, respectively compared to 47% and 33% for
the three and nine months ended September 20, 2002, respectively.
This change was primarily due to a pre-tax loss of $1,024,454 (including
tax-exempt investment income of $25,775) in the three months and a pre-tax
income of $207,223 (including tax-exempt investment income of $95,957) in the
nine months ended September 30, 2003, compared to pre-tax income of $278,899
(including tax-exempt investment income of $52,381) in the three months and a
pre-tax loss of $5,121,784 (including tax-exempt investment income of $243,996)
in the nine months ended September 30, 2002.
14
The combined effective income tax rates differ for the three and nine months
ended September 30, 2003, primarily due to Crusader's income (loss) not being
subject to state income tax. Crusader pays premium tax in lieu of state income
tax; and, therefore, the Company does not receive any state income tax benefit
from Crusader's loss for the three and nine months ended September 30, 2003.
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:
September 30 December 31
2003 2002 Increase
---- ---- --------
Fixed maturity bonds (at amortized value) $100,351,155 $93,249,468 $7,101,687
Short-term cash investments (at cost) 10,749,654 9,024,382 1,725,272
Certificates of deposit (over 1 year, at cost) 500,000 400,000 100,000
----------- ----------- ---------
Total invested assets $111,600,809 $102,673,850 $8,926,959
=========== =========== =========
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
September 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.
15
PART II - OTHER INFORMATION
- ---------------------------
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 August 14, 2003, the Company filed a Form 8-K providing under Item 12
its earnings press release for the quarter ended June 30, 2003.
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: November 7, 2003 By: /s/ ERWIN CHELDIN
-----------------
Erwin Cheldin
Chairman of the Board, President and Chief
Executive Officer, (Principal Executive Officer)
Date: November 7, 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)