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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 March 31, 2004 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
--- ---
5,489,815
Number of shares of common stock outstanding as of May 10, 2004
1
PART 1 - FINANCIAL INFORMATION
------------------------------
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31 December 31
2004 2003
---- ----
ASSETS
- ------
Investments
Available for sale:
Fixed maturities, at market value (amortized cost: March 31,
2004 $115,760,743; December 31, 2003 $111,325,592) $119,173,214 $114,524,046
Short-term investments, at cost 3,915,187 7,229,315
----------- -----------
Total Investments 123,088,401 121,753,361
Cash 44,490 37,988
Accrued investment income 1,178,384 1,251,126
Premiums and notes receivable, net 8,576,981 8,290,169
Reinsurance recoverable:
Paid losses and loss adjustment expenses 1,451,401 622,964
Unpaid losses and loss adjustment expenses 21,148,927 19,255,229
Prepaid reinsurance premiums 70,648 81,872
Deferred policy acquisition costs 8,012,388 8,054,363
Property and equipment (net of accumulated depreciation) 330,241 323,090
Deferred income taxes 471,037 975,701
Other assets 300,995 847,832
----------- -----------
Total Assets $164,673,893 $161,493,695
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
- -----------
Unpaid losses and loss adjustment expenses $81,436,518 $78,139,090
Unearned premiums 34,350,273 34,675,180
Advance premium and premium deposits 1,057,076 1,118,618
Income taxes payable 498,210 614,662
Notes payable-related parties 1,500,000 1,500,000
Accrued expenses and other liabilities 5,961,710 6,975,288
----------- -----------
Total Liabilities $124,803,787 $123,022,838
----------- -----------
STOCKHOLDERS' EQUITY
- --------------------
Common stock, no par - authorized 10,000,000 shares; issued
and outstanding shares 5,489,815 at March 31, 2004, and
5,489,815 at December 31, 2003 $2,700,272 $2,700,272
Accumulated other comprehensive income 2,252,231 2,110,979
Retained earnings 34,917,603 33,659,606
---------- ----------
Total Stockholders' Equity $39,870,106 $38,470,857
---------- ----------
Total Liabilities and Stockholders' Equity $164,673,893 $161,493,695
=========== ===========
See notes to unaudited consolidated financial statements.
2
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31
--------
2004 2003
---- ----
REVENUES
- --------
Insurance Company Revenues
Premium earned $16,474,958 $11,424,920
Premium ceded 3,888,639 3,464,096
---------- ---------
Net premium earned 12,586,319 7,960,824
Net investment income 1,091,591 1,266,918
Other income 30,291 18,770
---------- ---------
Total Insurance Company Revenues 13,708,201 9,246,512
Other Revenues from Insurance Operations
Gross commissions and fees 1,710,597 1,937,509
Investment income 9,827 13,085
Finance charges and fees earned 246,965 220,178
Other income 4,601 (693)
---------- ----------
Total Revenues 15,680,191 11,416,591
---------- ----------
EXPENSES
- --------
Losses and loss adjustment expenses 8,956,987 6,680,163
Policy acquisition costs 2,478,410 1,783,891
Salaries and employee benefits 1,216,119 1,193,410
Commissions to agents/brokers 271,123 402,578
Other operating expenses 789,108 996,469
---------- ----------
Total Expenses 13,711,747 11,056,511
---------- ----------
Income Before Taxes 1,968,444 360,080
Income Tax Provision 710,447 126,997
--------- -------
Net Income $1,257,997 $233,083
========= =======
PER SHARE DATA
- --------------
Basic Shares Outstanding 5,489,815 5,489,533
Basic Earnings Per Share $0.23 $0.04
Diluted Shares Outstanding 5,577,686 5,506,962
Diluted Earnings Per Share $0.23 $0.04
See notes to unaudited consolidated financial statements.
3
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended
March 31
--------
2004 2003
---- ----
Net Income $1,257,997 $233,083
Other changes in comprehensive income, net of tax:
Unrealized gains (losses) on securities classified
as available-for-sale arising during the period 141,252 (24,570)
--------- --------
Comprehensive Income $1,399,249 $208,513
========= =======
See notes to unaudited consolidated financial statements.
4
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
2004 2003
---- ----
Cash Flows from Operating Activities:
Net Income $1,257,997 $233,083
Adjustments to reconcile net income to net cash from operations
Depreciation 23,139 20,986
Bond amortization, net 81,500 80,076
Changes in assets and liabilities
Premium, notes and investment income receivable (214,070) (232,969)
Reinsurance recoverable (2,722,135) 2,394,940
Prepaid reinsurance premiums 11,224 22,501
Deferred policy acquisitions costs 41,975 (122,663)
Other assets 546,837 310,386
Reserve for unpaid losses and loss adjustment expenses 3,297,428 (1,137,065)
Unearned premium reserve (324,907) 534,777
Funds held as security and advanced premiums (61,542) 64,052
Accrued expenses and other liabilities (1,013,578) 2,250,898
Income taxes current/deferred 315,446 219,000
Federal income tax recoverable - (92,065)
---------- ----------
Net Cash Provided from Operations 1,239,314 4,545,937
--------- ---------
Investing Activities
Purchase of fixed maturity investments (20,987,800) (7,117,250)
Proceeds from maturity of fixed maturity investments 16,470,000 9,640,000
Net (increase) decrease in short-term investments 3,315,278 (7,029,371)
Additions to property and equipment (30,290) (12,346)
--------- ---------
Net Cash (Used) by Investing Activities (1,232,812) (4,518,967)
--------- ---------
Net increase in cash 6,502 26,970
Cash at beginning of period 37,988 19,766
------ ------
Cash at end of Period $44,490 $46,736
====== ======
Supplemental Cash Flow Information Cash paid during the period for:
Interest $14,087 $9,699
Income taxes $395,000 $636
See notes to unaudited consolidated financial statements.
5
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
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 through its other subsidiaries provides claim administration
services (through December 31, 2003), insurance premium financing, and
membership association services. 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 three months ended March 31, 2004, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. Quarterly financial statements should be read in conjunction
with the consolidated financial statements and related notes in the Company's
2003 Annual Report on Form 10-K as filed with the Securities and Exchange
Commission.
NOTE 2 - OMNIBUS STOCK PLAN
- ---------------------------
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 March 31, 2004. On December 18, 2002, the Company granted an additional
182,000 incentive stock options under the Company's 1999 Omnibus Stock Plan. All
of these options were outstanding and 57,000 were exercisable as of March 31,
2004. These options expire 10 years from the date of the grant. Options granted
as of March 31, 2004, are exercisable as follows:
Grant Date Grant Date
Date Exercisable August 26, 1999 December 18, 2002 Total
- ---------------- --------------- ----------------- -----
Currently Exercisable 95,000 57,000 152,000
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
MARCH 31, 2004
NOTE 2 - OMNIBUS STOCK PLAN (continued)
- -----------------------------------------
Three Months Ended
March 31
--------
2004 2003
---- ----
Net income
As reported $1,257,997 $233,083
Pro forma $1,246,601 $220,173
Income per share
As reported $0.23 $0.04
Pro forma $0.23 $0.04
Income per share - assuming dilution:
As reported $0.23 $0.04
Pro forma $0.22 $0.04
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 three months ended
March 31, 2003, the Company did not repurchase any shares of the Company's
common stock. As of March 31, 2004, the Company had purchased and retired under
the Board of Directors' authorization an aggregate of 868,958 shares of its
common stock at a cost of $5,517,465.
NOTE 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 months ended March 31, 2004 and 2003:
Three Months Ended
March 31
--------
2004 2003
---- ----
Basic Earnings Per Share
- ------------------------
Net income numerator $1,257,997 $233,083
========= =======
Weighted average shares outstanding denominator 5,489,815 5,489,533
========= =========
Basic Earnings Per Share $0.23 $0.04
7
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 4 - EARNINGS PER SHARE (continued)
- --------------------------------------
Three Months Ended
March 31
--------
2004 2003
---- ----
Diluted Earnings Per Share
- --------------------------
Net income numerator $1,257,997 $233,083
========= =======
Weighted average shares outstanding 5,489,815 5,489,533
Effect of diluted securities 87,871 17,429
--------- ---------
Diluted shares outstanding denominator 5,577,686 5,506,962
========= =========
Diluted Earnings Per Share $0.23 $0.04
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 87% of
consolidated revenues for the three months ended March 31, 2004, and 81% of
revenues for the three months ended March 31, 2003. 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
March 31
2004 2003
---- ----
Revenues
- --------
Insurance company operation $13,708,201 $9,246,512
Other insurance operations 6,404,849 5,461,868
Intersegment elimination (1) (4,432,859) (3,291,789)
--------- ---------
Total other insurance operations 1,971,990 2,170,079
---------- ----------
Total Revenues $15,680,191 $11,416,591
========== ==========
Income Before Income Taxes
- --------------------------
Insurance company operation $1,330,058 $90,687
Other insurance operations 638,386 269,393
---------- --------
Total Income (Loss) Before Income Taxes $1,968,444 $360,080
========= =======
As of March 31
2004 2003
---- ----
Assets
- ------
Insurance company operation $143,961,736 $132,362,561
Intersegment eliminations (2) (3,129,884) (1,877,859)
----------- -----------
Total insurance company operation 140,831,852 130,484,702
Other insurance operations 23,842,041 20,271,469
---------- ----------
Total Assets $164,673,893 $150,756,171
=========== ===========
(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
---------------------
OVERVIEW
- --------
General
- -------
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 through its other subsidiaries provides nsurance premium
financing, and membership association services.
The Company had a net income of $1,257,997 for the three months ending March 31,
2004, compared to net income of $233,083 for the three months ended March 31,
2003, an increase in net income of $1,024,914.
This overview discusses some of the relevant factors that management considers
in evaluating the Company's performance, prospects and risks. It is not
all-inclusive and is meant to be read in conjunction with the entirety of the
management discussion and analysis, the Company's financial statements and notes
thereto and all other items contained within the report on this Form 10-Q.
Revenue and Income Generation
- -----------------------------
The Company receives its revenue primarily from earned premium derived from the
insurance company operations, commission and fee income generated from the
insurance agency operations, finance charges and fee income from the premium
finance operations, and investment income from cash generated primarily from the
insurance operation. The insurance company operation generates approximately 87%
of the Company's total revenue. The Company's remaining operations constitute a
variety of specialty insurance services, each with unique characteristics and
individually not material to consolidated revenues.
Insurance Company Operation
- ---------------------------
The property and casualty insurance industry is highly competitive and includes
many insurers, ranging from large companies offering a wide variety of products
worldwide to smaller, specialized companies in a single state or region offering
only a single product. Many of the Company's existing or potential competitors
have considerably greater financial and other resources, have a higher rating
assigned by independent rating organizations such as A.M. Best Company, have
greater experience in the insurance industry and offer a broader line of
insurance products than the Company. Currently, Crusader is writing primarily
Commercial Multiple Peril business only in the state of California and is rated
B+ (Very Good) by A.M. Best Company.
The primary challenge of the property and casualty insurance company operation
is the fact that the Company sells its products before the ultimate costs are
actually known. When pricing its products, the Company projects the ultimate
claim and loss adjustment cost that it anticipates will be incurred after the
policy is sold. In addition, factors such as changes in, among other things,
regulations, changes in the legal environment, and inflation can all impact the
ultimate cost.
Over the past two years, the insurance industry has seen some difficult times as
a result of September 11, industry-wide underwriting losses, decreases in
investment yield, and increases in reinsurance cost that have all contributed to
the change from a "soft market" to a "hard market. The Company believes that a
"hard market" cycle currently exists in the insurance marketplace. The Company
has experienced beneficial market changes in its primary line of business and is
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.
Although the Company has increased its rates and adopted more restrictive
underwriting guidelines, the beneficial market changes have contributed to a 35%
increase in direct written premiums in the three months ended March 31, 2004,
compared to the three months ended March 31, 2003. The Company cannot determine
how long the existing market conditions will continue, nor in which direction
they might change. The Company's future writings and growth are dependent on,
among other things, market conditions, competition, and the Company's ability to
introduce new and profitable products.
9
The Company believes that rate adequacy is more important than premium growth
and underwriting profit is the Company's primary goal. Management's assessment
of trends and underwriting results is a primary factor in its decisions to
expand or contract its business. 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 2002 the Company began placing
moratoriums on non-California business on a state-by-state basis. By July 2003,
the Company had placed moratoriums on all non-California business. The Company
has no short-term plan to expand into additional states or to expand its
marketing channels. Instead, the Company intends to allocate its resources
toward improving its California business rates, rules, and forms.
Other Operations
- ----------------
The Company's other operations generate commissions, fees, and finance charges
from various insurance products. The events that have the most significant
economic impact on other operations are as follows:
Unifax primarily sells and services insurance policies for Crusader. The
commissions paid by Crusader to Unifax are eliminated as intercompany
transactions and are not reflected as income in the financial statements. As a
result of the increase in policies sold by Unifax, policy fee income increased
14% in the three months ended March 31, 2004, compared to the three months ended
March 31, 2003.
American Insurance Brokers, Inc. (AIB), a wholly owned subsidiary of the
Company, sells and services health insurance policies for individual/family and
small business groups primarily for CIGNA HealthCare and receives commission and
fee income based on the premiums that it writes. Commission and fee income in
this program decreased 29% in the three months ended March 31, 2004, compared to
the three months ended March 31, 2003. This decrease has been a result of CIGNA
HealthCare discontinuing its individual/family health insurance program over the
period from November 1, 2003 through October 1, 2004. AIB has been assisting
existing CIGNA policyholders to find health coverage with other insurance
carriers that AIB represents. The Company is unsure of the number of terminated
CIGNA policyholders it may ultimately assist with the purchase of new health
coverage. In addition, CIGNA small business group has decreased due to intense
competition in both rates and benefits offered.
Investments and Liquidity
- -------------------------
The Company generates revenue from its investment portfolio, which consisted of
approximately $119.7 million (at amortized cost) at March 31, 2004, compared to
$118.6 million (at amortized cost) at December 31, 2003. Although the portfolio
increased slightly in 2004, investment income decreased $178,585. The decrease
in investment income is primarily the result of a decline in short and long-term
yields in the marketplace and a shorter weighted average maturity of the
portfolio. Due to the interest rate environment, management believed it was
prudent to purchase fixed maturity investments with shorter maturities with
minimal credit risk.
The Company generated positive cash flows from operations of approximately $1.2
million in the three months ended March 31, 2004 and $4.5 million in the three
months ended March 31, 2003.
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 March 31,
2004, the Company had cash and investments of $119,720,420 (at amortized cost)
of which $116,610,846 (97%) were investments of Crusader.
As of the quarter ended March 31, 2004, the Company had invested $115,760,743
(at amortized cost) or 97% 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.
10
The Company's investments in fixed maturity obligations of $115,760,743 (at
amortized cost) include $2,018,797 (1.7%) of pre-refunded state and municipal
tax-exempt bonds, $53,286,231 (46.0%) of U.S. treasury securities, $11,997,639
(10.4%) of U.S. government agency securities, $47,958,076 (41.4%) of industrial
and miscellaneous securities, and $500,000 (0.5%) of certificates of deposit.
The tax-exempt interest income earned for the three months ended March 31, 2004
and 2003 was $17,087 and $35,304, 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. The 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.
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 three months ended March 31, 2004.
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 $1,447,414, statutory deposits of
$2,700,000, cash of $752,659 deposited with Superior courts in lieu of bonds,
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.
RESULTS OF OPERATIONS:
- ---------------------
All comparisons made in this discussion are comparing the three months ended
March 31, 2004, to the three months ended March 31, 2003, unless otherwise
indicated.
The Company had a net income of $1,257,997 for the three months ending March 31,
2004, compared to net income of $233,083 for the three months ended March 31,
2003, an increase in net income of $1,024,914. Total revenues for the three
months ended March 31, 2004, increased $4,263,600 (37%) to $15,680,191, compared
to total revenues of $11,416,591 for the three months ended March 31, 2003.
Premium written before reinsurance increased $4,190,353 (35%) to $16,150,050 for
the three months ended March 31, 2004, compared to $11,959,697 for the three
months ended March 31, 2003. The Company primarily writes commercial multiple
peril business package policies. This line of business represents approximately
98% and 97% of Crusader's total written premium for the three months ended March
31, 2004 and 2003, respectively.
Crusader's written premium by state is as follows:
Three Months Ended
March 31
-------- Increase
2004 2003 (Decrease)
---- ---- --------
California $16,150,318 $11,960,669 $4,189,649
Ohio - (13,598) 13,598
Arizona - 8,789 (8,789)
Pennsylvania - (3,681) 3,681
Oregon - (7,841) 7,841
Montana - 18,391 (18,391)
Washington - (2,894) 2,894
Nevada (268) (2,049) 1,781
Idaho - 1,911 (1,911)
---------- ---------- ---------
Total $16,150,050 $11,959,697 $4,190,353
========== ========== =========
11
The $4,190,353 increase in written premium in the three months ended March 31,
2004 compared to the three months ended March 31, 2003 was primarily the result
of the continued subsidence in priced-based competition in the property casualty
insurance market that has resulted in the Company's products becoming more
competitive. In addition, the Company has increased rates on some of its
products. 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 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 future writings and growth are dependent on market conditions,
competition, and the Company's ability to introduce new and profitable products.
The Company's average gross written premium per policy issued is as follows:
Quarter Ended Gross Written Policies Average Gross
March 31 Premium Issued Written Premium
-------- ------- ------ ---------------
2004 $16,150,050 5,142 $3,141
2003 $11,959,697 4,623 $2,587
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, the Company no
longer produces business outside of California. 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 $5,050,038 (44%) to $16,474,958 for
the three months ended March 31, 2004, compared to $11,424,920 for the three
months ended March 31, 2003. 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 $424,543 (12%) to $3,888,639 for the three months ended
March 31, 2004, compared to ceded premium of $3,464,096 in the three months
ended March 31, 2003. 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. Direct earned premium, earned ceded
premium, and ceding commission are as follows:
Three Months Ended
March 31
--------
Increase
2004 2003 (Decrease)
---- ---- --------
Direct earned premium $16,474,958 $11,424,920 $5,050,038
Earned ceded premium
Excluding provisionally rated ceded premium 4,196,062 3,399,562 796,500
Provisionally rated ceded premium (307,423) 64,534 (371,957)
--------- --------- -------
Total earned ceded premium 3,888,639 3,464,096 424,543
Ceding commission 1,463,636 1,154,347 309,289
--------- --------- -------
Earned ceded premium, net of ceding commission $2,425,003 $2,309,749 $115,254
========= ========= =======
The increase in ceded premium (excluding provisionally rated ceded premium) for
the three months ended March 31, 2004, is primarily related to the increase in
direct earned premium. Other factors effective January 1, 2004, affecting ceded
premium were a slight decrease in the reinsurance rate charged by the Company's
reinsurers and a change in the Company's participation in certain reinsurance
treaties. In 2003 Crusader retained a participation in its excess of loss
reinsurance treaties of 5% on its 1st layer ($750,000 in excess of $250,000),
10% on its 2nd layer ($1,000,000 in excess of $1,000,000), and 30% on its
property clash treaty. In 2004 Crusader retained a participation on its excess
of loss reinsurance treaties of 10% for both its 1st and 2nd layer and 15% on
its property clash treaty. 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.
12
NET INVESTMENT INCOME, excluding realized investment gains, decreased $178,585
(14%) to $1,101,418 for the three months ended March 31, 2004, compared to
investment income of $1,280,003 for the three months ended March 31, 2003. The
decrease in investment income is primarily the result of a continued decline in
the average return on invested assets in the Company's investment portfolio due
to both a general decline in short and long-term yield in the marketplace and a
shorter weighted average maturity of the portfolio.
At March 31, 2004, the Company held fixed maturity investments with unrealized
appreciation of $3,426,664 and fixed maturity investments with unrealized
depreciation of $14,193. 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, 2003, the Company held
investments with unrealized appreciation of $3,236,623 and securities with
unrealized depreciation of $38,169. The securities with unrealized depreciation
at March 31, 2004, consisted of four fixed maturity investments with a total par
value of $8,890,000. These investments consists of a U.S. treasury note (par
value $5,000,000), a U.S. government agency bond (par value $3,000,000), and two
pre-refunded municipal bonds secured with U.S. treasury securities (par value
$890,000).
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 quarter ended March 31, 2004, the Company had no
investments with a decline in market value that was considered other than
temporary. No investments were sold in the quarter ended March 31, 2004.
GROSS COMMISSION AND FEE INCOME decreased $226,912 (12%) to $1,710,597 for the
three months ended March 31, 2004, compared to commission and fee income of
$1,937,509 for the three months ended March 31, 2003.
The decrease in gross commission and fee income for the three months ended March
31, 2004, compared to the three months ended March 31, 2003, are as follows:
Three Months Ended
March 31
--------
Increase
2004 2003 (Decrease)
---- ---- --------
Policy fee income $840,946 $740,082 $100,864
Health and life insurance program
commission and fee income 629,516 889,651 (260,135)
Other commission and fee income 98,536 133,129 (34,593)
Daily automobile rental insurance program:
Commission income (excluding contingent commission) 132,111 143,056 (10,945)
Claim administration fee 31,591 (31,591)
Contingent commission 9,488 - 9,488
--------- --------- -------
Total $1,710,597 $1,937,509 $(226,912)
========= ========= =======
The increase in policy fee income was primarily due to 11% increase in the
number of policies issued during the three months ended March 31, 2004 compared
to the three months ended March 31, 2003.
The decrease in health and life insurance program commission and fee income is
primarily due to a decrease in premium written in the CIGNA HealthCare programs.
CIGNA discontinued its individual and family health insurance programs to new
policyholders in the state of California in April 2003. In addition, CIGNA began
the termination of existing policyholders in November 1, 2003, through October
1, 2004. As such, the percentage of business derived from CIGNA decreased.
CIGNA's termination of their California individual and family health insurance
does not affect CIGNA's individual and family dental program. AIB has secured
both commission and override commission relationships with other carriers
including Health Net, Nationwide (formerly CalFarm), and PacifiCare, and is
continuing its efforts to diversify and offer a wider variety of products to its
customers.
The decrease in claim administration fee is due to the fact that as of December
31, 2003, the Company no longer provides claim administration services. Prior to
December 31, 2003, a subsidiary of the Company provided insurance claim
administration services to a non-affiliated property and casualty insurance
company. As of December 31, 2003, the non-affiliated insurance company assumed
the claim administration responsibility for all outstanding and IBNR claims. As
such, the Company's subsidiary that provided the claim administration services
is currently inactive.
13
LOSSES AND LOSS ADJUSTMENT EXPENSES were 71% of net premium earned for the three
months ended March 31, 2004, compared to 84% of net premium earned for the three
months ended March 31, 2003. In the quarter ended March 31, 2004, current year
losses incurred were 71% of net premium earned and the Company incurred
favorable development of prior years' losses of approximately $10,000. In the
quarter ended March 31, 2003, current year losses incurred were 78% of net
earned premium and the Company incurred adverse development of prior years'
losses of approximately $496,000.
As a result of Crusader underwriting losses that began in year ended December
31, 2000, Crusader's management has been analyzing and acting upon various
components of its underwriting activity. These components include the following:
1. Business Outside of California
2. Habitability Exposure
3. Construction Defect Exposure
4. Special Risk Class of Business
5. Increased Cost of Settling Claims, Indemnity and Expense
6. Increased Cost of Reinsurance
7. Mold Exposure
8. Terrorism Exposure
Crusader believes that implementation of managements actions on the underwriting
components discussed above have contributed to improved operating results.
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 20% of net premium earned for the three months ended
March 31, 2004, and 22% of net earned premium for the three months ended March
31, 2003.
SALARIES AND EMPLOYEE BENEFITS increased $22,709 (2%) to $1,216,119 for the
three months ended March 31, 2004, compared to salary and employee benefits of
$1,193,410 for the three months ended March 31, 2003.
COMMISSIONS TO AGENTS/BROKERS decreased $131,455 (33%) to $271,123 for the three
months ended March 31, 2004, compared to commission expense of $402,578 for the
three months ended March 31, 2003. The decrease is primarily the result of a
decrease in premiums written in the health and life insurance program and is
related to the decrease in commission income.
OTHER OPERATING EXPENSES decreased $207,361 (21%) to $789,108 for the three
months ended March 31, 2004, compared to $996,469 for the three months ended
March 31, 2003. The decrease in other operating expenses is primarily due to a
decrease of approximately $124,000 in legal expenses and a decrease of
approximately $36,000 of expenses related to the 2001 tri-annual examination of
the Company's insurance subsidiary performed by the California Department of
Insurance.
14
INCOME TAX PROVISION was an expense of $710,447 (36% of pre-tax income) for the
three months ended March 31, 2004, compared to an income tax expense of $126,997
in the three months ended March 31, 2003 (35% of pre-tax income). This change
was primarily due to a pre-tax income of $1,968,444 (including tax-exempt
investment income of $17,087) in the three months ended March 31, 2004, compared
to pre-tax income of $360,080 (including tax-exempt investment income of
$35,304) in the three months ended March 31, 2003.
The effect of inflation on net income of the Company during the three months
ended March 31, 2004, and the three months ended March 31, 2003, 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, the Company's ability to introduce new profitable products,
and the Company's ability to expand geographically.
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:
March 31 December 31 Increase
2004 2003 (Decrease)
---- ---- --------
Fixed maturity bonds (at amortized value) $115,260,743 $110,825,592 $4,435,151
Short-term cash investments (at cost) 3,915,187 7,229,315 (3,314,128)
Certificates of deposit (over 1 year, at cost) 500,000 500,000 -
----------- ----------- ---------
Total invested assets $119,675,930 $118,554,907 $1,121,023
=========== =========== =========
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
March 31, 2004 (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 March 25, 2004, the Company filed a Form 8-K furnishing under Item 12 a
news release of its earnings for the year ended December 31, 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: May 13, 2004 By /s/ ERWIN CHELDIN
-----------------
Erwin Cheldin
Chairman of the Board, President and Chief
Executive Officer, (Principal Executive Officer)
Date: May 13, 2004 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)