Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the year ended December 31, 2004 Commission File No. 0-3978
UNICO AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 95-2583928
(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification No.)
23251 Mulholland Drive, Woodland Hills, California 91364
(Address of Principal Executive Offices) (Zip Code)
(818) 591-9800
Registrant's telephone number
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of each class)
Securities registered pursuant to section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-X is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy of information statements
incorporated by reference as Part III of this Form 10-K or any amendment to this
Form 10-K. X
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes __ No X
The aggregate market value of Registrant's voting and non-voting common equity
held by non-affiliates as of June 30, 2004, the last business day of
Registrant's most recently completed second fiscal quarter was $15,952,830.
5,496,315
Number of shares of common stock outstanding as of March 23, 2005
Portions of the definitive proxy statement that Registrant intends to file
pursuant to Regulation 14(A) by a date no later than 120 days after December 31,
2004, to be used in connection with the annual meeting of shareholders, are
incorporated herein by reference into Part III hereof. If such definitive proxy
statement is not filed in the 120-day period, the information called for by Part
III will be filed as an amendment to this Form 10-K not later than the end of
the 120 day period.
1
PART I
------
Item 1. Business
- -----------------
Unico American Corporation is an insurance holding company that underwrites
property and casualty insurance through its insurance company subsidiary;
provides property, casualty, health and life insurance through its agency
subsidiaries; and through its other subsidiaries provides 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.
Descriptions of the Company's operations in the following paragraphs are
categorized between the Company's major segment, its insurance company
operation, and all other revenues from insurance operations. The insurance
company operation is conducted through Crusader Insurance Company (Crusader),
Unico's property and casualty insurance company. Insurance company revenues and
other revenues from insurance operations for the years ended December 31, 2004,
and December 31, 2003, are as follows:
Year ended December 31
----------------------
2004 2003
----------------------- -----------------------
Percent of Percent of
Total Total
Total Company Total Company
Revenues Revenues Revenues Revenues
-------- -------- -------- --------
Insurance company revenues $54,414,947 87.9% $42,005,474 82.2%
Other revenues from insurance operations
- ----------------------------------------
Health and life insurance program commission income 2,156,924 3.5% 3,312,715 6.5%
Policy fee income 3,394,783 5.5% 3,458,559 6.7%
Daily automobile rental insurance program:
Commission 565,452 0.9% 574,197 1.1%
Claim administration fees - - 241,428 0.5%
Association operations membership and fee income 333,470 0.5% 481,366 0.9%
Other commission and fee income 53,251 0.1% 41,127 0.1%
--------- ---- --------- ---
Total gross commission and fee income 6,503,880 10.5% 8,109,392 15.9%
Insurance premium financing operation finance
charges and fees 933,529 1.5% 952,543 1.9%
Non-insurance company investment income 38,250 0.1% 47,010 0.1%
Other income 12,704 - 16,020 -
--------- ---- --------- ----
Total other revenues from insurance operations 7,488,363 12.1% 9,124,965 17.9%
--------- ---- --------- ----
Total Revenues $61,903,310 100.0% $51,130,439 100.0%
========== ===== ========== =====
INSURANCE COMPANY OPERATION
---------------------------
General
- -------
The insurance company operation is conducted through Crusader, which as of
December 31, 2004, was licensed as an admitted insurance carrier in the states
of Arizona, California, Idaho, Montana, Nevada, Ohio, Oregon and Washington. In
2002 the Company began to substantially reduce the offering of insurance outside
of California primarily due to the unprofitability of that business. In 2004 all
business outside of California had ceased. See Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations - Results of
Operations - Insurance Company Operation. Crusader is a multiple line property
and casualty insurance company that began transacting business on January 1,
1985. During the year ended December 31, 2004, 98% of Crusader's business was
commercial multiple peril business package insurance policies. Commercial
multiple peril policies provide a combination of property and liability coverage
for businesses. Commercial property coverages insure against loss or damage to
buildings, inventory and equipment from natural disasters, including hurricanes,
windstorms, hail, water, explosions, severe winter weather and other events such
as theft and vandalism, fires and storms and financial loss due to business
interruption resulting from covered property
2
damage. Commercial liability coverages insure against third party liability from
accidents occurring on the insured's premises or arising out of its operations,
such as injuries sustained from products sold. In addition to commercial
multiple peril policies, Crusader also writes separate policies to insure
commercial property and commercial liability risks on a mono-line basis.
All of Crusader's business is produced by Unifax Insurance Systems, Inc.,
(Unifax) its sister corporation. Unifax has substantial experience with these
classes of business. The commissions paid by Crusader to Unifax are eliminated
as intercompany transactions and are not reflected in the previous table.
Crusader is licensed in property and casualty and disability lines of insurance
by the California Department of Insurance.
Reinsurance
- -----------
A reinsurance transaction occurs when an insurance company transfers (cedes) a
portion of its exposure on business written by it to a reinsurer that assumes
that risk for a premium (ceded premium). Reinsurance does not legally discharge
the Company from primary liability under its policies. If the reinsurer fails to
meet its obligations, the Company must nonetheless pay its policy obligations.
In 2004 Crusader's primary excess of loss reinsurance agreements were with
Platinum Underwriters Reinsurance, Inc. (A.M. Best Rating A) and Hannover
Ruckversicherungs AG (A.M. Best Rating A). In 2003 Crusader's primary excess of
loss reinsurance agreements were with Platinum Underwriters Reinsurance, Inc.,
Hannover Ruckversicherungs AG and QBE Reinsurance Corporation (A.M. Best Rating
A). From 2000 through 2002, Crusader had its primary excess of loss reinsurance
agreements with Partner Reinsurance Company of the U.S. (A.M Best Rating A+). In
1999, Crusader had its primary excess of loss reinsurance agreements with
General Reinsurance Corporation (A.M. Best Rating A++). Crusader also has
catastrophe reinsurance from various highly rated California admitted and
Bermuda reinsurance companies. These reinsurance agreements help protect
Crusader against liabilities in excess of certain retentions, including major or
catastrophic losses that may occur from any one or more of the property and/or
casualty risks which Crusader insures. The Company has no reinsurance
recoverable balances in dispute.
The aggregate amount of earned premium ceded to the reinsurers was $17,784,240
for the fiscal year ended December 31, 2004, and $16,648,020 for the fiscal year
ended December 31, 2003.
On July 1, 1997, Crusader increased its retention from $150,000 to $250,000 per
risk. Concurrently, Crusader maintained catastrophe and clash covers (subject to
a maximum occurrence and annual aggregate) to help protect the Company from one
loss occurrence affecting multiple policies. Beginning January 1, 1998, an
annual aggregate deductible of $750,000 commenced on losses ceded to its
reinsurance treaty covering losses between $250,000 and $500,000. On January 1,
2000, the annual aggregate deductible decreased to $500,000, on January 1, 2002,
it increased to $675,000. On January 1, 2003, it decreased to $500,000 and
remained as such for the 2004 fiscal year. In 2004 Crusader retained a
participation in its excess of loss reinsurance treaties of 10% in its 1st layer
($750,000 in excess of $250,000), 10% in its 2nd layer ($1,000,000 in excess of
$1,000,000), and 30% in its property clash treaty. In 2003 Crusader retained a
participation in its excess of loss reinsurance treaties of 5% in its 1st layer
($750,000 in excess of $250,000), 10% in its 2nd layer ($1,000,000 in excess of
$1,000,000), and 30% in its property clash treaty. Prior to January 1, 1998,
National Reinsurance Corporation (acquired by General Reinsurance Corporation in
1996) charged a provisional rate on exposures up to $500,000 that was subject to
adjustment and was based on the amount of losses ceded, limited by a maximum
percentage that could be charged. That provisionally rated treaty was cancelled
on a runoff basis and replaced by a flat rated treaty on January 1, 1998.
Crusader's 2004 and 2003 1st layer primary excess of loss treaty provides for a
contingent commission equal to 45% of the net profit, if any, accruing to the
reinsurer. The first accounting period for the contingent commission is December
31, 2005. Based on losses and loss adjustment expenses ceded (including incurred
but not reported losses) as of December 31, 2004, no contingent commission has
been accrued.
Beginning January 1, 2005, Crusader increased its retention from $250,000 to
$300,000 per risk. There has been no change in the annual aggregate deductible
or participation rates compared to 2004. The 2005 1st layer primary excess of
loss treaty does not provide for a contingent commission.
On most of the premium that Crusader cedes to the reinsurer, the reinsurer pays
a commission to Crusader that includes a reimbursement of the cost of acquiring
the portion of the premium that is ceded. Crusader does not currently assume any
reinsurance. The Company intends to continue obtaining reinsurance although the
availability and cost may vary from time to time. The unpaid losses ceded to the
reinsurer are recorded as an asset on the balance sheet.
3
Unpaid Losses and Loss Adjustment Expenses
- ------------------------------------------
Crusader maintains reserves for losses and loss adjustment expenses with respect
to both reported and unreported losses. When a claim for loss is reported to the
Company, a reserve is established for the expected cost to settle the claim,
including estimates of any related legal expense and other costs associated with
resolving the claim. These reserves are called "case based" reserves. In
addition, the Company also sets up reserves at the end of each reporting period
for losses that have occurred but have not yet been reported to the Company.
These incurred but not reported losses are referred to as "IBNR" reserves.
Crusader establishes reserves for reported losses based on historical
experience, upon case-by-case evaluation of facts surrounding each known loss,
and the related policy provisions. The amount of reserves for unreported losses
is estimated by analysis of historical and statistical information. The ultimate
liability of Crusader may be greater or less than estimated reserves. Reserves
are monitored and adjusted when appropriate and are reflected in the statement
of operations in the period of adjustment. Reserves for losses and loss
adjustment expenses are estimated to cover the future amounts needed to pay
claims and related expenses with respect to insured events that have occurred.
The process of establishing loss and loss adjustment expense reserves involves
significant judgment. The following table shows the development of the unpaid
losses and loss adjustment expenses for fiscal years 1995 through 2004. The top
line of the table shows the estimated liability for unpaid losses and loss
adjustment expenses recorded at the balance sheet date for each of the indicated
years. This liability represents the estimated amount of losses and loss
adjustment expenses for losses arising in the current and prior years that are
unpaid at the balance sheet date. The table shows the reestimated amount of the
previously recorded liability based on experience as of the end of each
succeeding year. The estimate is increased or decreased, as more information
becomes known.
The table reflects redundancies and deficiencies in Crusader's net loss and loss
adjustment expense reserves. As of December 31, 2004, all periods stated in the
table prior to 2003 reflected a cumulative deficiency. The 2003 period reflects
an $835,434 redundancy in Crusader's net loss and loss adjustment expense
reserves. See discussion of losses and loss adjustment expenses in Item 7-
Management's Discussion and Analysis - Results of Operations - Insurance Company
Operation.
Crusader is a relatively small insurance company. Crusader is constantly
changing its product mix and exposures, including the types of businesses
insured within its business package program. Considering the uncertainties from
this changing environment, the Company recognizes the difficulties in developing
its own unique reserving statistics; therefore, it incorporates industry
standards and averages into its estimates. The Company believes that its loss
and loss adjustment expense reserves are properly stated. When subsequent loss
and loss adjustment expense development justifies changes in reserving
practices, the Company acts accordingly.
When evaluating the information in the following table, it should be noted that
each amount includes the effects of all changes in amounts of prior periods;
therefore, the cumulative redundancy or deficiency represents the aggregate
change in the estimates over all prior years. Conditions and trends that have
affected development of liability in the past may not necessarily occur in the
future. Accordingly, it may not be appropriate to extrapolate future
deficiencies or redundancies based on this table.
4
CRUSADER INSURANCE COMPANY
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
Fiscal Year Ended March 31 Fiscal Year Ended December 31
-------------------------- ---------------------------------------------------------
1995 1996 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
(Nine Months)
Reserve for Unpaid Losses and
Loss Adjustment Expenses $27,633,304 $32,682,153 $37,111,846 $40,591,248 $40,374,232 $37,628,165
Paid Cumulative as of
1 Year Later 8,814,611 7,019,174 10,996,896 12,677,646 15,393,167 18,745,224
2 Years Later 13,502,223 15,292,415 19,488,853 23,740,181 28,570,117 34,905,359
3 Years Later 18,911,104 20,898,580 25,552,756 30,217,031 38,923,545 46,072,688
4 Years Later 22,631,450 24,932,922 29,730,976 35,620,705 45,425,709 53,153,491
5 Years Later 25,509,618 27,726,438 33,893,473 40,639,328 50,526,164 56,021,297
6 Years Later 27,844,199 31,701,748 38,075,656 45,028,598 52,588,830
7 Years Later 31,445,057 35,482,343 41,650,221 46,921,020
8 Years Later 34,760,418 38,974,010 43,129,105
9 Years Later 38,071,916 40,429,262
10 Years Later 39,449,159
Reserves Reestimated as of
1 Year Later 25,666,251 31,232,388 32,838,369 35,730,603 39,132,945 41,898,796
2 Years Later 24,984,032 28,636,286 31,086,210 36,032,215 43,164,627 56,423,375
3 Years Later 24,575,023 28,074,691 32,347,788 38,844,953 52,349,735 59,486,543
4 Years Later 26,146,874 29,774,762 35,513,862 45,907,785 54,291,547 61,791,428
5 Years Later 28,687,265 32,382,991 43,335,778 47,940,955 56,619,057 62,174,813
6 Years Later 31,416,091 40,773,954 44,588,020 50,374,721 57,151,258
7 Years Later 40,165,717 41,690,986 46,146,262 50,993,874
8 Years Later 40,479,938 43,243,124 46,740,535
9 Years Later 41,979,904 43,779,781
10 Years Later 42,580,784
Cumulative Redundancy
(Deficiency) $(14,947,480) $(11,097,628) $(9,628,689) $(10,402,626) $(16,777,026) $(24,546,648)
========== ========== ========= ========== ========== ==========
Gross Liability for Unpaid Losses
and Loss Adjustment Expenses $32,370,752 $37,006,458 $39,740,865 $42,004,851 $41,513,945 $41,592,489
Ceded Liability for Unpaid Losses
and Loss Adjustment Expenses (4,737,448) (4,324,305) (2,629,019) (1,413,603) (1,139,713) (3,964,324)
--------- --------- --------- --------- --------- ---------
Net Liability for Unpaid Losses
and Loss Adjustment Expenses $27,633,304 $32,682,153 $37,111,846 $40,591,248 $40,374,232 $37,628,165
========== ========== ========== ========== ========== ==========
Gross Liability Reestimated $63,575,315 $68,371,474 $74,835,663 $74,158,224 $82,550,702 $90,396,423
Ceded Liability Reestimated (20,994,531) (24,591,693) (28,095,128) (23,164,350) (25,399,444) (28,221,610)
---------- ---------- ---------- ---------- ---------- ----------
Net Liability Reestimated $42,580,784 $43,779,781 $46,740,535 $50,993,874 $57,151,258 $62,174,813
========== ========== ========== ========== ========== ==========
Gross Reserve Redundancy
(Deficiency) $(31,204,563) $(31,365,016) $(35,094,798) $(32,153,373) $(41,036,757) $(48,803,934)
========== ========== ========== ========== ========== ===========
5
CRUSADER INSURANCE COMPANY
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
Fiscal Year Ended December 31
--------------------------------------------------------------------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
Reserve for Unpaid Losses and
Loss Adjustment Expenses $34,546,026 $49,786,215 $53,596,945 $58,883,861 $67,349,989
Paid Cumulative as of
1 Year Later 20,841,417 23,010,615 21,326,688 18,546,279
2 Years Later 37,976,277 39,463,106 35,883,729
3 Years Later 49,053,708 46,256,431
4 Years Later 52,821,183
5 Years Later
6 Years Later
7 Years Later
8 Years Later
9 Years Later
10 Years Later
Reserves Reestimated as of
1 Year Later 53,872,376 57,577,066 56,348,531 58,048,427
2 Years Later 59,746,880 60,629,814 57,237,770
3 Years Later 62,172,320 60,974,567
4 Years Later 62,369,460
5 Years Later
6 Years Later
7 Years Later
8 Years Later
9 Years Later
10 Years Later
Cumulative Redundancy
(Deficiency) $(27,823,434) $(11,188,352) $(3,640,825) $835,434
========== ========== ========= =======
Gross Liability for Unpaid Losses
and Loss Adjustment Expenses $45,217,369 $60,534,295 $74,905,284 $78,139,090 87,469,000
Ceded Liability for Unpaid Losses
and Loss Adjustment Expenses (10,671,343) (10,748,080) (21,308,339) (19,255,229) (20,119,011)
---------- ---------- ---------- ---------- ----------
Net Liability for Unpaid Losses
and Loss Adjustment Expenses $34,546,026 $49,786,215 $53,596,945 $58,883,861 $67,349,989
========== ========== ========== ========== ==========
Gross Liability Reestimated $92,330,680 $90,707,024 $79,321,760 $86,132,417
Ceded Liability Reestimated (29,961,220) (29,732,457) (22,083,990) (28,083,990)
---------- ---------- ---------- ----------
Net Liability Reestimated $62,369,460 $60,974,567 $57,237,770 $58,048,427
========== ========== ========== ==========
Gross Reserve Redundancy
(Deficiency) $(47,113,311) $(30,172,729) $(4,416,476) $(7,993,327)
========== ========== ========= =========
5
Net Premium Written to Policyholders' Surplus Ratio
- ---------------------------------------------------
The following table shows, for the periods indicated, Crusader's statutory
ratios of net premiums written to statutory policyholders' surplus. Since each
property and casualty insurance company has different capital needs, an
"acceptable" ratio of net premium written to policyholders' surplus for one
company may be inapplicable to another. While there is no statutory requirement
applicable to Crusader that establishes a permissible net premium to surplus
ratio, guidelines established by the National Association of Insurance
Commissioners (NAIC) provide that such ratio should generally be no greater than
3 to 1.
Twelve months ended December 31
----------------------------------------------------------------------------
Statutory: 2004 2003 2002 2001 2000
- ---------- ---- ---- ---- ---- ----
Net premiums written $51,089,573 $47,420,157 $38,363,201 $32,106,175 $26,406,565
Policyholders' surplus $29,436,343 $26,103,440 $26,258,452 $27,519,538 $39,626,269
Ratio 1.7 to 1 1.8 to 1 1.5 to 1 1.2 to 1 0.7 to 1
Crusader results are reported in accordance with accounting principles generally
accepted in the United States of America (GAAP). These results differ from its
financial results reported in accordance with Statutory Accounting Principles
(SAP) as prescribed or permitted by insurance regulatory authorities. Crusader
is required to file financial statements with insurance regulatory authorities
prepared on a SAP basis.
SAP differs in certain respects from GAAP. The more significant of these
differences that apply to Crusader are:
Policy acquisition costs such as commissions, premium taxes and other
variable costs incurred in connection with writing new and renewal
business are capitalized and amortized on a pro rata basis over the
period in which the related premiums are earned, rather than expensed
as incurred as required by SAP.
Certain assets included in balance sheets under GAAP are designated as
"non-admitted assets" and are charged directly against statutory
surplus under SAP. Non-admitted assets include primarily premium
receivables that are outstanding over 90 days, federal deferred tax
assets in excess of statutory limitations, furniture, equipment,
leasehold improvements and prepaid expenses.
Amounts related to ceded reinsurance are shown gross as prepaid
reinsurance premiums and reinsurance recoverable, rather than netted
against unearned premium reserves and loss and loss adjustment expense
reserves, respectively, as required by SAP.
Fixed maturity securities, which are classified as available-for sale,
are reported at current market values, rather than at amortized cost,
or the lower of amortized cost or market, depending on the specific
type of security as required by SAP.
The differing treatment of income and expense items results in a
corresponding difference in federal income tax expense. Under GAAP
reporting, changes in deferred income taxes are reflected as an item of
income tax benefit or expense. As required by SAP, federal income taxes
are recorded when payable and deferred taxes, subject to limitations,
are recognized but only to the extent that they do not exceed 10% of
statutory surplus. Changes in deferred taxes are recorded directly to
statutory surplus.
Regulation
- ----------
The insurance company operation is subject to regulation by the California
Department of Insurance (the insurance department) and by the department of
insurance of other states in which Crusader is licensed. The insurance
department has broad regulatory, supervisory, and administrative powers. These
powers relate primarily to the standards of solvency which must be met and
maintained; the licensing of insurers and their agents; the nature and
limitation of insurers' investments; the prior approval of rates, rules and
forms; the issuance of securities by insurers; periodic financial and market
conduct examinations of the affairs of insurers; the annual and other reports
required to be filed on the financial condition and results of operations of
such insurers or for other purposes; and the establishment of reserves required
to be maintained for unearned premiums, losses, and other purposes. The
regulations and supervision by the insurance department are designed principally
for the benefit of policyholders and not for the insurance company shareholders.
The insurance department's Market Conduct Division is responsible for conducting
periodic examinations of companies to ensure compliance with California
Insurance Code and California Code of Regulations with respect to rating,
underwriting and claims
6
handling practices. The most recent examination of Crusader covered underwriting
and rating practices for the period January 1, 2000, through June 18, 2001. The
report on the results of that examination was issued on September 10, 2002. As
of December 31, 2004, the Company believes that there are no outstanding
criticisms arising from that report. The insurance department also conducts
periodic financial examinations of Crusader. The insurance department has
completed its financial examination of Crusader's December 31, 2001, statutory
financial statements. The report of examination that was filed with the
insurance department on May 30, 2003, reported no adjustments to Crusader's
statutory financial statements.
In December 1993, the NAIC adopted a Risk-Based Capital (RBC) Model Law for
property and casualty companies. The RBC Model Law is intended to provide
standards for calculating a variable regulatory capital requirement related to a
company's current operations and its risk exposures (asset risk, underwriting
risk, credit risk and off-balance sheet risk). These standards are intended to
serve as a diagnostic solvency tool for regulators that establishes uniform
capital levels and specific authority levels for regulatory intervention when an
insurer falls below minimum capital levels. The RBC Model Law specifies four
distinct action levels at which a regulator can intervene with increasing
degrees of authority over a domestic insurer if its RBC is equal to or less than
200% of its computed authorized control level RBC. A company's RBC is required
to be disclosed in its statutory annual statement. The RBC is not intended to be
used as a rating or ranking tool nor is it to be used in premium rate making or
approval. Crusader's adjusted capital at December 31, 2004, was 301% of
authorized control level risk-based capital.
The following table sets forth the different levels of risk-based capital that
may trigger regulatory involvement and the corresponding actions that may
result.
- ----------------------------- ----------------------------------- ----------------------------------------------------------
LEVEL TRIGGER CORRECTIVE ACTION
- ----------------------------- ----------------------------------- ----------------------------------------------------------
- ----------------------------- ----------------------------------- ----------------------------------------------------------
Company Action Level Adjusted Capital less than 200% The insurer must submit a comprehensive plan to the
of Authorized Control Level insurance commissioner
- ----------------------------- ----------------------------------- ----------------------------------------------------------
- ----------------------------- ----------------------------------- ----------------------------------------------------------
Regulatory Action Level Adjusted Capital less than 150% In addition to above, insurer is subject to examination,
of Authorized Control Level analysis and specific corrective action
- ----------------------------- ----------------------------------- ----------------------------------------------------------
- ----------------------------- ----------------------------------- ----------------------------------------------------------
Authorized Control Level Adjusted Capital less than 100% In addition to both of the above, insurance commissioner
of Authorized Control Level may place insurer under regulatory control
- ----------------------------- ----------------------------------- ----------------------------------------------------------
- ----------------------------- ----------------------------------- ----------------------------------------------------------
Mandatory Control Level Adjusted Capital less than 70% Insurer must be placed under regulatory control
of Authorized Control Level
- ----------------------------- ----------------------------------- ----------------------------------------------------------
Insurance Regulatory Information System (IRIS) was developed by a committee of
state insurance regulators primarily to assist state insurance departments in
executing their statutory mandate to oversee the financial condition of
insurance companies. IRIS helps those companies that merit highest priority in
the allocation of the regulators' resources on the basis of 12 financial ratios
that are calculated annually. The analytical phase is a review of annual
statements and the financial ratios. The ratios and trends are valuable in
pointing to companies likely to experience financial difficulties, but are not
themselves indicative of adverse financial condition. The ratio and benchmark
comparisons are mechanically produced and are not intended to replace the state
insurance departments' own in-depth financial analysis or on-site examinations.
An unusual range of ratio results has been established from studies of the
ratios of companies that have become insolvent or have experienced financial
difficulties. In the analytical phase, companies that receive four or more
financial ratio values outside the usual range are analyzed in order to identify
those companies that appear to require immediate regulatory action.
Subsequently, a more comprehensive review of the ratio results and an insurer's
annual statement is performed to confirm that an insurer's situation calls for
increased or close regulatory attention.
In 2004, the Company was outside the usual values on two of the twelve IRIS
ratio tests. These ratios were the Estimated Current Reserve Deficiency to
Surplus Ratio and the Investment Yield Ratio. The Estimated Current Reserve
Deficiency to Surplus Ratio was outside the usual values due to adverse
development of the Company's losses and loss adjustment expense reserves in 2002
and 2003. The Investment Yield Ratio compares the Company's investment yield of
3.4% to an established minimum and maximum range of greater than 4.5% and less
than 10%. The decrease in the Company's investment yield is primarily the result
of a decline over the last 5 years 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.
7
California Insurance Guarantee Association
- ------------------------------------------
The California Insurance Guarantee Association (CIGA) was created to provide for
payment of claims for which insolvent insurers of most casualty lines are liable
but which cannot be paid out of such insurers' assets. The Company is subject to
assessment by CIGA for its pro-rata share of such claims based on premiums
written in the particular line in the year preceding the assessment by insurers
writing that line of insurance in California. Such assessments are based upon
estimates of losses to be incurred in liquidating an insolvent insurer. In a
particular year, the Company cannot be assessed an amount greater than 2% of its
premiums written in the preceding year. Assessments are recouped through a
mandated surcharge to policyholders the year after the assessment. During 2002,
the Company paid $643,680 that was assessed by CIGA. For premiums written in
2003 net of cancellations, the Company recovered assessments from policyholders
in the amount of $1,276,195. During 2004 the Company remitted an additional
amount of $647,587, which exceeded the amount recouped from policyholders by
$15,072. The excess amount remitted to CIGA will be recovered from CIGA in 2005.
No assessment was made by CIGA for the 2004 or the 2005 calendar year.
Holding Company Act
- -------------------
Crusader is subject to regulation by the insurance department pursuant to the
provisions of the California Insurance Holding Company System Regulatory Act
(the "Holding Company Act"). Pursuant to the Holding Company Act, the insurance
department may examine the affairs of Crusader at any time. Certain transactions
defined to be of an "extraordinary" type may not be effected without the prior
approval of the insurance department. Such transactions include, but are not
limited to, sales, purchases, exchanges, loans and extensions of credit, and
investments made within the immediately preceding 12 months involving the lesser
of 3% of admitted assets or 25% of policyholders' surplus, as of the preceding
December 31. An extraordinary transaction also includes a dividend which,
together with other dividends or distributions made within the preceding twelve
months, exceeds the greater of 10% of the insurance company's policyholders'
surplus as of the preceding December 31 or the insurance company's net income
for the preceding calendar year. An insurance company is also required to notify
the insurance department of any dividend after declaration, but prior to
payment.
The Holding Company Act also provides that the acquisition or change of
"control" of a California domiciled insurance company or of any person who
controls such an insurance company cannot be consummated without the prior
approval of the Insurance Commissioner. In general, a presumption of "control"
arises from the ownership of voting securities and securities that are
convertible into voting securities, which in the aggregate constitute 10% or
more of the voting securities of a California insurance company or a person who
controls a California insurance company, such as Crusader. A person seeking to
acquire "control," directly or indirectly, of the Company must generally file
with the Insurance Commissioner an application for change of control containing
certain information required by statute and published regulations and provide a
copy of the application to the Company. The Holding Company Act also effectively
restricts the Company from consummating certain reorganization or mergers
without prior regulatory approval. The Company is in compliance with the Holding
Company Act.
Rating
- ------
Insurance companies are rated to provide both industry participants and
insurance consumers with meaningful information on specific insurance companies.
Higher ratings generally indicate financial stability and a strong ability to
pay claims. These ratings are based upon factors relevant to policyholders and
are not directed toward protection of investors. Such ratings are neither a
rating of securities nor a recommendation to buy, hold or sell any security and
may be revised or withdrawn at any time. Ratings focus primarily on the
following factors: capital resources, financial strength, demonstrated
management expertise in the insurance business, credit analysis, systems
development, market segment position and growth opportunities, marketing, sales
conduct practices, investment operations, minimum policyholders' surplus
requirements and capital sufficiency to meet projected growth, as well as access
to such traditional capital as may be necessary to continue to meet standards
for capital adequacy.
The claims-paying abilities of insurers are rated to provide both insurance
consumers and industry participants with comparative information on specific
insurance companies. Claims-paying ratings are important for the marketing of
certain insurance products. A higher rating generally indicates greater
financial strength and a stronger ability to pay claims.
Primarily as a result of the underwriting losses in 2000 and 2001, the A.M. Best
Company lowered Crusader's rating from A (Excellent) to A- (Excellent) effective
March 26, 2002, based on financial information as of December 31, 2001. At the
time the rating was lowered, A.M. Best remained concerned with the potential for
further adverse
8
loss reserve development and the negative impact it would have on the Company's
operating performance and overall capitalization and viewed the rating outlook
as negative. Due to the continued adverse development in the six months ended
June 30, 2002, on October 3, 2002, A.M. Best Company lowered Crusader's rating
to B+ (Very Good). The lowering of Crusader's rating to B+ did not have a
materially adverse effect on the Company. The Company is currently rated B+ with
a rating outlook as negative.
Terrorism Risk Insurance Act of 2002
- ------------------------------------
On November 26, 2002, the Terrorism Risk Insurance Act of 2002 (The Act) was
signed by President Bush. The Act establishes a program within the Department of
the Treasury in which the Federal Government will share the risk of loss from
acts of terrorism with the insurance industry. Federal participation will be
triggered when the Secretary of the Treasury, in concurrence with the Secretary
of State and the Attorney General of the United States, certifies an act to be
an act of terrorism committed by an individual(s) acting on behalf of any
foreign interest, provided the terrorist act results in aggregate losses in
excess of $5 million.
Under The Act, the federal government will pay 90% of covered terrorism losses
exceeding the statutorily established deductible. All property and casualty
insurance companies are required to participate in the program to the extent
that they must make available property and casualty insurance coverage for
terrorism that does not differ materially from the terms, amounts, and other
coverage limitations applicable to losses arising from events other than acts of
terrorism.
The Company does not write policies on properties considered to be a target of
terrorist activities such as airports, hotels, large office structures,
amusement parks, landmark defined structures, or other public facilities. In
addition, there is not a high concentration of policies in any one area where
increased exposure to terrorist threats exist. Consequently, the Company
believes its exposure relating to acts of terrorism is low. In 2004 Crusader
received $990,709 in terrorism coverage premium from approximately 45% of its
policyholders. Crusader's 2004 terrorism deductible was $5,375,409. Crusader's
2005 terrorism deductible is $10,183,621.
California Department of Insurance
- ----------------------------------
On October 20, 2004, the California Insurance Commissioner proposed regulations
that require greater disclosure of the commissions that brokers may receive from
insurance companies for selling insurance policies. The proposed regulations are
designed to protect consumers from undisclosed commissions and would penalize
any broker who places his or her own financial or other interest above that of a
client. Under the proposed regulations, brokers and agents would be required to
disclose "all material facts" regarding third party compensation. Brokers would
also be required to provide their clients an insurance quote for the best
available policy. The Company believes that this proposed regulation, if
enacted, will not have a material impact on its business.
OTHER INSURANCE OPERATIONS
--------------------------
General Agency Operations
- -------------------------
Unifax primarily sells and services commercial multiple peril business insurance
policies for Crusader in California. In addition, it sells and services
commercial earthquake insurance policies in California for a non-affiliated
insurer. Unifax also sold and serviced policies for Crusader in Arizona, Idaho,
Kentucky, Montana, Nevada, Ohio, Oregon, Pennsylvania, Texas, and Washington.
However, 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.
Bedford Insurance Services, Inc., (Bedford) sells and services daily automobile
rental policies in most states for a non-affiliated insurer.
As general agents, these subsidiaries market, rate, underwrite, inspect and
issue policies, bill and collect insurance premiums, and maintain accounting and
statistical data. Unifax is the exclusive general agent for Crusader. Unifax and
Bedford are non-exclusive general agents for non-affiliated insurance companies.
The Company's marketing is conducted through advertising to independent
insurance agents and brokers. For its services, the general agent receives a
commission (based on the premium written) from the insurance company and, in
some cases, a policy fee from the customer. These subsidiaries all hold licenses
issued by the California Department of Insurance and other states where
applicable.
9
Insurance Claim Administration Operation
- ----------------------------------------
The Company's subsidiary U.S. Risk Managers, Inc., (U.S. Risk) previously
provided insurance claim administration services to the non-affiliated property
and casualty insurance company that Bedford represents as a general agent. As of
December 31, 2003, a non-affiliated insurance company assumed the claim
administration responsibility for all outstanding and IBNR claims. U.S. Risk
Managers, Inc., is currently inactive.
All claim adjusting services for Crusader policies are administered by Crusader.
Crusader engages independent field examiners for all work performed outside the
Company's office.
Insurance Premium Finance Operation
- -----------------------------------
American Acceptance Corporation (AAC) is a licensed insurance premium finance
company that provides insurance purchasers with the ability to pay their
insurance premiums on an installment basis. The premium finance company pays the
insurance premium to the insurance company in return for a premium finance note
from the insured. These notes are paid off by the insured in nine monthly
installments and are secured by the unearned premiums held by the insurance
company. AAC provides premium financing for Crusader policies that are produced
by Unifax in California.
Health and Life Insurance Operations
- ------------------------------------
The Company's subsidiary American Insurance Brokers, Inc., (AIB) markets
medical, dental, life, and vision insurance in California through non-affiliated
insurance companies for individuals and groups. The services provided consist of
marketing, billing and collection, accounting, and customer service. For these
services, AIB receives a commission/override from the insurance company. Most of
the business is produced through independent insurance agents and brokers who
receive a commission from AIB. AIB hold licenses issued by the California
Department of Insurance. Prior to 2003, a portion of this business was conducted
by the Company's subsidiary National Insurance Brokers, Inc. (NIB). On January
1, 2003, NIB assigned all its contracts and commissions to AIB. During 2004, NIB
only received commissions on selected new health and life insurance policies
written in 2004.
Association Operation
- ---------------------
The Company's subsidiary Insurance Club, Inc., DBA The American Association for
Quality Health Care (AAQHC), is a membership association that provides various
consumer benefits to its members, including participation in group health care
and life insurance policies that AAQHC negotiates for the association. For these
services, AAQHC receives membership and fee income from its members.
INVESTMENTS
-----------
The investments of the Company are made by the Company's Chief Financial Officer
under the supervision of an investment committee appointed by the Company's
Board of Directors. The Company's investment guidelines on equity securities
limit investments in equity securities to an aggregate maximum of $2,000,000.
The Company's investment guidelines on fixed maturities limit fixed maturity
investments to high-grade obligations with a maximum term of eight years. The
maximum investment authorized in any one issuer is $2,000,000 and any one U.S.
government agency or U.S. government sponsored enterprise is $3,000,000. This
dollar limitation excludes bond premiums paid in excess of par value and U.S.
government or U.S. government guaranteed issues. All investments in municipal
securities are pre-refunded and secured by U.S. treasury securities. Short-term
cash investments consist of bank money market accounts, certificates of deposit,
commercial paper, a U.S. government obligation money market fund, and U.S.
treasury bills. These short-term investments are either U.S. government
obligations, FDIC insured or are in an institution with a Moody's rating of P2
and/or a Standard & Poor's rating of A1. All of the Company's fixed maturity
investment securities are rated and readily marketable and could be liquidated
without any material financial impact.
COMPETITION
-----------
General
- -------
The property and casualty insurance industry is highly competitive in the areas
of price and service. It is highly cyclical, characterized by periods of high
premium rates and shortages of underwriting capacity followed by periods of
severe price competition and excess capacity.
10
The profitability of insurers is affected by many factors including rate
competition, the frequency of claims and their average cost, natural disasters,
state regulations, interest rates, crime rates, general business conditions, and
court decisions redefining and expanding the extent of coverage and granting
higher compensation awards. One of the challenging and unique features of the
property and casualty business is the fact that, since premiums are collected
before losses are paid, its products are normally priced before its costs are
known.
Insurance Company and General Agency Operations (Property and Casualty)
- ----------------------------------------------------------------------
The Company's property and casualty insurance business continues to experience a
competitive marketplace. There are many substantial competitors who have larger
resources, operate in more states, and insure coverages in more lines and in
higher limits than the Company. In addition, Crusader competes not only with
other insurance companies but also with the general agents. Many of these
general agents offer more products than the Company. The principal method of
competition among competitors is price. While the Company attempts to meet this
competition with competitive prices, its emphasis is on service, promotion, and
distribution. Additional information regarding competition in the insurance
marketplace is discussed in the Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of Operations.
Insurance Premium Financing Operation
- -------------------------------------
The insurance premium financing operation currently finances only policies
written through its sister company, Unifax. Although competition is intense in
the premium finance business, the competitive pricing, the quality of its
service, and the ease and convenience of financing with AAC has made its growth
and profitability possible. AAC's growth is dependent on the growth of Crusader
and Unifax.
Health and Life Insurance Operations
- ------------------------------------
Competition in the health and life insurance business is intense. In 2004 and
2003 approximately 78% and 93% of the Company's health and life insurance
business was from the CIGNA HealthCare medical and dental plan programs. These
plans consist of both individual and family health insurance and small group
markets. Due to CIGNA's discontinuance of its individual and family health
insurance programs to new policyholders in the state of California in April 2003
and the termination of existing policyholders beginning November 1, 2003,
through October 1, 2004, the percentage of business derived from CIGNA
decreased. CIGNA's termination of its 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 and is continuing its efforts to diversify and offer a wider variety of
products to its customers.
EMPLOYEES
---------
On March 11, 2005, the Company employed 132 persons at its facility located in
Woodland Hills, California. The Company has no collective bargaining agreements
and believes its relations with its employees are excellent.
Item 2. Properties
- -------------------
The Company presently occupies a 46,000 square foot building located at 23251
Mulholland Drive, Woodland Hills, California, under a master lease expiring
March 31, 2007. The lease provides for an annual gross rent of $1,025,952. Erwin
Cheldin, the Company's president, chairman and principal stockholder, is the
owner of the building. On February 22, 1995, the Company signed an extension to
the lease with no increase in rent to March 31, 2007. The Company believes that
the terms of the lease at inception and at the time the lease extension was
signed were at least as favorable to the Company as could have been obtained
from non-affiliated third parties.
The Company utilizes for its own operations approximately 100% of the space it
leases.
Item 3. Legal Proceedings
- --------------------------
The Company, by virtue of the nature of the business conducted by it, becomes
involved in numerous legal proceedings in which it may be named as either
plaintiff or defendant. Incidental actions are sometimes brought by customers or
others that relate to disputes concerning the issuance or non-issuance of
individual insurance policies or other matters. In addition, the Company resorts
to legal proceedings from time to time in order to enforce collection of
premiums, commissions, or fees for the services rendered to customers or to
their agents. These routine items of litigation do not materially affect the
Company and are handled on a routine basis through its counsel, and they do not
materially affect the operations of the Company.
11
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
PART II
-------
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
- -------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
-------------------------------------
The Company's common stock is traded on the NASDAQ National Market System under
the symbol "UNAM." The high and low sales prices (by quarter) during the last
two comparable twelve-month periods are as follows:
High Low
Quarter Ended Price Price
------------- ----- -----
March 31, 2003 $4.750 $3.050
June 30, 2003 $4.200 $3.700
September 30, 2003 $4.740 $3.960
December 31, 2003 $8.070 $4.670
March 31, 2004 $6.520 $5.220
June 30, 2004 $6.450 $5.780
September 30, 2004 $6.690 $5.780
December 31, 2004 $9.590 $7.200
As of December 31, 2004, the approximate number of shareholders of record of the
Company's common stock was 500. In addition, the Company estimates beneficial
owners of the Company's common stock held in the name of nominees to be
approximately 600.
The Company declared a cash dividend on its common stock annually from 1991
through 2002. However, as a result of losses incurred by the Company during
fiscal years 2001 and 2002, the Company's Board of Directors concluded not to
declare an annual cash dividend for 2003 and 2004. Declaration of future annual
cash dividends will be subject to the Company's profitability and its cash
requirements. Because the Company is a holding company and operates through its
subsidiaries, its cash flow and, consequently, its ability to pay dividends are
dependent upon the earnings of its subsidiaries and the distribution of those
earnings to the Company. Also, the ability of Crusader to pay dividends to the
Company is subject to certain regulatory restrictions under the Holding Company
Act (see Item 1 - Business - Insurance Company Operation - Holding Company Act).
Based on Crusader's statutory surplus as regards policyholders as of December
31, 2004, the maximum dividend that can be made by Crusader to Unico without
prior regulatory approval in 2005 is $2,943,634.
The Company has previously announced that its Board of Directors had authorized
the repurchase in the open market from time to time of up to an aggregate of
945,000 shares of the common stock of the Company (See Note 17 of Notes to
Consolidated Financial Statements). No shares were repurchased during the year
ended December 31, 2004. As of December 31, 2004, the Company has purchased and
retired under the Board of Directors authorization an aggregate of 868,958
shares of its common stock at a cost of $5,517,465.
12
Item 6. Selected Financial Data
- --------------------------------
Fiscal year ended December 31
-------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Total revenues $61,903,310 $51,130,439 $46,028,642 $42,116,906 $38,367,949
Total costs and expenses 53,230,852 48,981,068 50,842,701 58,840,015 38,174,336
---------- ---------- ---------- ---------- ----------
Income (loss) before taxes $8,672,458 $2,149,371 $(4,814,059) $(16,723,109) $193,613
Net income (loss) $5,681,500 $1,068,650 $(3,224,689) $(10,870,018) $439,797
Basic earnings (loss) per share $1.03 $0.19 $(0.59) $(1.97) $0.07
Diluted earnings (loss) per share $1.02 $0.19 $(0.59) $(1.97) $0.07
Cash dividends per share - - $0.05 $0.05 $0.15
Total assets $172,570,276 $161,493,695 $148,686,605 $128,823,273 $123,945,820
Stockholders' equity $42,425,325 $38,470,857 $38,408,990 $40,620,376 $51,413,329
Item 7. 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 provided claim administration
services (through December 31, 2003), insurance premium financing, and
membership association services.
The Company's net income was $5,681,500 in 2004, $1,068,650 in 2003, and a net
loss of $3,224,689 in 2002.
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 Annual Report
on Form 10-K.
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 company operation. The insurance company operation generates
approximately 88% 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.
A primary challenge of the property and casualty insurance company operation is
contending with 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.
13
Over the past few 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." Although the Company
increased its rates and adopted more restrictive underwriting guidelines, the
beneficial market changes contributed to an 8% increase in direct written
premium in the year ended December 31, 2004, compared to the year ended December
31, 2003. The Company's future writings and growth are dependent upon, among
other things, market conditions, competition, and the Company's ability to
introduce new and profitable products. The Company believes that rate adequacy
is more important than premium growth and that 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.
In 2002, primarily as a result of losses from liquor and premises liability
coverages which had rendered much of the Company's business outside of
California unprofitable, 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 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.
The Company incurred underwriting losses in 2000, 2001, and 2002. As a result of
these underwriting losses, management analyzed and acted upon various components
of its underwriting activity. The Company believes that the implementation of
these actions contributed to the improved underwriting results. This is
reflected in the decrease in the Company's ratio of losses and loss adjustment
expenses to net earned premium from 139% in 2001, to 98% in 2002, to 85% in
2003, and to 69% in 2004.
The 2004 development of prior year losses was favorable in the amount of
$835,434 as compared to $2,751,585 of adverse development of prior year losses
in 2003 and $7,790,817 in 2002. The 2003 adverse development of prior year
losses was substantially lower than 2002, and the 2003 adverse development was
primarily attributable to one claim.
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 a slight decrease in the number of policies sold by Unifax during 2004
as compared to 2003, policy fee income for the 12 months ended December 31,
2004, decreased 2% as compared to the prior year period.
AIB sells and services health insurance policies for individual/family and small
business groups primarily for CIGNA HealthCare (CIGNA) and receives commission
and fee income based on the premiums that it writes. Commission and fee income
in this program decreased 35% in the year ended December 31, 2004, compared to
2003. The decrease is a result of CIGNA's decision to discontinue its
individual/family health insurance program over the period from November 1,
2003, through October 1, 2004. AIB had been assisting former CIGNA policyholders
to find health coverage with other insurance carriers that AIB represents. As
such, AIB's commission from all insurance carriers other than CIGNA increased
approximately 78% in 2004 as compared to 2003.
AAC provides premium financing for Crusader policies that are produced by Unifax
in California. Finance charges and fees earned by AAC during 2004 decreased 2%
as compared to 2003. The decrease is a result of a 14% decrease in the number of
loans issued in 2004 compared to 2003, offset by a 13% increase in the average
premium financed from $2,309 in 2003 to $2,606 in 2004.
Investments and Liquidity
- -------------------------
The Company generates revenue from its investment portfolio, which consisted of
approximately $132.1 million (at amortized cost) at December 31, 2004, compared
to $118.6 million (at amortized cost) at December 31, 2003. Although the
portfolio increased in 2004, investment income decreased approximately $600,000.
The decrease in investment income is primarily the result of a decline over the
last five years 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.
14
Primarily as a result of the Company's growth in premiums in 2004 and 2003, the
Company generated positive cash flows from operations, which was approximately
$14.8 million in 2004 and $15.5 million in 2003. The increased cash flows from
operations contributed to the increase in the Company's investment portfolio.
Liquidity and Capital Resources
-------------------------------
Due to the nature of the Company's business (insurance and insurance services)
and whereas Company growth does not normally require material reinvestments of
profits into property or equipment, the cash flow generated from operations
usually results in improved liquidity for the Company. Because the Company is a
holding company and operates through its subsidiaries, its cash flow is
dependent upon the earnings of its subsidiaries and the distributions of those
earnings to the Company.
The cash flow provided by operations in the year ended December 31, 2004, was
$14,823,837, a decrease in cash flow of $701,549 compared to the cash flow for
the year ending December 31, 2003. Cash flow provided by operations for the year
ended December 31, 2003, was $15,525,386, an increase of $7,512,162 in cash
provided compared to the year ended December 31, 2002. The Company has utilized
the cash provided from operating activities and from the maturity of its long
and short-term investment primarily to purchase $51.4 million of fixed maturity
securities.
The most significant liquidity risk faced by the Company would be adverse
development of the insurance company claims, both reported and unreported. The
Company has taken measures to address the underlying causes of prior adverse
development; however, no assurance can be given that the measures taken will be
successful or that the Company's estimate of ultimate losses and loss adjustment
expenses will be sufficient. Based on the Company's current loss and loss
expense reserves and expected current and future payments, the Company believes
that there are no current liquidity issues.
Crusader generates a significant amount of cash as a result of its holdings of
unearned premium reserves, its reserves for loss payments, and its capital and
surplus. Crusader's loss and loss adjustment expense payments are the most
significant cash flow requirement of the Company. These payments are continually
monitored and projected to ensure that the Company has the liquidity to cover
these payments without the need to liquidate its investments. Cash and
investments (excluding net unrealized gains or losses) at December 31, 2004,
were $132,122,792 compared to $118,592,895 at December 31, 2003, an 11%
increase. Crusader's cash and investments at December 31, 2004, was $129,887,431
or 98% of the total held by the Company, compared to $116,736,763 or 98% of the
total held by the Company at December 31, 2003.
15
The Company's investments are as follows:
December 31, 2004 December 31, 2003 December 31, 2002
----------------- ----------------- -----------------
Amount % Amount % Amount %
------ - ------ - ------ -
Fixed maturities (at amortized cost)
Certificates of deposit $500,000 - $500,000 - $400,000 -
U.S. treasury securities 77,765,616 60 38,305,041 34 8,517,578 10
U.S. government sponsored enterprise securities 11,998,772 10 11,997,264 11 9,000,000 9
Industrial and miscellaneous (taxable) 37,754,927 29 58,493,396 53 73,000,830 78
State and municipal (tax exempt) 970,343 1 2,029,891 2 2,731,060 3
----------- --- ----------- --- ---------- ---
Total fixed maturity investments 128,989,658 100 111,325,592 100 93,649,468 100
----------- === ----------- === ---------- ===
Short-term cash investments (at cost)
Certificates of deposit 400,000 13 425,000 6 225,000 2
Cash deposited in lieu of bond* 752,659 24 752,659 10 - -
Commercial paper 1,005,000 32 2,000,000 28 1,525,000 17
Bank money market accounts 803,949 26 902,517 13 724,842 8
U.S. gov't obligation money market fund 144,925 5 147,666 2 6,546,602 73
Short-term U.S. treasury - - 2,998,850 41 - -
Bank savings accounts 11,585 - 2,623 - 2,938 -
--------- --- --------- --- -------- ---
Total short-term cash investments 3,118,118 100 7,229,315 100 9,024,382 100
--------- === --------- === --------- ===
Total investments $132,107,776 $118,554,907 $102,673,850
=========== =========== ===========
*Deposited with superior courts to stay execution of judgments pending appeal of
two Crusader claims.
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 investment 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 and the Company may
sell investment securities from time to time in response to economic and market
conditions, its investment guidelines place primary emphasis on buying and
holding high-quality investments to maturity.
The tax-exempt interest income earned (net of bond premium and discount
amortization) during the year ended December 31, 2004, was $36,719 compared to
$117,892 in the year ended December 31, 2003. In the year ended December 31,
2002, tax-exempt interest income earned totaled $283,856.
The Company's investment policy limits investments in any one company to
$2,000,000 and any one U.S. government agency or U.S. government sponsored
enterprise to $3,000,000. This limitation excludes bond premiums paid in excess
of par value and U.S. government or U.S. government guaranteed issues. The
Company's investment guidelines on equity securities limit investments in equity
securities to an aggregate maximum of $2,000,000. As of December 31, 2004, all
of the Company's fixed maturity investments were investment grade, the Company
held no non-traded fixed maturity or equity securities, all state and municipal
tax exempt fixed maturity investments were pre-refunded issues, and all
certificates of deposit were FDIC insured.
In 2003, Unico made capital contributions totaling $3,000,000 to its Crusader
subsidiary. The contributions were made to ensure that Crusader maintained its
A.M. Best Financial Size Category VI rating, which requires capital of a least
$25,000,000. 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. As of
December 31, 2004, the Company repaid the note from The Cary and Danielle
Cheldin Family Trust in full and repaid $500,000 of the Erwin Cheldin note. On
January 31, 2005, the Company repaid an additional $250,000 of the Erwin Cheldin
note. The note from Erwin Cheldin is unsecured and it is payable upon demand of
lender (on no less than fourteen days' notice) and, if no demand is made, then
it is payable in full on September 28, 2007. The note may be prepaid at any time
without penalty. The note bears an adjustable interest of 5.5% as of December
31, 2004. The interest is payable monthly and is adjustable every third month by
adding a margin of one percentage point to the prime rate.
16
Crusader's statutory capital and surplus as of December 31, 2004, was
$29,436,343, an increase of $3,332,903 (12.8%) from December 31, 2003.
Crusader's statutory capital and surplus as of December 31, 2003, was
$26,103,440, a decrease of $155,012 (0.6%) from December 31, 2002.
There were no dividends paid by Crusader to Unico in 2004, 2003 or 2002. Based
on Crusader's statutory surplus as regards policyholders as of December 31,
2004, the maximum dividend that can be made by Crusader to Unico without prior
regulatory approval in 2005 is $2,943,634.
The Company has previously announced that its Board of Directors had authorized
the repurchase in the open market from time to time of up to an aggregate of
945,000 shares of the common stock of the Company (see Note 17 of Notes to
Consolidated Financial Statements). During the year ended December 31, 2004, the
Company did not repurchase any shares of the Company's common stock. As of
December 31, 2004, the Company has purchased and retired under the Board of
Directors' authorization an aggregate of 868,958 shares of its common stock at a
cost of $5,517,465.
Although material capital expenditures may also be funded through borrowings,
the Company believes that its cash and short-term investments at year end, net
of trust restriction of $773,404, statutory deposits of $700,000, cash deposited
(with superior courts) in lieu of bond of $752,659 and dividend restriction
between Crusader and Unico (see Item 1 - Business - Insurance Company Operation
- - Holding Company Act) plus the cash to be generated from operations, should be
sufficient to meet its operating requirements during the next twelve months
without the necessity of borrowing funds. The Company anticipates incurring
approximately $600,000 of capital expenditures in 2005 for computer hardware and
software related to its conversion to a "paperless office." This project is
expected to be completed by mid-2005. The Company's analysis of its potential
return on this capital expenditure is estimated to be approximately two years
due to anticipated productivity improvements and lower operating costs.
As a California insurance company, Crusader is obligated to pay a premium tax on
gross premiums written in all states that Crusader is admitted. Premium taxes
are deferred and amortized as the related premiums are earned. The premium tax
is in lieu of state franchise taxes and is not included in the provision for
state taxes.
In the year ended December 31, 2003, the Company recognized an income tax
expense of $287,000 resulting from an assessment for the years 1999 and 2000
from the California Franchise Tax Board. The assessment resulted from a court
ruling in Ceridian vs. Franchise Tax Board that held that the California statute
permitting the tax deductibility of dividends received from a wholly owned
insurance subsidiary was unconstitutional because it discriminated against
out-of-state holding companies and thus was in violation of the interstate
commerce clause of the United States Constitution. The ruling concluded that the
discriminatory sections of the statute are not severable and the entire statute
was invalid and unenforceable. California law provides that the proper remedy in
such circumstances is to disallow the deduction to those taxpayers that
benefited from the deduction. As a result of the court ruling, in February 2003,
the Franchise Tax Board (FTB) notified the Company that it would issue a Notice
of Proposed Assessment (NPA) for tax years 1999 and 2000 of approximately
$287,000 representing California state franchise taxes plus related interest of
approximately $80,000. In September 2004, California enacted legislation (AB
263) that addresses many aspects of the tax treatment of insurance company
owners, including holding companies such as Unico. The legislation provides for
an election, applicable if made to all tax years ending after December 1, 1997,
and before January 1, 2005, under which a dividend-received deduction of up to
80% of dividends paid by an insurer to a non-insurer parent is allowed. The
Company made the election authorized by AB 263 and, therefore, has reversed 80%
of the $287,000 income tax expense. The Company has also reversed 80% of the
interest accrued at December 31, 2003, on the $287,000 assessment. In addition,
as a result of AB 263, the Company recognized a state deferred tax liability of
$157,249 in accordance with FASB 109. This deferred tax liability represents the
Company's future state tax liability for all undistributed earnings of Crusader
since January 1, 1993. The federal tax benefit resulting from AB 263 as of
December 31, 2004, is $53,465. Thus, the net deferred tax liability as of
December 31, 2004, is $103,784.
The Company has certain obligations to make future payments under contracts and
credit-related financial instruments and commitments. At December 31, 2004,
certain long-term aggregate contractual obligations and credit-related
commitments are summarized as follows:
17
Within 1-3 3-5 After
Contractual Obligations Total 1 Year Years Years 5 years
- ----------------------- ----- ------ ----- ----- -------
Building lease $2,308,392 $1,025,952 $1,282,440 - -
Notes payable - related parties * 500,000 - 500,000 - -
Losses and loss adjustment expense reserves** 87,469,000 23,217,000 33,219,000 $17,622,000 $13,411,000
---------- ---------- ---------- ---------- ----------
Total $90,277,392 $24,242,952 $35,001,440 $17,622,000 $13,411,000
========== ========== ========== ========== ==========
* On January 31, 2005 the Company repaid $250,000 in advance of the contractual
due date of the note.
**Unlike many other forms of contractual obligations, loss and loss adjustment
expense reserves do not have definitive due dates and the ultimate payment
dates are subject to a number of variables and uncertainties. As a result, the
total loss and loss adjustment expense reserve payments to be made by period,
as shown above, are estimates.
Results of Operations
---------------------
General
- -------
The Company had a net income of $5,681,500 for the year ended December 31, 2004,
compared to net income of $1,068,650 for the year ended December 31, 2003, and a
net loss of $3,224,689 for the year ended December 31, 2002. Total revenue for
the year ended December 31, 2004, was $61,903,310 compared to $51,130,439 for
the year ended December 31, 2003, and $46,028,642 for the year ended December
31, 2002.
For the year ended December 31, 2004, the Company had income before taxes of
$8,672,458 compared to income before taxes of $2,149,371 in the year ended
December 31, 2003, an increase in income before taxes of $6,523,087. The
increase in pre-tax income was primarily due to an increase of $7,892,277 in the
underwriting profit (net earned premium less losses and loss adjustment expenses
and policy acquisition costs) from Crusader offset by $1,605,512 decrease in
gross commissions and fees income.
For the year ended December 31, 2003, the Company had income before taxes of
$2,149,371 compared to a loss before taxes of $4,814,059 in the year ended
December 31, 2002, an increase in income before taxes of $6,963,430. The
increase in pre-tax income was primarily due to a decrease of $6,086,381 in the
underwriting loss (net earned premium less losses and loss adjustment expenses
and policy acquisition costs) from Crusader. The Company had a net income for
the year ended December 31, 2003, of $1,068,650 compared to a net loss of
$3,224,689 for the year ended December 31, 2002, an increase in net earnings of
$4,293,339.
The effect of inflation on the net income of the Company during the years ended
December 31, 2004, 2003, and 2002 was not significant.
The Company derives revenue from various sources as discussed below.
Insurance Company Operation
- ---------------------------
Premium and loss information of Crusader are as follows:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Gross written premium $68,872,021 $64,047,717 $45,622,280
Net written premium (net of reinsurance ceded) $51,089,573 $47,420,157 $38,363,201
Earned premium before reinsurance ceded $67,890,808 $53,754,119 $40,568,845
Earned premium (net of reinsurance ceded) $50,106,568 $37,106,099 $33,359,272
Losses and loss adjustment expenses $34,450,738 $31,720,533 $32,727,023
Unpaid losses and loss adjustment expenses $87,469,000 $78,139,090 $74,905,284
Crusader's primary line of business is commercial multiple peril business
package policies. This line of business represented approximately 98% of
Crusader's total written premium for the year ended December 31, 2004, 97% for
the year ended December 31,2003, and 96% for the year ended December 31, 2002.
18
As of December 31, 2004, Crusader was licensed as an admitted insurance company
in the states of Arizona, California, Idaho, Montana, Nevada, Ohio, Oregon, and
Washington and is approved as a non-admitted surplus lines writer in other
states.
Crusader's gross written premium by state is as follows:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
California $68,872,425 100.0% $64,029,493 100.0% $42,590,674 93.4%
Non-California (404) - 18,224 - 3,031,606 6.6%
----------- ----- ---------- ----- ---------- -----
Total gross written premium $68,872,021 100.0% $64,047,717 100.0% $45,622,280 100.0%
========== ===== ========== ===== ========== =====
For the year ended December 31, 2004, gross written premium increased by
$4,824,304 (7.5%) over 2003 and gross written premium for the year ended
December 31, 2003, increased by $18,425,437 (40%) over 2002. The growth in
written premium is primarily a result of higher premium rates charged by the
Company, which has resulted in a 10% and 22% increase in the average premium per
policy for each of the years ended December 31, 2004 and 2003, respectively. The
increase in average gross written premium per policy is a result of several
factors including a subsidence in price based competition in the property
casualty insurance market and an increase in rates for some of the Company's
products. The Company's future writings growth is dependent on market
conditions, competition, and the Company's ability to introduce new and
profitable products. The Company believes that the "hard market" condition
experienced by the Company in 2004 no longer exists. Nonetheless, the Company
continues to benefit from the fact that some of its competitors went out of
business and others raised rates or adopted more restrictive rules.
The Company's average premium per policy issued is as follows:
Year Ended Direct Written Policies Average
December 31 Premium Issued Premium
----------- ------- ------ -------
2004 $68,872,021 20,885 $3,298
2003 $64,047,717 21,425 $2,989
2002 $45,622,280 18,603 $2,452
As indicated in the above table, the number of policies issued during the 12
months ended December 31, 2004, decreased by 540 (3%) as compared to the prior
year. However, the average premium per policy in 2004 increased by $309 (10%) as
compared to the 12 months ended December 31, 2003. As previously discussed, the
increase in average gross written premium per policy is a result of several
factors including a subsidence in price based competition in the property
casualty insurance market (making the Company's products more competitive) and
an increase in rates for some of the Company's products.
Beginning July 1, 2003, the Company had placed moratoriums on all non-California
business, primarily due to the fact that much of the Company's business outside
of California has not been profitable. 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.
The Company continues to believe that it can compete effectively and profitably
by offering better service and by marketing its policies through its current
independent agents and brokers.
The Company writes annual policies and, therefore, earns written premium daily
over the one-year policy term. Premium earned before reinsurance increased
$14,136,689 (26%) in the year ended December 31, 2004, compared to the year
ended December 31, 2003, and increased $13,185,274 (33%) in the year ended
December 31, 2003, compared to the year ended December 31, 2002. The increase in
earned premium before reinsurance in 2004 and 2003 is a direct result of the
increase in written premium for these years.
Earned ceded premiums for the 12 months ended December 31, 2004, increased
$1,136,220 (7%) to $17,784,240 compared to $16,648,020 for the 12 months ended
December 31, 2003. Earned ceded premiums as a percentage of direct earned
premiums were 26% and 31% for 2004 and 2003, respectively. Although direct
earned premiums in 2004 increased 26% as compared to 2003, earned ceded premiums
increased only 7% primarily as a result of a rate decrease by the Company's
reinsurers effective January 1, 2004. Earned ceded premiums for the 12 months
ended December 31, 2003, increased $9,438,447 (131%) to $16,648,020 compared
19
to $7,209,573 for the 12 months ended December 31, 2002. Earned ceded premiums
as a percentage of direct earned premiums were 31% and 18% for 2003 and 2002,
respectively. The rate increase was primarily due to the Company's ceded loss
experience and the hardening of the reinsurance marketplace.
Ceding commissions on the Company's excess of loss treaties increased from 25%
in 2002 to 35% beginning January 1, 2003. Ceding commission is a component of
policy acquisition costs. The annual aggregate deductible on Crusader's primary
excess of loss treaty was $675,000 in 2002, and $500,000 in 2003 and 2004. In
2004 Crusader retained a participation in its excess of loss reinsurance
treaties of 10% in its 1st and 2nd layers (i.e., 10% of $750,000 in excess of
$250,000 and 10% of $1,000,000 in excess of $1,000,000, respectively), and 15%
in its property clash treaty. In 2003 Crusader retained a participation in its
excess of loss reinsurance treaties of 5% in its 1st layer (i.e., 5% of $750,000
in excess of $250,000), 10% in its 2nd layer (i.e., 10% of $1,000,000 in excess
of $1,000,000), and 30% in 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.
Crusader's 2004 and 2003 1st layer primary excess of loss treaty provides for a
contingent commission equal to 45% of the net profit, if any, accruing to the
reinsurer. The first accounting period for the contingent commission is December
31, 2005. Based on losses and loss adjustment expenses ceded (including incurred
but not reported losses) as of December 31, 2004, no contingent commission has
been accrued.
Beginning January 1, 2005, Crusader increased its retention from $250,000 to
$300,000 per risk. There has been no change in the 2005 annual aggregate
deductible amount or participation rates compared to 2004. The contingent
commission does not apply to 2005 premium. Due to favorable loss experience in
2003 and 2004, reinsurance premium on the Company's 1st layer primary excess of
loss treaty ($700,000 in excess of $300,000) decreased by 24% compared to 2004.
Crusader's direct earned premium, earned ceded premium, and ceding commission
are as follows:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Direct earned premium $67,890,808 $53,754,119 $40,568,845
Earned ceded premium
Excluding provisionally rated ceded premium 17,843,805 16,414,611 6,336,551
Provisionally rated ceded premium (59,565) 233,409 873,022
---------- ---------- ---------
Total earned ceded premium 17,784,240 16,648,020 7,209,573
Ceding commission 6,031,987 5,429,330 1,356,061
---------- ---------- ---------
Earned ceded premium, net of ceding commission $11,752,253 $11,218,690 $5,853,512
========== ========== =========
Ratios to direct earned premium
Direct ceded premium 26% 31% 18%
Earned ceded premium, net of ceding commission 17% 21% 14%
The combined ratio is the sum of (1) the net ratio of losses and loss adjustment
expenses incurred (including a provision for incurred-but-not-reported losses
"IBNR") to net premiums earned (loss ratio) and (2) the ratio of policy
acquisition costs to net premiums earned (expense ratio). The following table
shows the loss ratios, expense ratios, and combined ratios of Crusader as
derived from data prepared in accordance with GAAP.
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Loss ratio 68.8% 85.5% 98.1%
Expense ratio 20.6% 21.4% 27.8%
---- ----- -----
Combined ratio 89.4% 106.9% 125.9%
==== ===== =====
As indicated in the above table, loss ratio for the year ended December 31,
2004, decreased to 68.8% from 85.5% in 2003 and 98.1% in 2002. The decrease in
the loss ratio since 2002 was primarily due to improvements in the provision for
prior years' incurred losses. Generally, if the combined ratio is below 100%, an
insurance company has an underwriting profit; if it is above 100%, a company has
an underwriting loss.
20
Reserves for losses and loss adjustment expenses before reinsurance was
$87,469,000 at December 31, 2004, compared to $78,139,090 and $74,905,284 at
December 31, 2003 and 2002 respectively. The increase in loss and loss
adjustment expense reserves in 2004 and 2003 is primarily a result of increased
IBNR reserves as a result of the 26% and 32% increase in direct earned premium
in the years ended December 31, 2004 and 2003 respectively, as discussed above.
Reserves for losses and loss adjustment expenses before reinsurance for each of
Crusader's lines of business were as follows:
Year ended December 31
----------------------
Line of Business 2004 2003 2002
- ---------------- ---- ---- ----
CMP $83,677,560 95.7% $73,708,553 94.3% $69,111,825 92.3%
Other Liability 3,592,719 4.1% 4,279,021 5.5% 5,564,214 7.4%
Other 198,721 0.2% 151,516 0.2% 229,245 0.3%
---------- ----- ---------- ------- ---------- -----
Total $87,469,000 100.0% $78,139,090 100.0% $74,905,284 100.0%
========== ===== ========== ====== ========== =====
The Company`s consolidated financial statements include estimated reserves for
unpaid losses and related claim settlement or loss adjustment expenses of the
insurance company operation. Crusader sets loss and loss adjustment expense
reserves at each balance sheet date as management's best estimate of the
ultimate payments that it anticipates will be made to settle all losses incurred
and related expenses incurred as of that date for both reported and unreported
losses. 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.
2004 losses and loss adjustment expenses
- ----------------------------------------
Losses and loss adjustment expenses were $34,450,738 or 69% of net premium
earned for the year ended December 31, 2004, compared to $31,720,533 or 85% of
net premium earned for the year ended December 31, 2003. Incurred losses of
prior years were approximately $835,434 (favorable development) for the year
ended December 31, 2004, compared to an incurred losses of prior years of
$2,751,585 (adverse development) for the year ended December 31, 2003.
2003 losses and loss adjustment expenses
- ----------------------------------------
Losses and loss adjustment expenses were $31,720,533 (85%) of net premium earned
for the year ended December 31, 2003, compared to $32,727,023 (98%) of net
premium earned for the year ended December 31, 2002. The decrease in losses for
the year ended December 31, 2003, is primarily the result of a decrease in the
adverse development of prior year losses in 2003 compared to 2002. The adverse
loss development in 2003 was $2,751,585 compared to $7,790,851 in 2002. The
adverse development in 2003 was primarily attributable to one claim. That claim
was a loss in excess-of-policy-limits, arising from a policy issued in 1993. The
claim was resolved on August 1, 2003, for $4 million through binding
arbitration. Available reinsurance limits in 1993 were $2,000,000 plus pro-rata
loss adjustment expenses. As a result of the binding arbitration decision, in
2003 Crusader incurred adverse development on this claim, net of reinsurance, of
approximately $2,000,000 or approximately $1,320,000 net of taxes. To help
assure that such situations do not reoccur, the Company adopted changes in its
underwriting and claims adjusting practices, and it bought substantially more
reinsurance.
The remaining adverse development in 2003 was attributable to 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 claims
occurring on or prior to the Company's revision of its policy forms in 1995.
21
Analysis of the roll forward of losses and loss adjustment expenses
- -------------------------------------------------------------------
The following table provides an analysis of the roll forward of Crusader's
losses and loss adjustment expenses, including a reconciliation of the ending
balance sheet liability for the periods indicated:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Reserve for unpaid losses and loss adjustment expenses
at beginning of year - net of reinsurance $58,883,861 $53,596,945 $49,786,215
---------- ---------- ----------
Incurred losses and loss adjustment expenses
Provision for insured events of current year 35,286,172 28,968,948 24,936,172
Increase (Decrease) in provision for events of prior years (835,434) 2,751,585 7,790,851
---------- ---------- ----------
Total losses and loss adjustment expenses 34,450,738 31,720,533 32,727,023
---------- ---------- ----------
Payments
Losses and loss adjustment expenses attributable to
insured events of the current year 7,438,331 5,106,929 5,905,678
Losses and loss adjustment expenses attributable to
insured events of prior years 18,546,279 21,326,688 23,010,615
---------- ---------- ----------
Total payments 25,984,610 26,433,617 28,916,293
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses
at end of year - net of reinsurance 67,349,989 58,883,861 53,596,945
Reinsurance recoverable on unpaid losses and loss
adjustment expenses at end of year 20,119,011 19,255,229 21,308,339
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses at
end of year per balance sheet, gross of reinsurance (*) $87,469,000 $78,139,090 $74,905,284
========== ========== ==========
(*) In accordance with Financial Accounting Standards Board Statement No. 113,
Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts, reinsurance recoverable on unpaid losses and loss adjustment expenses
are reported for GAAP as assets rather than netted against the corresponding
liability for such items on the balance sheet.
Managements analysis and actions regarding underwriting activity
- ----------------------------------------------------------------
Crusader incurred underwriting losses in 2000, 2001, and 2002. As a result of
these underwriting losses, Crusader's management analyzed and acted upon the
following components of its underwriting activity:
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
The following is a discussion of the above items. The Company believes that
except for one aberrational claim previously discussed under the 2003 adverse
development, the implementation of the above items have contributed to improved
operating results in 2003 and 2004.
1. Business Outside of California: Collectively, the insurance underwritten by
the Company outside of California has been very unprofitable, particularly
with respect to the Liquor and Premises types of liability coverage. The
Company adopted substantial rate increases and coverage restrictions
beginning in June of 2001 for all Liquor Liability written outside of
California and Nevada. The rate increases caused a dramatic decline in
sales, causing the Company to be concerned about adverse selection. The
Company determined that under current market conditions, it could not sell
its policies at an adequate rate outside of California and ceased writing
in those states.
22
Non-California Non-California
Accident Direct Written Direct Earned
Year Premium Premium
---- ------- -------
1997 $9,464,473 $9,287,644
1998 $5,813,949 $8,085,720
1999 $4,429,266 $4,783,426
2000 $4,746,126 $4,473,864
2001 $5,263,039 $5,112,715
2002 $3,031,606 $4,431,289
2003 $18,224 $1,198,006
2004 ($404) $19,862
2. Habitability Exposure: In 2000 and 2001, the Company began experiencing
adverse development on its apartment house business, due primarily to the
effect of settlements on habitability claims. Those settlements were
substantially influenced by a statute that provides for the payment of
plaintiff attorney fees without regard to policy limits, and by the
Montrose Chemical Corp. v. Admiral Insurance Company decision of 1995.
Starting in October 2000, the Company significantly changed its
underwriting practice with respect to the type of apartment buildings
thought to cause these claims. These changes included:
A. In September 2000, the Company identified a subcategory of
apartment building risk, referred to as the "Big and Old" group.
The Company believes that members of this group pose a
greater-than-average probability of habitability loss.
B. On September 28, 2000, the Company imposed more stringent
underwriting restrictions and requirements upon members of the
"Big and Old" group, including the adoption of more restrictive
coverage forms and use of maintenance warranties for members of
this group.
C. On September 7, 2002, the Company changed its coverage forms to
limit the "costs taxed against the insured" clause of the
"Supplementary Provisions" coverage grant, from unlimited to
$100,000.
D. In September 2003, the Company adopted an 80% liability rate
increase for all of its apartment risks.
Since 2002, no additional claims of any significance have been reported to
Crusader. The Company believes that the combination of improved
underwriting and policy language limiting supplemental payments have
substantially reduced the exposure.
3. Construction Defect Exposure: The Company continuously modifies its
underwriting practice with respect to subcontractors in an effort to
improve loss experience. For example, subcontractors performing
"waterproofing, weather-coating, or decking" were deemed ineligible by the
Company in 1995; and, to minimize the adverse effects of the Montrose
decision of 1995, the Company changed its coverage forms in 1996; and, the
Company adopted numerous, program-specific questions to its applications,
inspections, and survey forms. Although the Company believes that the
ultimate results of its post-1996 underwriting of this class of business
will prove to be profitable, the results will not be known until the 10
year statute runs. Therefore, on April 18, 2002, the Company sought
regulatory approval for a change in or discontinuation of its experience
rating plan. When the regulator disapproved that filing, on June 18, 2002,
the Company imposed a moratorium on all new offers of artisan contractors'
insurance. In January 2003 Crusader received regulatory approval of its
plan to discontinue experience rating, which translates into a 21% rate
increase for all coverages offered to artisan contractors. However, because
the Company is cautious about underwriting this type of business, it has
not lifted the underwriting moratorium that started on June 18, 2002. Since
that date, attrition was significant, reducing the number of policies in
force. Until such time that the Company can change this program to make
underwriting more predictable, the moratorium will not be lifted.
4. The Special Risks Division: The Company's Special Risk class of business
represents risks written within current underwriting programs that have a
higher degree of exposure and require special pricing and underwriting. In
November 2000 after a change of program management, the Company reviewed
those policies underwritten by its Special Risks division. That review
resulted in the cancellation of a significant number of policies, those
thought to be generating most of the losses.
23
Special Risk Special Risk Special Risk
Direct Written Direct Earned Policies
Year Premium Premium In Force
---- ------- ------- --------
1998 $2,734,635 $3,380,747 259 as of 12/31/98
1999 $2,595,032 $2,636,451 235 as of 12/31/99
2000 $2,851,194 $2,731,012 250 as of 12/31/00
2001 $2,922,257 $2,925,365 201 as of 12/31/01
2002 $2,329,771 $2,582,673 131 as of 12/31/02
2003 $1,804,249 $2,222,707 115 as of 12/31/03
2004 $25,772 $775,167 10 as of 12/31/04
5. Increased Cost of Settling Claims: In 2002 the Company noticed a trend of
increasing costs in settling claims but does not believe that the trend
reflects operational changes. The Company believes that the trend is most
likely attributable to several changes in the law, including an increased
propensity for trial courts to award large plaintiff verdicts. However,
several favorable decisions were recently published, including the U.S.
Supreme Court's limitation on punitive damages (see Campbell vs. State
Farm, 2003), and the California Supreme Court's limitation on public policy
reformations (see Rosen vs. State Farm, 2003). It is difficult to quantify
and predict the continuation of this trend. In 2003, an outside actuary was
engaged to assist the Company in reviewing the premium rate adequacy of
certain key Crusader programs and to assist in the regulatory rate filings.
Crusader raises its premium rates whenever the adequacy is in doubt.
6. Increased Cost of Reinsurance: In 2003, the cost of reinsurance
significantly increased primarily as a result of losses sustained outside
of California that the Company no longer underwrites. The Company received
a slight decrease in its reinsurance rates in 2004.
7. Mold Exposure: The Company has not seen any significant mold-based claims
and all of its policies are now being endorsed with a "Mold Exclusion." In
addition, numerous articles from respected medical authorities were
recently published, making plaintiffs task of proving mold-based injuries
much more difficult.
8. Terrorism Exposure: All policies are endorsed with a "Terrorism
Endorsement" that conforms with the Federal Terrorism Risk Insurance Act of
November 26, 2002. All policyholders that reject the federal coverage will
get a policy containing a Terrorism Exclusion endorsement.
Primarily as a result of the underwriting losses in 2000 and 2001, A.M. Best
Company lowered Crusader's rating from A (Excellent) to A- (Excellent) effective
March 26, 2002, based on financial information as of December 31, 2001. At the
time the rating was lowered, A.M. Best remained concerned with the potential for
further adverse loss reserve development and the negative impact it would have
on the Company's operating performance and overall capitalization and viewed the
rating outlook as negative. Due to the continued adverse development in the six
months ended June 30, 2002, on October 3, 2002, A.M. Best Company lowered
Crusader's rating to B+ (Very Good) and continued to view its rating outlook as
negative. The lowering of Crusader's rating to B+ did not have a material
adverse effect on the Company.
Other Insurance Operations
- --------------------------
Health and Life Insurance Program
---------------------------------
Commission income from the health and life insurance sales of NIB and AIB is as
follows:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Commission income $2,156,924 $3,312,715 $2,741,672
AIB markets health and life insurance in California through non-affiliated
insurance companies for individuals and groups and receives commission and fee
income based on the premiums that it writes.
24
Commission and fee income decreased $1,156,924 (35%) in the year ended December
31, 2004, compared to 2003. The decrease is primarily due to the discontinuance
of CIGNA's individual and family health insurance program in the state of
California. AIB was able to secure other insurance for approximately half of the
2,200 CIGNA members that were terminated by CIGNA. AIB could not obtain
insurance for the remaining CIGNA individuals and family members primarily due
to their pre-existing health conditions or that they were able to secure
insurance through their employer or their spouse's employer. The discontinuance
of CIGNA's individual and family health insurance program did not affect the
CIGNA small group program. Due to intense competition in both rates and benefits
offered, CIGNA small group program membership decreased in 2004. As of December
31, 2004, CIGNA small group program membership is comprised of 1,488 subscribers
and 878 dependents compared to 1,935 subscribers and 1,149 dependents as of
December 31, 2003.
Commissions/overrides from other carriers are generally higher than the
commission structure paid by CIGNA. As such, AIB's commission income from all
insurance carriers except CIGNA increased approximately 78% in 2004 as compared
to 2003.
Commission and fee income for the year ended December 31, 2003 increased
$571,043 (21%) compared to the year ended December 31, 2002. The increase in
health and life insurance program commission and fee income was primarily due to
an increase in premium written. This increase was primarily due to 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. Approximately 65% were
enrolled in the CIGNA individual health and family program and 35% were enrolled
in CIGNA's small group program.
Policy Fee Income
-----------------
Unifax sells and services insurance policies for Crusader. The policy fee
charged to the policyholder by Unifax is recognized as income in the
consolidated financial statements. Policy fee income of Unifax is as follows:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Policy fee income $3,394,783 $3,458,559 $2,241,883
Policies written 20,885 21,425 18,603
Policy fee income for the year ended December 31, 2004, decreased $63,776 (2%)
as compared to the year ended December 31, 2003. The slight decrease in policy
fee income is a result of a 540 (3%) decrease in the number of policies issued
during 2004 as compared to 2003.
Policy fee income for the year ended December 31, 2003, increased $1,216,676
(54%) as compared to the year ended December 31, 2002. The increase in policy
fee income was due to an increase in the fee from $100 to $165 per policy
written in California effective on and after the latter part of August 2002 and
due to the 2,822 (15%) increase in the number of policies written by Unifax
during 2003 as compared to 2002.
Daily Automobile Rental Insurance Program
-----------------------------------------
The daily automobile rental insurance program is produced by Bedford. Bedford
receives a commission from a non-affiliated insurance company based on premium
written. Prior to December 31, 2003, Bedford also received a claim
administration fee from the non-affiliated insurance company.
Commission and fee income from the daily automobile rental insurance program are
as follows:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Rental program commission $555,964 $574,197 $642,005
Claim administration fee - 241,428 80,531
Contingent commission 9,488 - 66,947
------- ------- -------
Total commission and fee income $565,452 $815,625 $789,483
======= ======= =======
25
Commission and fee income during the year ended December 31, 2004, were
$565,452, a decrease of $250,173 (31%) as compared to the year ended December
31, 2003. Commission and fee income for the year ended December 31, 2003,
increased by $26,142 (3%) compared to the year ended December 31, 2002.
The daily automobile rental insurance program commission income (excluding
contingent commission) decreased $18,233 (3%) in 2004 compared to 2003. The
daily automobile rental insurance program commission income (excluding
contingent commission) decreased $67,808 (11%) in 2003 compared to 2002. Premium
written in 2004 decreased 6% compared to premium written in 2003, and premium
written in 2003 increased 11% compared to premium written in 2002. The decrease
in written premium in 2004 and 2003 is primarily due to the continued intense
price competition in the daily automobile rental insurance program, which is
causing these fluctuations in the Company's written premium and related
commission income. To avoid underwriting losses for the non-affiliated insurance
Company that it represents, Bedford continues to produce business only at rates
that it believes to be adequate. The Company cannot determine how long the
existing market conditions will continue, nor in which direction they might
change.
The decrease in claim administration fee income is due to the fact that the
Company's subsidiary U.S. Risk Managers, Inc., (U.S. Risk) ceased providing
insurance claim administration services to a non-affiliated property and
casualty insurance as of December 31, 2003, and it is currently inactive. As of
December 31, 2003, the non-affiliated insurance company assumed the claim
administration responsibility for all outstanding and IBNR claims.
During 2003, the Company recognized $200,000 of claim administration fees that
were unearned as of December 31, 2002. Although U.S. Risk is inactive, the
Company is still responsible for all claim administration cost arising from
losses covered by premiums for which it received a claim administration fee. As
of December 31, 2003, the non-affiliated insurer assumed the claim
administration for the remaining outstanding and IBNR claims. During 2004, the
Company did not receive any claim administration fees and will not incur any
future internal claim administration costs. The unearned claim administration
reserve as of December 31, 2004, is in the amount of $100,000 and it reflects
the estimated costs to complete the claim administration by the non-affiliated
insurer. The non-affiliated insurer will bill the Company for these costs as
they are incurred.
Association Operation
---------------------
Membership and fee income from the association program of AAQHC is as follows:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Membership and fee income $333,470 $481,366 $424,784
Membership and fee income for the year ended December 31, 2004, decreased
$147,896 (31%), compared to the year ended December 31, 2003. Beginning in April
2003, CIGNA discontinued its individual and family health insurance program to
new policyholders in the State of California and on November 1, 2003, CIGNA
began terminating approximately 2,200 individual and family policyholders on a
runoff basis. The termination of policyholders continued through October 1,
2004. Due to the discontinuance of CIGNA's individual and family health
insurance program, membership and fee income decreased as these terminated
members were no longer members of the association.
The increase in membership and fee income for the year ended December 31, 2003,
as compared to 2002 is primarily a result of the fact that in November 2002
CIGNA terminated its 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.
Other Commission and Fee Income
-------------------------------
Other commission and fee income are as follows:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Earthquake program commission income $53,140 $40,015 $51,576
Miscellaneous commission and fee income 111 1,112 11,626
------ ------ ------
Total other commission and fee income $53,251 $41,127 $63,202
====== ====== ======
26
Unifax began producing commercial earthquake insurance policies in California
for non-affiliated insurance companies in 1999. Unifax receives a commission
from these insurance companies based on premium written. Commission income on
the earthquake program for the year ended December 31, 2004, increased $13,125
(33%) compared to the prior year. The commission income on the earthquake
program is based on premium written.
The commissions paid by Crusader to Unifax are eliminated as intercompany
transactions and are not reflected in commission income or commission expense.
Premium Finance Program
-----------------------
Premium finance charges and late fees earned from financing policies are as
follows:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Premium finance charges and fees earned $933,529 $952,543 $878,316
New loans 5,156 6,216 6,340
AAC provides premium financing to Crusader policies produced by Unifax in
California. The growth of this program is dependent and directly related to the
growth of Crusader's written premium and AAC's ability to market its competitive
rates and service to finance those policies. Premium finance charges and fees
earned decreased $19,014 (2%) in the year ended December 31, 2004, compared to
the prior year due to the fact that there were 1,060 (17%) fewer loans financed
in the current year. However, the decrease in the number of new loans issued
during 2004 was offset by the 13% increase in the average premium financed as
compared to 2003. During 2004, 33% of all Unifax policies were financed and 74%
of those policies were financed by AAC. During 2003, 36% of all Unifax policies
were financed and 81% of those policies were financed by AAC.
Premium finance charges and fees earned for the year ended December 31, 2003,
increased $74,227 (8%) as compared to 2002. The increase in revenues despite the
124 (2%) decrease in the number of new loans in 2003 was primarily due to a 23%
increase in the average policy premium financed as compared to 2002.
Investment Income and Net Realized Gains
- ----------------------------------------
Investment income and net realized gains are as follows:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Interest income
Insurance company operations $4,204,573 $4,801,133 $5,401,870
Other operations 38,250 47,010 56,176
--------- --------- ---------
Total interest income 4,242,823 4,848,143 5,458,046
Net realized investment gains - - 3,690
--------- --------- ---------
Total investment income and
realized gains $4,242,823 $4,848,143 $5,461,736
========= ========= =========
In the year ended December 31, 2004, while the Company's average invested assets
(at amortized value) increased $14,716,855 (13%) compared to the year ended
December 31, 2003, investment income earned (excluding net realized gains)
decreased $605,320 (12%) compared to the year ended December 31, 2003. The
decrease in investment income is primarily the result of a decline in the
average return on new and reinvested assets in the Company's investment
portfolio. Also contributing to the decline in average return is a shorter
weighted average maturity of new and reinvested assets. Due to the current
interest rate environment, management believes it prudent to purchase fixed
maturity investments with shorter maturities and therefore, the weighted average
maturity of the Company's fixed maturity investments has decreased from 1.9
years as of December 31, 2003, to 1.4 years as of December 31, 2004. In the year
ended December 31, 2004, the Company's average yield on invested assets (at
amortized value) was 3.39% compared to 4.38% at the year ended December 31,
2003. The Company's average invested assets increased in the year ending
December 31, 2004, primarily as a result of increased cash flows from
operations. The mix of taxable and tax-exempt securities in the portfolio
affects the investment income return percentage. Tax-exempt securities generally
carry a lower yield than taxable securities. These securities (at amortized
value) decreased to $970,343 (1% of total investments) at December 31, 2004,
compared to $2,029,891 (2% of total investments) at December 31, 2003.
27
In the year ended December 31, 2003, while the Company's average invested assets
(at amortized value) increased $11,939,605 (12%) compared to the year ended
December 31, 2002, investment income earned (excluding net realized gains)
decreased $609,903 (11%) compared to the year ended December 31, 2002. The
decrease in investment income was primarily the result of a decline in the
average return on new and reinvested 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. The
weighted average maturity of the Company's fixed maturity investments has
decreased from 2.4 years as of December 31, 2002, to 1.9 years as of December
31, 2003. In the year ended December 31, 2003, the Company's average yield on
invested assets (at amortized value) was 4.38% compared to 5.53% at the year
ended December 31, 2002. The Company's average invested assets increased in the
year ending December 31, 2003, primarily as a result of increased cash flows
from operations. The mix of taxable and tax-exempt securities in the portfolio
affects the investment income return percentage. Tax-exempt securities generally
carry a lower yield than taxable securities. These securities (at amortized
value) decreased to $2,029,891 (2% of total investments) at December 31, 2003,
compared to $2,731,060 (3% of total investments) at December 31, 2002.
The following table sets forth the composition of the investment portfolio of
the Company at the dates indicated:
(Amounts in Thousands)
As of December 31
-----------------
2004 2003 2002
-------------------- -------------------- --------------------
Amortized Market Amortized Market Amortized Market
Type of Security Cost Value Cost Value Cost Value
- ---------------- ---- ----- ---- ----- ---- -----
Certificates of deposit $500 $500 $500 $500 $400 $400
U.S. treasury securities 77,766 77,299 38,305 38,550 8,518 8,901
U.S. government sponsored
enterprise securities 11,999 11,853 11,997 11,987 9,000 9,024
Industrial and miscellaneous
taxable bonds 37,755 38,950 58,494 61,447 73,001 77,221
State and municipal tax-exempt bonds 970 958 2,030 2,040 2,731 2,828
------- ------- ------- ------- ------ ------
Total fixed maturity investments 128,990 129,560 111,326 114,524 93,650 98,374
Short-term cash investments 3,118 3,118 7,229 7,229 9,024 9,024
------- ------- ------- ------- ------- -------
Total investments $132,108 $132,678 $118,555 $121,753 $102,674 $107,398
======= ======= ======= ======= ======= =======
The amortized cost and estimated market value of fixed maturity investments at
December 31, 2004, by contractual maturity are as follows. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without penalties.
(Amounts in Thousands)
As of December 31, 2004
-----------------------
Amortized Market
Fixed maturities due Cost Value
- -------------------- ---- -----
Within 1 year $50,772 $50,712
Beyond 1 year but within 5 years 78,218 78,848
Beyond 5 years but within 10 years - -
------- -------
Total $128,990 $129,560
======= =======
The Company continually evaluates the recoverability of its investment holdings.
All securities held by the Company are rated. When a decline in value of fixed
maturities or equity securities is considered other than temporary, a loss is
recognized in the consolidated statements of operations. In 2004, there were no
other than temporary declines in the value of fixed maturity or equity
securities recognized in the consolidated statements of operations. No
securities were sold at a loss during 2004, 2003 or 2002.
The following table summarizes, for all fixed maturities in an unrealized loss
position as of December 31, 2004, the aggregate fair value and gross unrealized
loss by length of time those fixed maturities have been continuously in an
unrealized loss position:
28
Amortized Gross
Cost Fair Value Unrealized Loss
---- ---------- ---------------
0-6 months $26,470,295 $26,352,610 $117,685
7-12 months 56,073,912 55,573,734 500,178
Over 12 months 3,970,343 3,916,139 54,204
---------- ---------- -------
Total $86,514,550 $85,842,483 $672,067
========== ========== =======
At December 31, 2004, the Company held securities with unrealized appreciation
of $1,242,024 and securities with unrealized depreciation of $672,067. Fixed
maturity investments with a gross unrealized loss for a continuous period of 0
to 6 months consisted of U.S. treasury securities. Fixed maturity investments
with a gross unrealized loss position for a continuous period of 7 to 12 months
consists of U.S. treasury and U.S. government sponsored enterprise securities.
Fixed maturity investments with a gross unrealized loss position exceeding a
12-month period consist of U.S. government sponsored enterprise securities and
pre-refunded state and municipal bonds.
The Company monitors its investments closely. If an unrealized loss is
determined to be other than temporary it is written off as a realized loss
through the Consolidated Statements of Operations. The Company's methodology of
assessing other-than-temporary impairments is based on security-specific
analysis as of the balance sheet date and considers various factors including
the length of time and the extent to which the fair value has been less than the
cost, the financial condition and the near term prospects of the issuer, whether
the debtor is current on its contractually obligated interest and principal
payments, and the Company's intent to hold the investment for a period of time
sufficient to allow the Company to recover its costs. The Company has concluded
that the gross unrealized losses of $672,067 at December 31, 2004, were
temporary in nature. However, facts and circumstances may change which could
result in a decline in market value considered to be other than temporary.
The Company did not sell any fixed maturity investment in the years ended
December 31, 2004 and 2003.
Operating Expenses
- ------------------
POLICY ACQUISITION COSTS consist of commissions, premium taxes, inspection fees,
and certain other underwriting costs that are directly related to and vary with
the production of Crusader insurance policies. These costs include both Crusader
expenses and allocated expenses of other Unico subsidiaries. On certain
reinsurance treaties, Crusader receives a ceding commission from its reinsurer
that represents a reimbursement of the acquisition costs related to the premium
ceded. No ceding commission is received on facultative, catastrophe, or
provisionally rated ceded premium. Policy acquisition costs, net of ceding
commission, are deferred and amortized as the related premiums are earned. The
ratio of policy acquisition cost to net earned premium in 2004 and 2003 were
lower than the ratio in 2002 primarily due to the increase in the Company's
ceding commission from its reinsurer as of January 1, 2003 from 25% in 2002 to
35% in both 2003 and 2004. Policy acquisition costs, net of ceding commission,
are as follows:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Policy acquisition costs $10,319,186 $7,941,199 $9,274,263
Ratio to net earned premium (GAAP ratio) 21% 21% 28%
SALRIES AND EMPLOYEE BENEFITS incurred for the year ended December 31, 2004,
increased $349,347 (4%) compared to the year ended December 31, 2003.
Total salaries and employee benefits incurred for the year ended December 31,
2003, increased $932,463 (12%) compared to the year ended December 31, 2002.
Factors that affected the 12% increase include the hiring of higher-level
employees, general salary increases (less than 6%), and increases in employee
benefits costs.
29
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Total salaries and employee benefits incurred $9,126,929 $8,777,582 $7,845,119
Less: charged to losses and loss adjustment expenses (1,335,778) (1,137,090) (1,056,563)
Less: capitalized to policy acquisition costs (2,921,984) (2,679,726) (2,414,678)
--------- --------- ---------
Net amount charged to operating expenses $4,869,166 $4,960,766 $4,373,878
========= ========= =========
COMMISSIONS TO AGENTS/BROKERS (not including commissions on Crusader policies
that are reflected in policy acquisition costs) are generally related to gross
commission income from the health and life insurance program, the daily
automobile rental insurance program, the earthquake program, and the commercial
liability program. Commissions to agents and brokers decreased $526,232 (36%)
for the year ended December 31, 2004, as compared to the year ended December 31,
2003. The decrease is primarily the result of a decrease in premiums written and
the related decrease in the commission expense in the health and life insurance
program.
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Commission to agents/brokers $934,452 $1,460,684 $1,219,310
OTHER OPERATING EXPENSES generally do not change significantly with changes in
production. This is true for both increases and decreases in production.
Operating expenses decreased $240,576 (8%) for the year ended December 31, 2004,
compared to the year ended December 31, 2003. The decrease in other operating
expenses was in part due to $111,122 decrease in interest expense. As described
below, due a change in law in September 2004, the Company recognized as income
80% of the interest expense accrued at December 31, 2003, on a Notice of
Proposed Assessment (NPA) by the California Franchise Tax Board for tax years
1999 and 2000.
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Other operating expenses $2,657,310 $2,897,886 $3,248,227
Income Taxes
- ------------
Income tax expense for the year ended December 31, 2004, was $2,990,958 compared
to an income tax expense of $1,080,721 for the year ended December 31, 2003. The
effective combined income tax rates for 2004 and 2003 were 34% and 50%,
respectively. The pre-tax income increased $6,523,087 for the year ended
December 31, 2004, compared to the year ended December 31, 2003, which resulted
in an increased income tax expense in 2004. The income tax expense for the year
ended December 31, 2003, was $1,080,721 compared to an income tax benefit of
$1,589,370 for the year ended December 31, 2002. The effective combined income
tax rates for 2003 and 2002 were 50% and 33%, respectively.
In the year ended December 31, 2003, the Company recognized an income tax
expense of $287,000 resulting from an assessment for the years 1999 and 2000
from the California Franchise Tax Board. The assessment resulted from a court
ruling in Ceridian vs. Franchise Tax Board that held that the California statute
permitting the tax deductibility of dividends received from a wholly owned
insurance subsidiary was unconstitutional because it discriminated against
out-of-state holding companies and thus was in violation of the interstate
commerce clause of the United States Constitution. The ruling concluded that the
discriminatory sections of the statute are not severable and the entire statute
was invalid and unenforceable. California law provides that the proper remedy in
such circumstances is to disallow the deduction to those taxpayers that
benefited from the deduction. As a result of the court ruling, in February 2003,
the Franchise Tax Board (FTB) notified the Company that it would issue a Notice
of Proposed Assessment (NPA) for tax years 1999 and 2000 of approximately
$287,000 representing California state franchise taxes plus related interest of
approximately $80,000. In September 2004, California enacted legislation (AB
263) that addresses many aspects of the tax treatment of insurance company
owners, including holding companies such as Unico. The legislation provides for
an election, applicable if made to all tax years ending after December 1, 1997,
and before January 1, 2005, under which a dividend-received deduction of up to
80% of dividends paid by an insurer to a non-insurer parent is allowed. The
Company made the election authorized by AB 263 and, therefore, has reversed 80%
of the $287,000 income tax expense and 80% of the interest accrued thereon. In
addition, as a result of AB 263, the Company recognized a state deferred tax
liability of $157,249 in accordance with FASB 109. This deferred tax liability
represents the Company's future state tax liability for all undistributed
earnings of Crusader since
30
January 1, 1993. The federal tax benefit resulting from AB 263 as of
December 31, 2004, is $53,465. Thus, the net deferred tax liability as of
December 31, 2004, is $103,784.
Recently Issued Accounting Standards
- ------------------------------------
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123R, "Share-Based Payment" ("SFAS No. 123R")
that will require compensation costs related to share-based payment transactions
to be recognized in the financial statements. With limited exceptions, the
amount of compensation cost will be measured based on the grant-date fair value
of the equity or liability instruments issued. In addition, liability awards
will be re-measured each reporting period. Compensation cost will be recognized
over the period that an employee provides service in exchange for the award.
SFAS No. 123R replaces Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," the principles that the Company
currently employs to account and report its employee stock option awards. SFAS
No. I 23R is effective for the first interim reporting period that begins after
June 15, 2005.
There were no other accounting standards issued during 2004 that are expected to
have a material impact on the Company's consolidated financial statements.
Significant Accounting Policies
- -------------------------------
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
certain assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. While every effort is made to
ensure the integrity of such estimates, actual results could differ.
Management believes the Company's current critical accounting policies comprise
the following:
Losses and Loss Adjustment Expenses
-----------------------------------
The preparation of the Company's financial statements requires judgments and
estimates. The most significant is the estimate of loss reserves as required by
Statement of Financial Accounting Standards No 60 (SFAS No. 60), Accounting and
Reporting by Insurance Enterprises and Statement of Financial Accounting
Standards No. 5 (SFAS No. 5), Accounting for Contingencies. Estimating loss
reserves is a difficult process as there are many factors that can ultimately
affect the final settlement of a claim and, therefore, the reserve that is
needed. Changes in the regulatory and legal environment, results of litigation,
medical costs, the cost of repair materials and labor rates can all impact
ultimate claim costs. In addition, time can be a critical part of reserving
determinations since the longer 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.
Investments
-----------
In accordance with Statement of Financial Accounting Standard No. 115,
Accounting for Certain Investments in Debt and Equity Securities, the Company is
required to classify its investments in debt and equity securities into one of
three categories: held-to-maturity, available-for-sale or trading securities.
The Company's fixed maturity investments are classified as available-for-sale
and are stated at market value. Although all of the Company's investments are
classified as available-for-sale and the Company may sell investment securities
from time to time in response to economic and market conditions, its investment
guidelines place primary emphasis on buying and holding high-quality investments
to maturity. Short-term investments are carried at cost, which approximates
market value. Investments in equity securities are carried at market value. The
unrealized gains or losses from fixed maturities and equity securities are
reported as accumulated other comprehensive
31
income (loss), which is a separate component of stockholders' equity, net of any
deferred tax effect. When a decline in value of a fixed maturity or equity
security is considered other than temporary, a loss is recognized in the
consolidated statements of operations. Realized gains and losses are included in
the consolidated statements of operations based on the specific identification
method.
Related Party Transactions
- --------------------------
The Company presently occupies a 46,000 square foot building located at 23251
Mulholland Drive, Woodland Hills, California, under a master lease expiring
March 31, 2007. The lease provides for an annual gross rent of $1,025,952. Erwin
Cheldin, the Company's president, chairman and principal stockholder, is the
owner of the building. On February 22, 1995, the Company signed an extension to
the lease with no increase in rent to March 31, 2007. The Company believes that
the terms of the lease at inception and at the time the lease extension was
signed were at least as favorable to the Company as could have been obtained
from non-affiliated third parties. The Company utilizes for its own operations
approximately 100% of the space it leases.
In 2003, Unico made capital contributions totaling $3,000,000 to its Crusader
subsidiary. The contributions were made to ensure that Crusade maintained its
A.M. Best Financial Size Category VI rating, which requires capital of at least
$25,000,000. 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. As of
December 31, 2004, the Company repaid the note from The Cary and Danielle
Cheldin Family Trust in full and repaid $500,000 of the Erwin Cheldin note. On
January 31, 2005, the Company repaid an additional $250,000 of the Erwin Cheldin
note. The note from Erwin Cheldin is unsecured and it is payable upon demand of
lender (on no less than fourteen days' notice) and, if no demand is made, then
it is payable in full on September 28, 2007. The note may be prepaid at any time
without penalty. The note bears an adjustable interest of 5.5% as of December
31, 2004. The interest is payable monthly and it is adjustable every third month
by adding a margin of one percentage point to the prime rate.
Forward Looking Statements
- --------------------------
Certain statements contained herein, including the Sections entitled "Business,"
"Legal Proceedings" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," that are not historical facts are forward
looking. These statements, which may be identified by forward looking words or
phrases such as "anticipate," "appears," "believe," "estimates," "expect,"
"intend," "may," "should," and "would," involve risks and uncertainties, many of
which are beyond the control of the Company. Such risks and uncertainties could
cause actual results to differ materially from these forward looking statements.
Factors which could cause actual results to differ materially include those
described under Item 1 - Business - Competition; premium rate adequacy relating
to competition or regulation; actual versus estimated claim experience; success
of the Company's underwriting and pricing actions that it believes addressed the
adverse development on its construction defect, apartment house habitability,
special risk class of business, and non-California liquor liability claims; the
outcome of existing and planned filings with regulatory authorities seeking rate
increases; acceptance by insureds of rate increases; adequacy of rate increases;
possible reductions in Crusader's A.M. Best rating; regulatory changes or
developments; the outcome of regulatory proceedings; unforeseen calamities;
general market conditions; and the Company's ability to introduce new profitable
products.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The Company's consolidated balance sheet includes a substantial amount of
invested assets whose fair values are subject to various market risk exposures
including interest rate risk and equity price risk.
The Company's invested assets at December 31, 2004 and 2003 consisted of the
following:
2004 2003
---- ----
Fixed maturity bonds (at amortized cost) $128,489,658 $110,825,592
Short-term cash investments (at cost) 3,118,118 7,229,315
Certificates of deposit - over 1 year (at cost) 500,000 500,000
----------- -----------
Total invested assets $132,107,776 $118,554,907
=========== ===========
32
The Company's interest rate risk is primarily in its fixed maturity bond
portfolio. As market interest rates decrease, the value of the portfolio
increases with the opposite holding true in rising interest rate environments.
In addition, the longer the maturity, the more sensitive the asset is to market
interest rate fluctuations. The Company limits this risk by investing in
securities with maturities no greater than eight years. In addition, although
fixed maturity bonds are classified as available-for-sale, the Company's
investment guidelines place primary emphasis on buying and holding high-quality
bonds to maturity. Because fixed maturity bonds are primarily held to maturity,
the change in the market value of these bonds resulting from interest rate
movements is unrealized and no gains or losses are recognized in the
consolidated statements of operations. Unrealized gains and losses are reported
as separate components of stockholders' equity, net of any deferred tax effect.
As of December 31, 2004, the Company's unrealized gains (net of unrealized
losses) before income taxes on its fixed maturity bond portfolio were $569,957
compared to $3,198,454 as of December 31, 2003. Given a hypothetical parallel
increase of 100 basis points in interest rates, the fair value of the fixed
maturity bond portfolio as of December 31, 2004, would decrease by approximately
$1,786,000. This decrease would not be reflected in the statements of operations
except to the extent that the securities were sold.
The Company's short-term investments and certificates of deposit have only
minimal interest rate risk.
33
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
------
Report of Independent Registered Public Accounting Firm 35
Consolidated Balance Sheets as of December 31, 2004, and
December 31, 2003 36
Consolidated Statements of Operations for the years ended
December 31, 2004, December 31, 2003, and December 31, 2002 37
Consolidated Statements of Comprehensive Income for the years
ended December 31, 2004, December 31, 2003, and December 31, 2002 38
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 2004, December 39 31, 2003, and December 31, 2002 39
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, December 31, 2003, and December 31, 2002 40
Notes to Consolidated Financial Statements 41
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
The Board of Directors and Stockholders
Unico American Corporation:
We have audited the accompanying consolidated balance sheets of Unico American
Corporation and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of operations, comprehensive income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Unico American
Corporation and subsidiaries as of December 31, 2004 and 2003, and the results
of its their operations and its their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
KPMG LLP
Los Angeles, California
March 23, 2005
35
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31 December 31
2004 2003
---- ----
ASSETS
------
Investments
Available for sale:
Fixed maturities, at market value (amortized cost: December 31,
2004 $128,989,658; December 31, 2003 $111,325,592) $129,559,615 $114,524,046
Short-term investments, at cost 3,118,118 7,229,315
----------- -----------
Total Investments 132,677,733 121,753,361
Cash 15,016 37,988
Accrued investment income 1,047,278 1,251,126
Premiums and notes receivable, net 7,770,560 8,290,169
Reinsurance recoverable:
Paid losses and loss adjustment expenses 18,512 622,964
Unpaid losses and loss adjustment expenses 20,119,011 19,255,229
Deferred policy acquisition costs 8,203,238 8,054,363
Property and equipment (net of accumulated depreciation) 278,404 323,090
Deferred income taxes 1,667,195 975,701
Other assets 773,329 929,704
----------- -----------
Total Assets $172,570,276 $161,493,695
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
- -----------
Unpaid losses and loss adjustment expenses $87,469,000 $78,139,090
Unearned premiums 35,656,393 34,675,180
Advance premium and premium deposits 1,067,224 1,118,618
Income taxes payable 227,551 614,662
Notes payable - related parties 500,000 1,500,000
Accrued expenses and other liabilities 5,224,783 6,975,288
----------- -----------
Total Liabilities $130,144,951 $123,022,838
----------- -----------
STOCKHOLDERS' EQUITY
- --------------------
Common stock, no par - authorized 10,000,000 shares, issued and outstanding
shares 5,492,315 at December 31, 2004, and 5,489,815 at December 31, 2003 $2,708,047 $2,700,272
Accumulated other comprehensive income 376,172 2,110,979
Retained earnings 39,341,106 33,659,606
---------- ----------
Total Stockholders' Equity $42,425,325 $38,470,857
---------- ----------
Total Liabilities and Stockholders' Equity $172,570,276 $161,493,695
=========== ===========
See accompanying notes to consolidated financial statements.
36
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
2004 2003 2002
---- ---- ----
REVENUES
- --------
Insurance Company Revenues
Premium earned $67,890,808 $53,754,119 $40,568,845
Premium ceded 17,784,240 16,648,020 7,209,573
---------- ---------- ----------
Net premium earned 50,106,568 37,106,099 33,359,272
Net investment income 4,204,573 4,801,133 5,401,870
Net realized investment gains - - 3,690
Other income 103,806 98,242 49,038
---------- ---------- ----------
Total Insurance Company Revenues 54,414,947 42,005,474 38,813,870
Other Revenues from Insurance Operations
Gross commissions and fees 6,503,880 8,109,392 6,261,024
Investment income 38,250 47,010 56,176
Finance charges and fees earned 933,529 952,543 878,316
Other income 12,704 16,020 19,256
---------- ---------- ----------
Total Revenues 61,903,310 51,130,439 46,028,642
---------- ---------- ----------
EXPENSES
- --------
Losses and loss adjustment expenses 34,450,738 31,720,533 32,727,023
Policy acquisition costs 10,319,186 7,941,199 9,274,263
Salaries and employee benefits 4,869,166 4,960,766 4,373,878
Commissions to agents/brokers 934,452 1,460,684 1,219,310
Other operating expenses 2,657,310 2,897,886 3,248,227
---------- ---------- ----------
Total Expenses 53,230,852 48,981,068 50,842,701
---------- ---------- ----------
Income (Loss) Before Taxes 8,672,458 2,149,371 (4,814,059)
Income Tax (Benefit) 2,990,958 1,080,721 (1,589,370)
--------- --------- ---------
Net Income (Loss) $5,681,500 $1,068,650 $(3,224,689)
========= ========= =========
PER SHARE DATA:
- --------------
Basic Shares Outstanding 5,490,346 5,489,604 5,487,311
Basic Earnings (Loss) Per Share $1.03 $0.19 $(0.59)
Diluted Shares Outstanding 5,581,295 5,533,112 5,487,311
Diluted Earnings (Loss) Per Share $1.02 $0.19 $(0.59)
See accompanying notes to consolidated financial statements.
37
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31
2004 2003 2002
---- ---- ----
Net income (loss) $5,681,500 $1,068,650 $(3,224,689)
Other changes in comprehensive income, net of tax:
Unrealized gains (losses) on securities classified as
available-for-sale arising during the period (1,734,807) (1,006,783) 1,261,358
Less: reclassification adjustment for (gains) included in net income - - (2,435)
--------- ------ ---------
Comprehensive Income (Loss) $3,946,693 $61,867 $(1,965,766)
========= ====== =========
See accompanying notes to consolidated financial statements.
38
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 and 2002
Accumulated
Common Shares Other
------------------------- Comprehensive
Issued and Income Retained
Outstanding Amount (Losses) Earnings Total
----------- ------ ------ -------- -----
Balance - December 31, 2001 5,481,288 $2,671,415 $1,858,839 $36,090,122 $40,620,376
Net shares issued for exercise of
stock options 8,245 28,857 - - 28,857
Cash dividend paid ($0.05
per share) - - - (274,477) (274,477)
Change in comprehensive income,
net of deferred income tax - - 1,258,923 - 1,258,923
Net (loss) - - - (3,224,689) (3,224,689)
--------- --------- --------- ---------- ----------
Balance - December 31, 2002 5,489,533 $2,700,272 $3,117,762 $32,590,956 $38,408,990
Shares canceled or adjusted 282 - - - -
Change in comprehensive income,
net of deferred income tax - - (1,006,783) - (1,006,783)
Net income - - - 1,068,650 1,068,650
--------- --------- --------- ---------- ----------
Balance - December 31, 2003 5,489,815 $2,700,272 $2,110,979 $33,659,606 $38,470,857
Net shares issued for exercise of
stock options 2,500 7,775 - - 7,775
Change in comprehensive income,
net of deferred income tax - - (1,734,807) - (1,734,807)
Net income - - - 5,681,500 5,681,500
--------- --------- ------- ---------- ----------
Balance - December 31, 2004 5,492,315 $2,708,047 $376,172 $39,341,106 $42,425,325
========= ========= ======= ========== ==========
See accompanying notes to consolidated financial statements.
39
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
2004 2003 2002
---- ---- ----
Cash flows from operating activities:
Net income (loss) $5,681,500 $1,068,650 $(3,224,689)
Adjustments to reconcile net income to net cash from operations
Depreciation and amortization 95,084 89,821 84,951
Bond amortization, net 251,318 317,389 376,657
Net realized (gain) on sale of securities - - (3,690)
Changes in assets and liabilities
Premium, notes and investment income receivable 723,457 (1,371,053) (153,857)
Reinsurance recoverable (259,330) 4,235,194 (12,633,253)
Deferred policy acquisition costs (148,875) (2,107,353) (867,475)
Other assets 156,375 147,792 (590,015)
Reserve for unpaid losses and loss adjustment expenses 9,329,910 3,233,806 14,370,989
Unearned premium reserve 981,213 10,293,597 5,053,433
Advance premium and premium deposits (51,394) (488,654) 523,277
Accrued expenses and other liabilities (1,750,505) (1,658,188) 1,377,019
Income taxes current/deferred (184,916) 215,558 (150,235)
Federal income tax recoverable - 1,548,827 3,850,112
---------- ---------- ---------
Net Cash Provided from Operations 14,823,837 15,525,386 8,013,224
---------- ---------- ---------
Investing Activities
Purchase of fixed maturity investments (51,447,350) (55,234,166) (19,300,366)
Proceeds from maturity of fixed maturity investments 33,530,817 37,228,000 15,086,100
Proceeds from sale of fixed maturity investments - - 2,003,906
Net (increase) decrease in short-term investments 4,112,347 1,807,719 (6,160,760)
Additions to property and equipment (50,398) (58,717) (171,719)
---------- ---------- ---------
Net Cash (Used) by Investing Activities (13,854,584) (16,257,164) (8,542,839)
---------- ---------- ---------
Financing Activities
Proceeds from issuance of common stock 7,775 - 28,857
Proceeds from notes payable - related parties - 1,500,000 750,000
Repayment of notes payable - related parties (1,000,000) (750,000) -
Dividends paid to shareholders - - (274,477)
------- ------- -------
Net Cash Provided (Used) by Financing Activities (992,225) 750,000 504,380
------- ------- -------
Net increase (decrease) in cash (22,972) 18,222 (25,235)
Cash at beginning of year 37,988 19,766 45,001
------ ------ ------
Cash at End of Year $15,016 $37,988 $19,766
====== ====== ======
Supplemental cash flow information Cash paid during the period for:
Interest $13,666 $124,788 $6,575
Income taxes $3,383,876 $370,520 $150,636
See accompanying notes to consolidated financial statements.
40
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Nature of Business
- ------------------
Unico American Corporation is an insurance holding company that underwrites
property and casualty insurance through its insurance company subsidiary;
provides property, casualty, health and life insurance through its agency
subsidiaries; and provides insurance premium financing, claim administration
services, and membership association services through its other subsidiaries.
Unico American Corporation is referred to herein as the "Company" or "Unico" and
such references include both the corporation and its subsidiaries, all of which
are wholly owned, unless otherwise indicated. Unico was incorporated under the
laws of Nevada in 1969.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Unico American
Corporation and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Basis of Presentation
- ---------------------
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America (GAAP).
As described in Note 14, the Company's insurance subsidiary also files financial
statements with regulatory agencies prepared on a statutory basis of accounting
that differs from GAAP.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
certain assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. While every effort is made to
ensure the integrity of such estimates, actual results could differ.
Investments
- -----------
All of the Company's fixed maturity investments are classified as
available-for-sale and are stated at market value. Although all of the Company's
investments are classified as available-for-sale and the Company may sell
investment securities from time to time in response to economic and market
conditions, its investment guidelines place primary emphasis on buying and
holding high-quality investments to maturity. Short-term investments are carried
at cost, which approximates market value. Investments in equity securities are
carried at market value. The unrealized gains or losses from fixed maturities
and equity securities are reported as "accumulated other comprehensive income
(loss)," which is a separate component of stockholders' equity, net of any
deferred tax effect. When a decline in value of a fixed maturity or equity
security is considered other than temporary, a loss is recognized in the
consolidated statements of operations. Realized gains and losses are included in
the consolidated statements of operations based on the specific identification
method.
The Company had net unrealized investment gains, net of deferred taxes, of
$376,172 as of December 31, 2004, and $2,110,979 as of December 31, 2003.
Property and Equipment
- ----------------------
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using accelerated depreciation methods over the
estimated useful lives of the related assets.
Income Taxes
- ------------
The provision for federal income taxes is computed on the basis of income as
reported for financial reporting purposes. Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes, and are measured using the enacted tax rates and laws expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Income tax expense provisions increase or
decrease in the same period in which a change in tax rates is enacted.
41
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
- -----------------------------------
The Company has used the following methods and assumptions in estimating its
fair value disclosures:
Investment Securities - Fair values for fixed maturity securities are
obtained from a national quotation service. The fair values for equity
securities are based on quoted market prices.
Cash and Short-Term Investments - The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Premiums and Notes Receivable - The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Earnings Per Share
- ------------------
Basic earnings per share exclude the impact of common share equivalents and are
based upon the weighted average common shares outstanding. Diluted earnings per
share utilize the average market price per share when applying the treasury
stock method in determining common share dilution. When dilutive, outstanding
stock options are treated as common share equivalents for purposes of computing
diluted earnings per share and represent the difference between basic and
diluted weighted average shares outstanding. In loss periods, options are
excluded from the calculation of diluted earnings per share, as the inclusion of
such options would have antidilutive effect.
Revenue Recognition
- -------------------
a. General Agency Operations
-----------------------------
Commissions and policy fees due the Company are recognized as income on the
effective date of the insurance policies.
b. Insurance Company Operations
--------------------------------
Premiums are earned on a pro-rata basis over the terms of the policies.
Premiums applicable to the unexpired terms of policies in force are
recorded as unearned premiums. The Company earns a commission on policies
that are ceded to its reinsurers. This commission is considered earned on a
pro-rata basis over the terms of the policies.
c. Insurance Premium Financing Operations
------------------------------------------
Premium finance interest is charged to policyholders who choose to finance
insurance premiums. Interest is charged at rates that vary with the amount
of premium financed. Premium finance interest is recognized using a method
that approximates the interest (actuarial) method.
Losses and Loss Adjustment Expenses
- -----------------------------------
The liability for unpaid losses and loss adjustment expenses is based upon the
accumulation of individual case estimates for losses reported prior to the close
of the accounting period plus estimates based on experience and industry data
for development of case estimates and for unreported losses and loss adjustment
expenses.
There is a high level of uncertainty inherent in the evaluation of the required
loss and loss adjustment expense reserves for the Company. The long-tailed
nature of liability claims and the volatility of jury awards exacerbate that
uncertainty. The Company sets loss and loss adjustment expense reserves at each
balance sheet date at management's best estimate of the ultimate payments that
it anticipates will be made to settle all losses incurred and related expenses
incurred as of that date for both reported and unreported losses. The ultimate
cost of claims is dependent upon future events, the outcomes of which are
affected by many factors. Company claim reserving procedures and settlement
philosophy, current and perceived social and economic inflation, current and
future court rulings and jury attitudes, improvements in medical technology, and
many other economic, scientific, legal, political, and social factors all can
have significant effects on the ultimate costs of claims. Changes in Company
operations and management philosophy also may cause actual developments to vary
from the past. Since the emergence and disposition of claims are subject to
uncertainties, the net amounts that will ultimately be paid to settle claims may
vary significantly from the estimated 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.
42
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Funds
- ----------------
Restricted funds are as follows:
Year ended December 31
----------------------
2004 2003
---- ----
Premium trust funds (1) $773,404 $939,491
Cash deposited in lieu of bond (2) 752,659 752,659
Assigned to state agencies (3) 700,000 2,825,000
--------- ---------
Total restricted funds $2,226,063 $4,517,150
========= =========
(1) As required by law, the Company segregates from its operating
accounts the premiums collected from insurers which are payable to
insurance companies into separate trust accounts. These amounts are
included in cash and short-term investments.
(2) Included in short-term investments are two deposits assigned and held
by Travis County and the Los Angeles Superior courts. These deposits
are filed with the superior courts in lieu of a bond in order to stay
execution of judgments and to allow the Company to appeal the
judgment in these matters.
.
(3) Included in fixed maturity investments are statutory deposits
assigned to and held by the California State Treasurer and the
Insurance Commissioner of the State of Nevada. These deposits are
required for writing certain lines of business in California and for
admission in states other than California.
Deferred Policy Acquisition Costs
- ---------------------------------
Policy acquisition costs consist of costs associated with the production of
insurance policies such as commissions, premium taxes, and certain other
underwriting expenses that vary with and are primarily related to the production
of the insurance policy. Policy acquisition costs are deferred and amortized as
the related premiums are earned and are limited to their estimated realizable
value based on the related unearned premiums plus investment income less
anticipated losses and loss adjustment expenses. Ceding commission applicable to
the unexpired terms of policies in force is recorded as unearned ceding
commission, which is included in deferred policy acquisition costs.
Reinsurance
- -----------
The Company cedes reinsurance to provide for greater diversification of
business, to allow management to control exposure to potential losses arising
from large risks by reinsuring certain levels of risk in various areas of
exposure, to reduce the loss that may arise from catastrophes, and to provide
additional capacity for growth. Prepaid reinsurance premiums and reinsurance
receivables are reported as assets and represent ceded unearned premiums and
reinsurance recoverable on both paid and unpaid losses, respectively. Amounts
recoverable from reinsurers are estimated in a manner consistent with the claim
liability associated with the reinsured policies.
Segment Reporting
- -----------------
Statement of Financial Accounting Standards No. 131 (SFAS No. 131), Disclosures
about Segments of an Enterprise and Related Information, became effective for
fiscal years effective after December 15, 1997. SFAS No. 131 establishes
standards for the way information about operating segments is reported in
financial statements. The Company has identified its insurance company operation
as its primary reporting segment. Revenues from this segment comprised 88% of
consolidated revenues in the year ended December 31, 2004, 82% of consolidated
revenues in the year ended December 31, 2003, and 84% for the year ended
December 31, 2002. The Company's remaining operations constitute a variety of
specialty insurance services, each with unique characteristics and individually
insignificant to consolidated revenues.
The insurance company operation is conducted through the Company's wholly owned
subsidiary Crusader Insurance Company (Crusader), which as of December 31, 2004,
was licensed as an admitted insurance carrier in the states of Arizona,
California, Idaho, Montana, Nevada, Ohio, Oregon, and Washington. Crusader is a
multiple-line property and casualty insurance company, which began transacting
business on January 1, 1985. As of December 31, 2004, 98% of Crusader's business
was commercial multiple peril business package insurance
43
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
policies. Commercial multiple peril policies provide a combination of property
and liability coverage for businesses. Commercial property coverages insure
against loss or damage to buildings, inventory and equipment from natural
disasters, including hurricanes, windstorms, hail, water, explosions, severe
winter weather and other events such as theft and vandalism, fires and storms
and financial loss due to business interruption resulting from covered property
damage. Commercial liability coverages insure against third party liability from
accidents occurring on the insured's premises or arising out of its operations,
such as injuries sustained from products sold or operation of the insured
premises. In addition to commercial multiple peril policies, Crusader also
writes separate policies to insure commercial property and commercial liability
risks on a mono-line basis.
Revenues, income before income taxes and assets by segment are as follows:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Revenues
- --------
Insurance company operation $54,414,947 $42,005,474 $38,813,870
---------- ---------- ----------
Other insurance operations 26,380,789 26,684,721 20,469,400
Intersegment elimination (1) (18,892,426) (17,559,756) (13,254,628)
---------- ---------- ----------
Total other insurance operations 7,488,363 9,124,965 7,214,772
--------- --------- ---------
Total revenues $61,903,310 $51,130,439 $46,028,642
========== ========== ==========
Income (loss) before income taxes
- ---------------------------------
Insurance company operation $5,333,273 $(3,208,657) $(7,069,522)
Other insurance operations 3,339,185 5,358,028 2,255,463
--------- --------- ---------
Total income (loss) before income taxes $8,672,458 $2,149,371 $(4,814,059)
========= ========= =========
Assets
- ------
Insurance company operation $151,963,707 $138,247,845 $131,574,608
Intersegment eliminations (2) (2,285,589) (2,302,224) (1,245,711)
----------- ----------- -----------
Total insurance company operation 149,678,118 135,945,621 130,328,897
Other insurance operations 22,892,158 25,548,074 18,357,708
----------- ----------- -----------
Total assets $172,570,276 $161,493,695 $148,686,605
=========== =========== ===========
(1) Intersegment revenue eliminations reflect commissions paid by Crusader to
Unifax.
(2) Intersegment asset eliminations reflect the elimination of
Crusader receivables and Unifax payables.
Concentration of Risks
- ----------------------
In 2004 100% of Crusader's gross premium written was derived from California. In
2004 approximately 78% of the $2,156,924 commission and fee income from the
Company's health and life insurance program was from CIGNA HealthCare medical
and dental plan programs.
At December 31, 2004, the Company's reinsurance recoverable on paid and unpaid
losses and loss adjustment expenses of $20,137,523 were as follows:
A.M. Best Amount
Name of Reinsurer Rating Recoverable
- ----------------- ------ -----------
Platinum Reinsurance A $7,508,919
Partners Reinsurance of the U.S. A+ 5,430,618
Hannover Ruckversicherungs AG A 4,070,346
General Reinsurance Corporation A++ 2,180,640
QBE Reinsurance Corporation A 947,000
----------
Total $20,137,523
==========
44
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
- ------------------------
The Company applies the intrinsic-value based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations including FASB Interpretation No. 44,
Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB Opinion No. 25, to account for its fixed-plan stock
options. Under this method, compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. FASB Statement No. 123, Accounting for Stock-Based Compensation
and FASB Statement No. 148, Accounting for Stock Based Compensation - Transition
and Disclosure, an amendment of FASB Statement No. 123, established accounting
and disclosure requirements using a fair-value based method of accounting for
stock-based employee compensation plans. As permitted by existing accounting
standards, the Company has elected to continue to apply the intrinsic-value
based method of accounting described above and has adopted only the disclosure
requirements of Statement 123, as amended. 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 SFAS 123, the Company's net income
would have been reduced to the pro forma amounts indicated below:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Net income (loss)
As reported $5,681,500 $1,068,650 $(3,224,689)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 43,604 51,639 51,606
--------- --------- ---------
Pro forma $5,637,896 $1,017,011 $(3,275,995)
========= ========= =========
Income (loss) per share
As reported $1.03 $0.19 $(0.59)
Pro forma $1.03 $0.19 $(0.60)
Income (loss) per share - assuming dilution:
As reported $1.02 $0.19 $(0.59)
Pro forma $1.01 $0.18 $(0.60)
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
---- ----
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
Recently Issued Accounting Standards
- ------------------------------------
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123R, Share-Based Payment (SFAS No. 123R) that
will require compensation costs related to share-based payment transactions to
be recognized in the financial statements. With limited exceptions, the amount
of compensation cost will be measured based on the grant-date fair value of the
equity or liability instruments issued. In addition, liability awards will be
re-measured each reporting period. Compensation cost will be recognized over the
period that an employee provides service in exchange for the award. SFAS No.
123R replaces Statement of Financial Accounting Standard No. 123, Accounting for
Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, the principles that the Company currently employs to
account and report its employee stock option awards. SFAS No. I23R is effective
for the first interim reporting period that begins after June 15, 2005.
45
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no other accounting standards issued during 2004 that are expected to
have a material impact on the Company's consolidated financial statements.
NOTE 2 - ADVANCE PREMIUM AND PREMIUM DEPOSITS
- ---------------------------------------------
Some of the Company's health and life programs require payments of premium prior
to the effective date of coverage; and, accordingly, invoices are sent out as
early as two months prior to the coverage effective date. Insurance premiums
received for coverage months effective after the balance sheet date are recorded
as advance premiums. The Company received deposits to guarantee the payment of
premiums for past coverage months on its daily automobile rental program. These
deposits are required when information such as gross receipts or number of
rental cars is required to compute the actual premium due, but is not available
until after the coverage month.
NOTE 3 - INVESTMENTS
- ---------------------
The Company manages its own investment portfolio. A summary of net investments
and related income is as follows:
Investment income is summarized as follows:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Fixed maturities $4,200,190 $4,742,204 $5,354,707
Short-term investments 42,633 105,939 103,339
--------- --------- ---------
Total investment income $4,242,823 $4,848,143 $5,458,046
========= ========= =========
Net realized investment gains and (losses) are summarized as follows:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Gross realized gains on fixed maturities: - - $3,906
Gross realized (losses) on equity securities: - - (216)
-----
Net realized investment gains (losses) - - $3,690
=====
A summary of the unrealized appreciation (depreciation) on investments carried
at market and the applicable deferred federal income taxes is shown below:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Gross unrealized appreciation of fixed maturities: $1,242,024 $3,236,623 $4,828,956
Gross unrealized (depreciation) of fixed maturities: (672,067) (38,169) (105,074)
------- --------- ---------
Net unrealized appreciation on investments 569,957 3,198,454 4,723,882
Deferred federal tax (expense) (193,785) (1,087,475) (1,606,120)
------- --------- ---------
Net unrealized appreciation,
net of deferred income taxes $376,172 $2,110,979 $3,117,762
======= ========= =========
The amortized cost and estimated market value of fixed maturity investments at
December 31, 2004, by contractual maturity are as follows. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without penalties.
46
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amortized Estimated
Cost Market Value
---- ------------
Due in one year or less $50,771,462 $50,711,703
Due after one year through five years 78,218,196 78,847,912
Due after five years through ten years - -
----------- -----------
Total fixed maturities $128,989,658 $129,559,615
=========== ===========
The amortized cost and estimated market values of investments in fixed
maturities by categories are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
December 31, 2004
- -----------------
Available for sale:
Fixed maturities
----------------
Certificates of deposit $500,000 - - $500,000
U.S. treasury securities 77,765,616 $47,620 $514,331 77,298,905
U.S. government sponsored
enterprise securities 11,998,772 - 145,712 11,853,060
State and municipal tax-exempt bonds 970,343 - 12,024 958,319
Industrial and miscellaneous taxable bonds 37,754,927 1,194,404 - 38,949,331
----------- --------- ------ -----------
Total fixed maturities $128,989,658 $1,242,024 $672,067 $129,559,615
=========== ========= ======= ===========
December 31, 2003
- -----------------
Available for sale:
Fixed maturities
----------------
Certificates of deposit $500,000 - - $500,000
U.S. treasury securities 38,305,041 $251,713 $6,485 38,550,269
U.S. government sponsored
enterprise securities 11,997,264 13,976 24,360 11,986,880
State and municipal tax-exempt bonds 2,029,891 17,316 7,324 2,039,883
Industrial and miscellaneous taxable bonds 58,493,396 2,953,618 - 61,447,014
----------- --------- ------ -----------
Total fixed maturities $111,325,592 $3,236,623 $38,169 $114,524,046
=========== ========= ====== ===========
The following table illustrates the gross unrealized losses included in the
Company's investment portfolio and the fair value of those securities,
aggregated by investment category. The table also illustrates the length of time
that they have been in a continuous unrealized loss position as of December 31,
2004.
Amortized Gross
Cost Fair Value Unrealized Loss
---- ---------- ---------------
0-6 months $26,470,295 $26,352,610 $117,685
7-12 months 56,073,912 55,573,734 500,178
Over 12 months 3,970,343 3,916,139 54,204
---------- ---------- -------
Total $86,514,550 $85,842,483 $672,067
========== ========== =======
At December 31, 2004, the Company held securities with unrealized appreciation
of $1,242,024 and securities with unrealized depreciation of $672,067. Fixed
maturity investments with a gross unrealized loss for a continuous period of 0
to 6 months consisted of U.S. treasury securities. Fixed maturity investments
with a gross unrealized loss position for a continuous period of 7 to 12 months
consists of U.S. treasury and U.S. government sponsored enterprise securities.
Fixed maturity investments with a gross unrealized loss position exceeding a
12-month period consist of U.S. government sponsored enterprise securities and
pre-refunded state and municipal bonds.
The Company monitors its investments closely. If an unrealized loss is
determined to be other than temporary it is written off as a realized loss
through the Consolidated Statements of Operations. The Company's methodology of
47
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assessing other-than-temporary impairments is based on security-specific
analysis as of the balance sheet date and considers various factors including
the length of time and the extent to which the fair value has been less than the
cost, the financial condition and the near term prospects of the issuer, whether
the debtor is current on its contractually obligated interest and principal
payments, and the Company's intent to hold the investment for a period of time
sufficient to allow the Company to recover its costs. The Company has concluded
that the gross unrealized losses of $672,067 at December 31, 2004, were
temporary in nature. However, facts and circumstances may change which could
result in a decline in market value considered to be other than temporary.
The Company did not sell any fixed maturity investment in the years ended
December 31, 2004 and 2003.
Short-term investments have an initial maturity of one year or less and consist
of the following:
Year ended December 31
----------------------
2004 2003
---- ----
Certificates of deposit $400,000 $425,000
Cash deposited in lieu of bond * 752,659 752,659
Commercial paper 1,005,000 2,000,000
U.S. treasury bills - 2,998,850
Commercial bank money market accounts 803,949 902,517
U.S. government obligation money market fund 144,925 147,666
Savings account 11,585 2,623
--------- ---------
Total short-term investments $3,118,118 $7,229,315
========= =========
*Deposited with superior courts to stay execution of judgments pending appeal of
two Crusader claims.
NOTE 4 - PROPERTY AND EQUIPMENT (NET OF ACCUMULATED DEPRECIATION)
- ----------------------------------------------------------------
Property and equipment consist of the following:
Year ended December 31
----------------------
2004 2003
---- ----
Furniture, fixtures, computer, office,
and transportation equipment $1,599,077 $1,570,716
Accumulated depreciation 1,320,673 1,247,626
--------- ---------
Net property and equipment $278,404 $323,090
======= =======
NOTE 5 - PREMIUMS, COMMISSIONS AND NOTES RECEIVABLE, NET
- --------------------------------------------------------
Premiums and notes receivable are substantially secured by unearned premiums and
funds held as security for performance.
Year ended December 31
----------------------
2004 2003
---- ----
Premiums and commission receivable $2,947,130 $2,851,189
Premium finance notes receivable 4,843,060 5,457,797
--------- ---------
Total premiums and notes receivable 7,790,190 8,308,986
Less allowance for doubtful accounts 19,630 18,817
--------- ---------
Net premiums and notes receivable $7,770,560 $8,290,169
========= =========
Bad debt expense for the fiscal year ended December 31, 2004, and the fiscal
year ended December 31, 2003, was $29,402 and $23,895, respectively. Premium
finance notes receivable represent the balance due to the Company's premium
finance subsidiary from policyholders who elect to finance their premiums over
the policy term. These notes are net of unearned finance charges.
48
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - NOTES PAYABLE - RELATED PARTIES
- ----------------------------------------
In 2003, Unico made capital contributions totaling $3,000,000 to its Crusader
subsidiary. The contributions were made to ensure that Crusader's capital
remained above $25,000,000. 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. As of December 31, 2004, the Company repaid
the note from The Cary and Danielle Cheldin Family Trust in full and repaid
$500,000 of the Erwin Cheldin note. On January 31, 2005, the Company repaid an
additional $250,000 of the Erwin Cheldin note. The note from Erwin Cheldin is
unsecured and it is payable upon demand of lender (on no less than fourteen
days' notice) and, if no demand is made, then it is payable in full on September
28, 2007. The note may be prepaid at any time without penalty. The note bears an
adjustable interest of 5.5% as of December 31, 2004. The interest is payable
monthly and it is adjustable every third month by adding a margin of one
percentage point to the prime rate.
Year ended December 31
----------------------
2004 2003
---- ----
Note payable - Erwin Cheldin $500,000 $1,000,000
Note payable - The Cary and Danielle
Cheldin Family Trust - 500,000
------- ---------
Notes payable - related parties $500,000 $1,500,000
======= =========
NOTE 7 - UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
- ---------------------------------------------------
The following table provides an analysis of the roll forward of Crusader's
losses and loss adjustment expenses, including a reconciliation of the ending
balance sheet liability for the periods indicated:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Reserve for unpaid losses and loss adjustment expenses
at beginning of year - net of reinsurance $58,883,861 $53,596,945 $49,786,215
---------- ---------- ----------
Incurred losses and loss adjustment expenses
Provision for insured events of current year 35,286,172 28,968,948 24,936,172
Increase (decrease) in provision for events of prior years (835,434) 2,751,585 7,790,851
---------- ----------- ----------
Total losses and loss adjustment expenses 34,450,738 31,720,533 32,727,023
---------- ---------- ----------
Payments
Losses and loss adjustment expenses attributable to
insured events of the current year 7,438,331 5,106,929 5,905,678
Losses and loss adjustment expenses attributable to
insured events of prior years 18,546,279 21,326,688 23,010,615
---------- ---------- ----------
Total payments 25,984,610 26,433,617 28,916,293
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses
at end of year - net of reinsurance 67,349,989 58,883,861 53,596,945
Reinsurance recoverable on unpaid losses and loss
adjustment expenses at end of year 20,119,011 19,255,229 21,308,339
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses at
end of year per balance sheet, gross of reinsurance (*) $87,469,000 $78,139,090 $74,905,284
========== ========== ==========
(*) In accordance with Financial Accounting Standards Board Statement No. 113,
Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts, reinsurance recoverable on unpaid losses and loss adjustment expenses
are reported for GAAP as assets rather than netted against the corresponding
liability for such items on the balance sheet.
49
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loss and loss adjustment expense reserves by line of business before reinsurance
are as follows:
Year ended December 31
----------------------
2004 2003 2002
------------------- ------------------- -------------------
Line of Business
- ----------------
CMP $83,677,560 95.7% $73,708,553 94.3% $69,111,825 92.3%
Other Liability 3,592,719 4.1% 4,279,021 5.5% 5,564,214 7.4%
Other 198,721 0.2% 151,516 0.2% 229,245 0.3%
---------- ----- ---------- ----- ---------- -----
Total $87,469,000 100.0% $78,139,090 100.0% $74,905,284 100.0%
========== ===== ========== ===== ========== =====
The Company`s consolidated financial statements include estimated reserves for
unpaid losses and related claim settlement or loss adjustment expenses of our
insurance company operation. Crusader sets loss and loss adjustment expense
reserves at each balance sheet date at management's best estimate of the
ultimate payments that it anticipates will be made to settle all losses incurred
and related expenses incurred as of that date for both reported and unreported
losses. The process of estimating loss and loss adjustment reserves involves
significant judgment and is complex and imprecise due to the number of variables
and assumptions inherent in the estimating process. Crusader establishes
reserves for reported losses based on historical experience, upon case-by-case
evaluation of facts surrounding each known loss, and the related policy
provisions. The amount of reserves for unreported losses is estimated by
analysis of historical and statistical information. Reserves are monitored and
adjusted when appropriate and reflected in the statement of operations in the
period of adjustment.
Losses and loss adjustment expenses were $34,450,738 (69%) of net premium earned
for the year ended December 31, 2004, compared to $31,720,533 (85%) of net
premium earned for the year ended December 31, 2003. Incurred losses of prior
years were approximately $835,434 (favorable development) for the year ended
December 31, 2004, compared to incurred losses of prior years of $2,751,585
(adverse development) for the year ended December 31, 2003.
Losses and loss adjustment expenses were $31,720,533, for the year ended
December 31, 2003, compared to $32,727,023 for the year ended December 31, 2002.
The decrease in losses and loss adjustment expenses for the year ended December
31, 2003, is primarily the result of a decrease in the adverse development of
prior year losses in 2003 compared to 2002. The adverse loss development in 2003
was $2,751,586 compared to $7,790,851 in 2002. The adverse development in 2003
was primarily the result of an adverse binding arbitration decision on a 1993
claim that 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 other adverse development in 2003
was a result of 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 claims occurring in or prior to the Company's revision of its
policy forms in 1995.
NOTE 8 - DEFERRED POLICY ACQUISITION COSTS
- ------------------------------------------
Deferred policy acquisition costs consist of commissions (net of ceding
commission), premium taxes, inspection fees, and certain other underwriting
costs, which are related to and vary with the production of Crusader policies.
Policy acquisition costs are deferred and amortized as the related premiums are
earned. Deferred acquisition costs are reviewed to determine if they are
recoverable from future income, including investment income.
The following table provides an analysis of the roll forward of Crusader's
deferred policy acquisition costs:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Deferred policy acquisition costs at beginning of year $8,054,363 $5,947,010 $5,079,535
Policy acquisition costs incurred during year 10,468,061 10,048,552 10,141,738
Policy acquisition costs amortized during year (10,319,186) (7,941,199) (9,274,263)
---------- --------- ---------
Deferred policy acquisition costs at end of year $8,203,238 $8,054,363 $5,947,010
========= ========= =========
50
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 30% increase in policy acquisition amortized during the year ended December
31, 2004, is a direct result of the 26% increase in direct earned premium during
the year ended December 31, 2004, compared to the year ended December 31, 2003.
NOTE 9 - LEASE COMMITMENT TO RELATED PARTY
- ------------------------------------------
The Company presently occupies a 46,000 square foot building located at 23251
Mulholland Drive, Woodland Hills, California, under a master lease expiring
March 31, 2007. The total rent expense under this lease agreement was $1,025,952
for the year ended December 31, 2004; $1,025,952 for the year ended December 31,
2003; and $1,025,952 for the year ended December 31, 2002.
The lease provides for the following minimum annual rental commitments:
Year ending
-----------
December 31, 2005 $1,025,952
December 31, 2006 1,025,952
December 31, 2007 (through March 31, 2007) 256,488
---------
Total minimum payments $2,308,392
=========
Erwin Cheldin, the Company's president, chairman, and principal stockholder, is
the owner of the building. On February 22, 1995, the Company signed an extension
to the lease with no increase in rent to March 31, 2007. The Company believes
that the terms of the lease at inception and at the time the lease extension was
signed were at least as favorable to the Company as could have been obtained
from non-affiliated third parties. The Company utilizes for its own operations
100% of the space it leases.
NOTE 10 - ACCRUED EXPENSES AND OTHER LIABILITIES
- ------------------------------------------------
Accrued expenses and other liabilities consist of the following:
Year ended December 31
----------------------
2004 2003
---- ----
Premium payable $3,394,181 $4,241,811
Unearned claim administration income 100,000 100,000
Profit sharing contributions 636,186 477,000
Accrued salaries 331,054 250,803
Commission payable 333,525 299,153
Assessments due California Insurance
Guarantee Association - 650,448
Other 429,837 956,073
--------- ---------
Total accrued expenses and other liabilities $5,224,783 $6,975,288
========= =========
NOTE 11 - COMMITMENT AND CONTINGENCIES
- --------------------------------------
The Company, by virtue of the nature of the business conducted by it, becomes
involved in numerous legal proceedings as either plaintiff or defendant. The
Company is also required to resort to legal proceedings from time to time in
order to enforce collection of premiums, commissions, or fees for the services
rendered to customers or to their agents. These routine items of litigation do
not materially affect the Company and are handled on a routine basis by the
Company through its general counsel.
Likewise, the Company is sometimes named as a cross-defendant in litigation,
which is principally directed against that insurer who was issued a policy of
insurance directly or indirectly through the Company. Incidental actions are
sometimes brought by customers or others, which relate to disputes concerning
the issuance or non-issuance of individual policies. These items are also
handled on a routine basis by the Company's general counsel, and they do not
materially affect the operations of the Company. Management is confident that
the ultimate outcome of pending litigation should not have an adverse effect on
the Company's consolidated operation or financial position.
51
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - REINSURANCE
- ---------------------
A reinsurance transaction occurs when an insurance company transfers (cedes) a
portion of its exposure on business written by it to a reinsurer that assumes
that risk for a premium (ceded premium). Reinsurance does not legally discharge
the Company from primary liability under its policies. If the reinsurer fails to
meet its obligations, the Company must nonetheless pay its policy obligations.
In 2004, Crusader's primary excess of loss reinsurance agreements were with
Platinum Underwriters Reinsurance, Inc. (A.M. Best Rating A) and Hannover
Ruckversicherungs AG (A.M. Best Rating A). In 2003, Crusader's primary excess of
loss reinsurance agreements were with Platinum Underwriters Reinsurance, Inc.,
Hannover Ruckversicherungs AG, QBE Reinsurance Corporation (A.M. Best Rating A).
From 2000 through 2002 Crusader had its primary excess of loss reinsurance
agreements with Partner Reinsurance Company of the U.S. (A.M Best Rating A+). In
1999, Crusader had its primary excess of loss reinsurance agreements with
General Reinsurance Corporation (A.M. Best Rating A++). Crusader also has
catastrophe reinsurance from various highly rated California admitted and
Bermuda reinsurance companies. These reinsurance agreements help protect
Crusader against liabilities in excess of certain retentions, including major or
catastrophic losses that may occur from any one or more of the property and/or
casualty risks which Crusader insures. The Company has no reinsurance
recoverable balances in dispute.
On most of the premium that Crusader cedes to the reinsurer, the reinsurer pays
a commission to Crusader, which includes a reimbursement of the cost of
acquiring the portion of the premium, which is ceded. Ceding commission was
$6,031,987 in 2004, $5,429,330 in 2003, and $1,356,061 in 2002. Crusader does
not currently assume any reinsurance. The Company intends to continue obtaining
reinsurance although the availability and cost may vary from time to time. The
unpaid losses ceded to the reinsurer are recorded as an asset on the balance
sheet.
The increase in earned ceded premiums in 2004 and 2003 were primarily the result
of rate increases by the Company's reinsurers and the increase in the related
direct earned premiums on which those rates were based. The rate increases are
primarily due to the Company's ceded loss experience and the hardening of the
reinsurance marketplace.
The effect of reinsurance on premiums written, premiums earned, and incurred
losses is as follows:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Premiums written:
Direct business $68,872,021 $64,047,717 $45,622,280
Reinsurance assumed - - -
Reinsurance ceded (17,782,448) (16,627,560) (7,259,079)
---------- ---------- ----------
Net premiums written $51,089,573 $47,420,157 $38,363,201
========== ========== ==========
Premiums earned:
Direct business $67,890,808 $53,754,119 $40,568,845
Reinsurance assumed - - -
Reinsurance ceded (17,784,240) (16,648,020) (7,209,573)
---------- ---------- ----------
Net premiums earned $50,106,568 $37,106,099 $33,359,272
========== ========== ==========
Incurred losses and loss
adjustment expenses:
Direct $40,436,295 $39,036,895 $54,352,403
Assumed - - -
Ceded (5,985,557) (7,316,362) (21,625,380)
--------- ---------- ----------
Net incurred losses and
loss adjustment expenses $34,450,738 $31,720,533 $32,727,023
========== ========== ==========
NOTE 13 - PROFIT SHARING PLAN
- -----------------------------
During the fiscal year ended March 31, 1986, the Company adopted the Unico
American Corporation Profit Sharing Plan. Employees who are at least 21 years of
age and have been employed by the Company for at least two years are
participants in the Plan. Pursuant to the terms of the Plan, the Company
annually contributes to the account of each participant an amount equal to a
percentage of the participant's eligible compensation as determined by the Board
of Directors. Participants are entitled to receive benefits under the plan upon
the later of
52
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the following: the date 60 days after the end of the plan year in which the
participant's retirement occurs or one year and 60 days after the end of the
plan year following the participant's termination with the Company. However, the
participant's interest must be distributed in its entirety no later than April 1
of the calendar year following the calendar year in which the participant
attains age 70 1/2 or otherwise in accordance with the Treasury Regulations
promulgated under the Internal Revenue Code of 1954 as amended.
Employer contributions to the plan were as follows:
Year ended December 31, 2004 $759,482
Year ended December 31, 2003 $674,977
Year ended December 31, 2002 $434,789
NOTE 14 - STATUTORY CAPITAL AND SURPLUS
- ---------------------------------------
Crusader is required to file an annual statement with insurance regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory). Statutory accounting practices differ in certain
respects from GAAP. The more significant of these differences for statutory
accounting are (a) premium income is taken into earnings over the periods
covered by the policies, whereas the related acquisition and commission costs
are expensed when incurred; (b) fixed maturity securities are reported at
amortized cost, or the lower of amortized cost or market value, depending on the
quality of the security as specified by the NAIC; (c) equity securities are
valued by the NAIC as required by Statutory Accounting Principles; d)
non-admitted assets are charged directly against surplus; (e) loss reserves and
unearned premium reserves are stated net of reinsurance; and (f) federal income
taxes are recorded when payable and deferred taxes, subject to limitations, are
recognized but only to the extent that they do not exceed 10% of statutory
surplus; changes in deferred taxes are recorded directly to surplus as regards
policyholders. Additionally, the cash flow presentation is not consistent with
generally accepted accounting principles and reconciliation from net income to
cash provided by operations is not presented. Comprehensive income is not
presented under statutory accounting.
Crusader Insurance Company statutory capital and surplus are as follows:
As of December 31, 2004 $29,436,343
As of December 31, 2003 $26,103,440
Crusader Insurance Company statutory net income (loss) is as follows:
Year ended December 31, 2004 $3,343,859
Year ended December 31, 2003 $(3,106,103)
Year ended December 31, 2002 $(5,331,777)
The insurance department has completed its financial examination of Crusader's
December 31, 2001, statutory financial statements. The report of examination
that was filed with the insurance department on May 30, 2003, reported no
adjustments to Crusader's statutory financial statements.
The Company believes that Crusader's statutory capital and surplus were
sufficient to support the insurance premiums written based on guidelines
established by the NAIC.
Crusader is restricted in the amount of dividends it may pay to its parent in
any twelve (12) month period without prior approval of the California Department
of Insurance. Presently, without prior approval, Crusader may pay a dividend in
any twelve (12) month period to its parent equal to the greater of (a) 10% of
Crusader's statutory policyholders' surplus or (b) Crusader's statutory net
income for the preceding calendar year. There were no dividends paid by Crusader
to Unico in 2004, 2003, or in 2002. Based on Crusader's statutory surplus as
regards policyholders as of December 31, 2004, the maximum dividend that could
be made by Crusader to Unico without prior regulatory approval in 2005 is
$2,943,634.
In December 1993, the National Association of Insurance Commissioners (NAIC)
adopted a Risk-Based Capital (RBC) Model Law for property and casualty
companies. The RBC Model Law is intended to provide standards for calculating a
variable regulatory capital requirement related to a company's current
operations and its risk exposures (asset risk, underwriting risk, credit risk
and off-balance sheet risk). These standards are intended to
53
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
serve as a diagnostic solvency tool for regulators that establishes uniform
capital levels and specific authority levels for regulatory intervention when an
insurer falls below minimum capital levels. The RBC Model Law specifies four
distinct action levels at which a regulator can intervene with increasing
degrees of authority over a domestic insurer if its RBC is equal to or less than
200% of its computed authorized control level RBC. A company's RBC is required
to be disclosed in its statutory annual statement. The RBC is not intended to be
used as a rating or ranking tool nor is it to be used in premium rate making or
approval. Crusader's adjusted capital at December 31, 2004, was 301% of
authorized control level risk-based capital.
Insurance Regulatory Information System (IRIS) was developed by a committee of
state insurance regulators primarily to assist state insurance departments in
executing their statutory mandate to oversee the financial condition of
insurance companies. IRIS helps those companies that merit highest priority in
the allocation of the regulators' resources on the basis of 12 financial ratios
that are calculated annually. The analytical phase is a review of annual
statements and the financial ratios. The ratios and trends are valuable in
pointing to companies likely to experience financial difficulties, but are not
themselves indicative of adverse financial condition. The ratio and benchmark
comparisons are mechanically produced and are not intended to replace the state
insurance department's own in-depth financial analysis or on-site examinations.
An unusual range of ratio results has been established from studies of the
ratios of companies that have become insolvent or have experienced financial
difficulties. In the analytical phase, companies that receive four or more
financial ratio values outside the usual range are analyzed in order to identify
those companies that appear to require immediate regulatory action.
Subsequently, a more comprehensive review of the ratio results and an insurer's
annual statement are performed to confirm that an insurer's situation calls for
increased or closer regulatory attention.
In 2004, the Company was outside the usual values on two of the twelve IRIS
ratio tests. These ratios were the Estimated Current Reserve Deficiency to
Surplus Ratio and the Investment Yield Ratio. The Estimated Current Reserve
Deficiency to Surplus ratio was outside the usual values due to adverse
development of the Company's losses and loss adjustment expense reserves in 2002
and 2003. The Investment Yield Ratio compares the Company's investment yield of
3.4% to an established minimum and maximum range of greater than 4.5% and less
than 10%. The decrease in the Company's investment yield is primarily the result
of a decline over the last 5 years 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.
NOTE 15 - STOCK PLANS
- ---------------------
The Company's 1999 Omnibus Stock Plan that covers 500,000 shares of the
Company's common stock (subject to adjustment in the case of stock splits,
reverse stock splits, stock dividends, etc.) was approved by shareholders June
4, 1999. On August 26, 1999, the Company granted 135,000 incentive stock options
of which 40,000 were terminated and 95,000 were outstanding and exercisable as
of December 31, 2004. These options expire 10 years from the date of the grant.
On December 18, 2002, the Company granted an additional 182,000 incentive stock
options under the Company's 1999 Omnibus Stock Plan of which 2,500 options were
exercised, 2,500 options were terminated and 177,000 were outstanding as of
December 31, 2004. These options expire 10 years from the date of the grant.
These options become exercisable as follows:
January 1, 2004 54,500
January 1, 2005 55,000
January 1, 2006 37,500
January 1, 2007 30,000
-------
Total 177,000
=======
54
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The changes in the number of common shares under
option are summarized as follows:
Weighted Average
Options Exercise Price
------- --------------
Outstanding at December 31, 2001 116,415 $8.686
Options granted 182,000 3.110
Options exercised (8,245) 3.500
Options terminated (3,170) 3.500
-------
Outstanding at December 31, 2002 287,000 5.356
Options granted - -
Options exercised - -
Options terminated (10,000) 9.250
-------
Outstanding at December 31, 2003 277,000 5.216
Options granted - -
Options exercised (2,500) 3.110
Options terminated (2,500) 3.110
-------
Outstanding at December 31, 2004 272,000 $5.254
=======
Options exercisable were 149,500 at December 31, 2004, at a weighted average
exercise price of $7.01; 95,000 at December 31, 2003, at a weighted average
exercise price of $9.25; 92,500 at December 31, 2002, at a weighted average
exercise price of $9.25.
The following table summarizes information regarding the stock options
outstanding at December 31, 2004:
Weighted Weighted Weighted
Average Average Average
Number of Remaining Exercise Price Exercise Price
Exercise Options Contractual Life of Outstanding Number of Options of Exercisable
Price Outstanding (Years) Options Exercisable Options
----- ----------- ----- ------- ----------- -------
$9.25 95,000 4.65 9.25 95,000 $9.25
$3.11 177,000 7.96 3.11 54,500 $3.11
NOTE 16 - TAXES ON INCOME
- -------------------------
The provision for taxes on income consists of the following:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Current provision:
Federal $2,947,668 $703,663 (1,599,760)
State 64,400 572,822 160,626
--------- ---------- ---------
Total federal and state 3,012,068 1,276,485 (1,439,134)
Deferred (21,110) (195,764) (150,236)
--------- --------- ---------
Provision for taxes $2,990,958 $1,080,721 $(1,589,370)
========= ========= =========
The income tax provision reflected in the consolidated statements of operations
is different than the expected federal income tax on income as shown in the
table below:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Computed tax expense (benefit) $2,948,636 $730,786 $(1,636,780)
Tax effect of:
Tax exempt income (10,612) (34,071) (82,034)
State tax, net of federal tax benefit 65,237 370,784 114,413
Other (12,303) 13,222 15,031
--------- --------- ---------
Tax per financial statements $2,990,958 $1,080,721 $(1,589,370)
========= ========= =========
55
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 9, 2002, the Job Creation and Workers Assistance Act of 2002 was signed
into law. This act was effective for tax years ending in 2001 and provided that
a net operating loss for tax years ending in 2001 or 2002 is carried back five
years, rather than the previously allowed two years. This act allowed the
Company to carryback its entire 2002 net operating loss. The carryback of the
2002 Federal tax benefit was allocated as follows:
2002 federal income tax loss carryback to 1998 (1,548,427)
Adjustment to 2001 tax provision (51,333)
---------
2002 federal income tax provision $(1,599,760)
=========
The components of the net federal income tax asset included in the financial
statements as required by the assets and liability method are as follows:
Year ended December 31
----------------------
2004 2003
---- ----
Deferred tax assets:
Discount on loss reserves $2,368,238 $2,246,793
Unearned premiums 2,418,595 2,351,751
AMT credit - 203,340
State income tax deductible in future periods 152,306 121,278
Other 104,644 89,499
--------- ---------
Total deferred tax assets $5,043,783 $5,012,661
--------- ---------
Deferred tax liabilities:
Deferred acquisition costs $2,789,102 $2,738,484
Unrealized gain on investments 193,785 1,087,474
State tax on undistributed insurance
company earnings 157,249 -
Tax depreciation in excess of book depreciation 66,913 32,483
Other 166,529 178,519
--------- ---------
Total deferred tax liabilities $3,376,588 $4,036,960
--------- ---------
Net deferred tax assets $1,667,195 $975,701
========= =======
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax assets will be realized. The amount of the
deferred tax assets considered realizable could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
The Company and its wholly owned subsidiaries file consolidated federal and
combined California income tax returns. Pursuant to the a tax allocation
agreement, Crusader and American Acceptance Corporation are allocated taxes or
(in the case of losses) tax credits at current corporate rates based on their
own taxable income or loss.
As a California insurance company, Crusader is obligated to pay a premium tax on
gross premiums written in all states that Crusader is admitted. Premium taxes
are deferred and amortized as the related premiums are earned. The premium tax
is in lieu of state franchise taxes and is not included in the provision for
state taxes.
In the year ended December 31, 2003, the Company recognized an income tax
expense of $287,000 resulting from an assessment for the years 1999 and 2000
from the California Franchise Tax Board. The assessment resulted from a court
ruling in Ceridian vs. Franchise Tax Board that held that the California statute
permitting the tax deductibility of dividends received from a wholly owned
insurance subsidiary was unconstitutional because it discriminated against
out-of-state holding companies and thus was in violation of the interstate
commerce clause of the United States Constitution. The ruling concluded that the
discriminatory sections of the statute are not severable and the entire statute
was invalid and unenforceable. California law provides that the proper remedy in
such circumstances is to disallow the deduction to those taxpayers who benefited
from the deduction. As a result of the court ruling, in February 2003, the
Franchise Tax Board (FTB) notified the Company that it would issue a Notice of
Proposed Assessment (NPA) for tax years 1999 and 2000 of approximately $287,000
representing California state franchise taxes plus related interest of
approximately $80,000. In September 2004, California enacted legislation (AB
263) that
57
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
addresses many aspects of the tax treatment of insurance company owners,
including holding companies such as Unico. The legislation provides for an
election, applicable if made to all tax years ending after December 1, 1997, and
before January 1, 2005, under which a dividend-received deduction of up to 80%
of dividends paid by an insurer to a non-insurer parent is allowed. The Company
made the election authorized by AB 263 and, therefore, has reversed 80% of the
$287,000 income tax expense. The Company has also reversed 80% of the interest
accrued at December 31, 2003, on the $287,000 assessment. In addition, as a
result of AB 263, the Company recognized a state deferred tax liability of
$157,249 in accordance with FASB 109. This deferred tax liability represents the
Company's future state tax liability for all undistributed earnings of Crusader
since January 1, 1993. The federal tax benefit resulting from AB 263 as of
December 31, 2004, is $53,465. Thus, the net deferred tax liability as of
December 31, 2004, is $103,784.
NOTE 17 - REPURCHASE OF COMMON STOCK - EFFECT ON STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------
The Company has previously announced that its Board of Directors had authorized
the repurchase in the open market from time to time of up to an aggregate of
945,000 shares of the common stock of the Company. During the year ended
December 31, 2004, the Company did not purchase any shares of the Company's
common stock. As of December 31, 2003, the Company had purchased and retired
under the Board of Directors authorization an aggregate of 868,958 shares of its
common stock at a cost of $5,517,465.
NOTE 18 - EARNINGS PER SHARE
- ----------------------------
A reconciliation of the numerator and denominator used in the basic and diluted
earnings per share calculation is presented below:
Year ended December 31
----------------------
2004 2003 2002
---- ---- ----
Basic Earnings (Loss) Per Share
- -------------------------------
Net income (loss) numerator $5,681,500 $1,068,650 $(3,224,689)
========= ========= =========
Weighted average shares outstanding denominator 5,490,346 5,489,604 5,487,311
========= ========= =========
Per share amount $1.03 $0.19 $(0.59)
Diluted Earnings (Loss) Per Share
- ---------------------------------
Net income (loss) numerator $5,681,500 $1,068,650 $(3,224,689)
========= ========= =========
Weighted average shares outstanding 5,490,346 5,489,604 5,487,311
Effect of diluted securities* 90,949 43,508 -
--------- --------- ---------
Diluted shares outstanding denominator 5,581,295 5,533,112 5,487,311
========= ========= =========
Per share amount $1.02 $0.19 $(0.59)
*In loss periods, options are excluded from the calculation of diluted EPS, as
the inclusion of such options would have an antidilutive effect. Therefore,
1,428 options were excluded from the calculation of diluted EPS for the year
ended December 31, 2002.
57
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------
Summarized unaudited quarterly financial data for each of the calendar years
2004 and 2003 is set forth below:
Comparable Period by Quarter Ended
----------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Calendar Year 2004
------------------
Total revenues $15,680,191 $15,243,414 $15,477,954 $15,501,751
Income before taxes 1,968,444 1,945,412 2,119,372 2,639,230
Net income 1,257,997 1,233,390 1,426,213 1,763,900
Earnings per share: Basic $0.23 $0.22 $0.26 $0.32
Diluted $0.23 $0.22 $0.26 $0.32
Calendar Year 2003
------------------
Total revenues $11,416,591 $12,292,016 $13,228,806 $14,193,026
Income (loss) before taxes 360,080 871,597 (1,024,454) 1,942,148
Net income (loss) 233,083 561,276 (733,562) 1,007,853
Earnings (loss) per share: Basic $0.04 $0.10 $(0.13) $0.18
Diluted $0.04 $0.10 $(0.13) $0.18
58
Item 9. Changes in and Disagreements With Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
--------------------
None
Item 9A. 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
December 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.
Item 9b. Other Information
- ---------------------------
None
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Information in response to Item 10 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
Item 11. Executive Compensation
- --------------------------------
Information in response to Item 11 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
- ----------------------------------------------------------------------------
Related Stockholder Matters
---------------------------
Information in response to Item 12 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Information in response to Item 13 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
Item 14. Principal Accountant Fees and Services
- ------------------------------------------------
Information in response to Item 14 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
59
PART IV
-------
Item 15. Exhibits and Financial Statement Schedules
- ----------------------------------------------------
(a) Financial Statements, Schedules and Exhibits:
1. Financial statements:
The consolidated financial statements for the fiscal year ended December
31, 2004, are contained herein as listed in the index to consolidated
financial statements on page 34.
2. Financial schedules:
Index to Consolidated Financial Statements
------------------------------------------
Independent Registered Public Accounting Firms' Report on Financial
Statement Schedules
Schedule II - Condensed Financial Information of Registrant
Schedule III - Supplemental Insurance Information
Schedules other than those listed above are omitted, since they are not
applicable, not required, or the information required being set forth is
included in the consolidated financial statements or notes.
3. Exhibits:
3.1 Articles of Incorporation of Registrant, as amended. (Incorporated
herein by reference to Exhibit 3.1 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1984.)
3.2 By-Laws of Registrant, as amended. (Incorporated herein by
reference to Exhibit 3.2 to Registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 1991.)
10.1 Unico American Corporation Profit Sharing Plan & Trust.
(Incorporated herein by reference to Exhibit 10.1 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1985.) (*)
10.2 The Lease dated July 31, 1986, between Unico American Corporation and
Cheldin Management Company. (Incorporated herein by reference to
Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1987.)
10.3 The Lease Amendment #1 dated February 22, 1995, between Unico
American Corporation and Cheldin Management amending the lease dated
July 31, 1986. (Incorporated herein by reference to Exhibit 10.5 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1995.)
10.4 2000 Omnibus Stock Plan of Unico American Corporation (Incorporated
herein by reference to Exhibit A to Registrant's Proxy Statement for
its Annual Meeting of Shareholders held June 4, 2000.) (*)
21 Subsidiaries of Registrant. (Incorporated herein by reference to
Exhibit 22 to Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1984.)
23 Consent of Independent Registered Public Accounting Firm - KPMG LLP.
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.
(*) Indicates management contract or compensatory plan or
arrangement.
60
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 28, 2005
UNICO AMERICAN CORPORATION
By: /s/ Erwin Cheldin
-----------------
Erwin Cheldin
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- -----
/s/ Erwin Cheldin Chairman of the Board, March 28, 2005
- ----------------- President and Chief
Erwin Cheldin Executive Officer,
(Principal Executive Officer)
/s/ Lester A. Aaron Treasurer, Chief Financial March 28, 2005
- ------------------- Officer and Director
Lester A. Aaron (Principal Accounting and
Principal Financial Officer)
/s/ Cary L. Cheldin Executive Vice President March 28, 2005
- ------------------- and Director
Cary L. Cheldin
/s/ George C. Gilpatrick Vice President, Secretary March 28, 2005
- ------------------------ and Director
George C. Gilpatrick
/s/ David A. Lewis Director March 28, 2005
- ------------------
David A. Lewis
/s/ Warren D. Orloff Director March 28, 2005
- --------------------
Warren D. Orloff
/s/ Donald B. Urfrig Director March 28, 2005
- --------------------
Donald B. Urfrig
61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
The Board of Directors and Stockholders
Unico American Corporation:
Under date of March 23, 2005, we reported on the consolidated balance sheets of
Unico American Corporation and subsidiaries as of December 31, 2004 and 2003,
and the related consolidated statements of operations, comprehensive income,
changes in stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 2004, as contained in the 2004 annual
report to stockholders. These consolidated financial statements and our report
thereon are incorporated by reference in the annual report on Form 10-K for the
year 2004. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedules as listed under 15(a)2. These financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG LLP
Los Angeles, California
March 23, 2005
62
SCHEDULE II
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS - PARENT COMPANY ONLY
December 31 December 31
2004 2003
---- ----
ASSETS
------
Investments
Short-term investments $9,147 $9,097
----- -----
Total Investments 9,147 9,097
Cash 8,317 17,119
Accrued investment and other income 6,000 12,000
Investments in subsidiaries 61,038,810 55,369,327
Property and equipment (net of accumulated depreciation) 278,404 323,090
Income taxes receivable - -
Other assets 456,787 158,560
---------- ----------
Total Assets $61,797,465 $55,889,193
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
- -----------
Accrued expenses and other liabilities $149,797 $288,340
Payables to subsidiaries (net of receivables) (1) 18,494,793 15,015,334
Income taxes payable 227,550 614,662
Notes Payable - related parties 500,000 1,500,000
---------- ----------
Total Liabilities $19,372,140 $17,418,336
---------- ----------
STOCKHOLDERS' EQUITY
- --------------------
Common stock $2,708,047 $2,700,272
Net unrealized investment gains 376,172 2,110,979
Retained earnings 39,341,106 33,659,606
---------- ----------
Total Stockholders' Equity $42,425,325 $38,470,857
---------- ----------
Total Liabilities and Stockholders' Equity $61,797,465 $55,889,193
========== ==========
(1) The Company and its wholly owned subsidiaries file consolidated Federal and
combined California income tax returns. Pursuant to a tax allocation
agreement, Crusader Insurance Company and American Acceptance Corporation
are allocated taxes or (in the case of losses) tax credits at current
corporate rates based on their own taxable income or loss. The payable to
subsidiaries includes their income tax receivable or liability included in
the consolidated return.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
63
SCHEDULE II (continued)
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS - PARENT COMPANY ONLY
FOR THE YEARS ENDED DECEMBER 31
2004 2003 2002
---- ---- ----
REVENUES
- --------
Net investment income $9,293 $9,315 $476
Other income 11,981 15,974 18,706
------ ------ ------
Total Revenue 21,274 25,289 19,182
EXPENSES
- --------
General and administrative expenses 9,257 18,670 16,166
----- ------ ------
Income before equity in net income of subsidiaries 12,017 6,619 3,016
Equity in net income (loss) of subsidiaries 5,669,483 1,062,031 (3,227,705)
--------- --------- ---------
Net Income (Loss) $5,681,500 $1,068,650 $(3,224,689)
========= ========= =========
The Company and its subsidiaries file a consolidated federal income tax return.
Unico received cash dividends of $200,000 from American Acceptance Corporation
in the years ended December 31, 2004 and 2002.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
64
SCHEDULE II (continued)
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS - PARENT COMPANY ONLY
FOR THE YEARS ENDED DECEMBER 31
2004 2003 2002
---- ---- ----
Cash flows from operating activities: Cash flows from operating activities:
Net income (loss) $5,681,500 $1,068,650 $(3,224,689)
Adjustments to reconcile net income to net cash from operations
Undistributed equity in net (income) loss of subsidiaries (5,669,483) (1,062,031) 3,227,705
Depreciation and amortization 95,084 89,821 84,951
Accrued expenses and other liabilities (138,543) (44,338) (32,111)
Accrued investment and other income 6,000 (6,000) (5,750)
Income taxes receivable - 1,548,427 3,850,512
Other assets (298,227) (20,963) 81,276
------- --------- ---------
Net cash provided (used) from operations (323,669) 1,573,566 3,981,894
------- --------- ---------
Cash flows from investing activities
(Increase) in short-term investments (50) (35) (184)
Additions to property and equipment (50,398) (58,717) (171,719)
------ ------ -------
Net cash (used) by investing activities (50,448) (58,752) (171,903)
------ ------ -------
Cash flows from financing activities
Proceeds from issuance of common stock 7,775 - 28,857
Proceeds from notes payable - related parties - 1,500,000 750,000
Repayment of notes payable - related parties (1,000,000) (750,000) -
Dividends paid to shareholders - - (274,477)
Net change in payables and receivables from subsidiaries 1,357,540 (2,256,145) (4,325,348)
--------- --------- ---------
Net cash provided (used) by financing activities 365,315 (1,506,145) (3,820,968)
------- --------- ---------
Net increase (decrease) in cash (8,802) 8,669 (10,977)
Cash at beginning of year 17,119 8,450 19,427
------ ------- ------
Cash at end of year $8,317 $17,119 $8,450
===== ====== =====
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
65
SCHEDULE III
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Future
Benefits, Benefits, Amortization
Deferred Losses, Claims, of Deferred
Policy and Loss Net Losses and Policy Other
Acquisition Adjustment Unearned Premium Investment Settlement Acquisition Operating Premium
Cost Expenses Premiums Revenue Income Expenses Costs Costs Written
---- -------- -------- ------- ------ -------- ----- ----- -------
Year Ended
December 31, 2004
Property &
Casualty $8,203,238 $87,469,000 $35,656,393 $50,106,568 $4,204,573 $34,450,738 $10,319,186 $1,746,815 $51,089,573
Year Ended
December 31, 2003
Property &
Casualty $8,054,363 $78,139,090 $34,675,180 $37,106,099 $4,801,133 $31,720,533 $7,941,199 $2,418,935 $47,420,157
Year Ended
December 31, 2002
Property &
Casualty $5,947,010 $74,905,284 $24,381,583 $33,359,272 $5,401,870 $32,727,023 $9,274,263 $2,151,332 $38,363,201
66
EXHIBIT INDEX
--------------
Exhibit
No. Description
-- -----------
3.1 Articles of Incorporation of Registrant, as amended. (Incorporated
herein by reference to Exhibit 3.1 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1984.)
3.2 By-Laws of Registrant, as amended. (Incorporated herein by reference
to Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1991.)
10.1 Unico American Corporation Profit Sharing Plan & Trust.
(Incorporated herein by reference to Exhibit 10.1 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1985.) (*)
10.2 The Lease dated July 31, 1986, between Unico American Corporation and
Cheldin Management Company. (Incorporated herein by reference to
Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1987.)
10.3 The Lease Amendment #1 dated February 22, 1995, between Unico
American Corporation and Cheldin Management amending the lease dated
July 31, 1986. (Incorporated herein by reference to Exhibit 10.5 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1995.)
10.4 2000 Omnibus Stock Plan of Unico American Corporation (Incorporated
herein by reference to Exhibit A to Registrant's Proxy Statement for
its Annual Meeting of Shareholders held June 4, 2000.) (*)
21 Subsidiaries of Registrant. (Incorporated herein by reference to
Exhibit 22 to Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1984.)
23 Consent of Independent Public Accountants - KPMG LLP.
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.
(*) Indicates management contract or compensatory plan or arrangement.