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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 fiscal year ended or
|X| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from April 1, 1996
to December 31, 1996
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 registrants knowledge, in definitive proxy of information statements
incorporated by reference as Part III of this Form 10-K or any amendment to this
Form 10K. X
The aggregate market value of Registrant's voting stock held by non-affiliates
as of March 25, 1997, was $34,035,320 (based on the closing sales price on such
date, as reported by the Wall Street Journal).
6,120,081
Number of shares of common stock outstanding as of March 25, 1997
Portions of the definitive proxy statement which registrant intends to file
pursuant to regulation 14(A) by a date no later than 120 days after December 31,
1996, 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 10K not later than the end of the
120 day period.
1
PART I
Item 1. Business
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. Unico American Corporation is an insurance holding
company which provides property, casualty, health and life insurance and related
premium financing through its wholly owned subsidiaries.
General Agency Operations
The Company's general agency subsidiaries are as follows:
Unifax Insurance Systems, Inc. ("Unifax") primarily sells and services business
package insurance policies. In addition, it also sells and services commercial
liability, commercial property, commercial automobile and workers' compensation
insurance policies. Its workers' compensation policies are sold in California
and Arizona for a non-affiliated insurer. Its commercial automobile policies are
sold in California for a non-affiliated insurer. In February 1997 management
decided to discontinue writing new policies in the Unifax commercial automobile
program, and will only service and renew existing policies after that date. All
other policies are sold and serviced by Unifax in California, Arizona, Nevada,
Oregon, and Washington for Crusader Insurance Company ("Crusader"), a wholly
owned subsidiary of Unico.
Bedford Insurance Services, Inc. ("Bedford") sells and services daily automobile
rental policies in most states for a non-affiliated insurer.
National Coverage Corporation ("NCC") renewed and serviced commercial and
personal automobile policies in California for a non-affiliated insurer. This
program was terminated in August 1996, and the corporation is now inactive.
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 service fee from the customer. These subsidiaries all hold
licenses issued by the California Department of Insurance and other states where
applicable.
Insurance Claim Adjusting Operation
The Company's subsidiary, U.S. Risk Managers, Inc. ("U.S. Risk"), provides
insurance claim adjusting services to the non-affiliated property and casualty
insurance company that Bedford represents as a general agent. This service
consists of receiving, reserving, adjusting, paying and accounting for insurance
claims. U.S. Risk engages independent field examiners for all work performed
outside the Company's office. For its services, U.S. Risk receives a percentage
of the premium written by the general agent. U.S. Risk operates under a license
issued by the California Department of Insurance and other states where
applicable. 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 which 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. The premium
2
finance company provides premium financing to Crusader and a non-affiliated
insurer on commercial auto policies produced by Unifax.
Health and Life Insurance Operations
The Company's subsidiaries National Insurance Brokers, Inc. ("NIB") and American
Insurance Brokers, Inc. ("AIB"), market medical, dental, life, and accidental
death and dismemberment insurance through non-affiliated insurance companies for
individuals and groups. The services provided consist of marketing, billing and
collection, accounting, and customer service. For its services, these
subsidiaries receive a commission from the insurance company. Most of the
business is produced through independent insurance agents and brokers who
receive a commission from NIB or AIB. NIB and AIB hold licenses issued by the
California Department of Insurance. All business is currently written in the
State of California.
Association Operation
The Company's subsidiary Insurance Club, Inc., DBA The American Association For
Quality Health Care ("AAQHC"), is a membership association which provides
various consumer benefits to its members, including participation in group
health care and life insurance policies which AAQHC negotiates for the
Association. For these services, AAQHC receives membership and fee income from
its members.
Insurance Company Operation
General
The insurance company operations are conducted through Crusader, which as of
December 31, 1996, is licensed as an admitted insurance carrier in the states of
California, Arizona, Nevada, 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, 1996, it was primarily writing business
package policies in all the states in which it is licensed. Crusader also writes
commercial property and commercial liability policies in those states. Its
business is sold through Unifax Insurance Systems, Inc., its sister corporation.
Unifax has substantial experience with these classes of business. Crusader is
licensed in all property and casualty and disability lines 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 which assumes
that risk for a premium ("ceded premium"). Reinsurance does not legally
discharge the Company from primary liability under its policies, and if the
reinsurer fails to meet the obligations, the Company must nonetheless pay its
policy obligations. Crusader has reinsurance agreements with National
Reinsurance Corporation, a California admitted reinsurance company. National
Reinsurance Corporation was acquired by General Reinsurance Corporation in 1996.
These reinsurance agreements help protect Crusader against liabilities in excess
of certain retentions, including major or catastrophic losses which may occur
from any one or more of the property and/or casualty risks which Crusader
insures. Crusader also has additional catastrophe reinsurance from various
California admitted reinsurance companies.
The aggregate amount of insurance premiums ceded to the reinsurers for the nine
month period ended December 31, 1996, and fiscal year ended March 31, 1996, was
$3,307,085 and $6,077,403 respectively.
Crusader's retention is currently $150,000 per risk subject to a maximum dollar
amount and to catastrophe and clash covers. The catastrophe and clash covers
(subject to a maximum occurrence and annual aggregate amount) help protect the
Company from one loss occurrence affecting multiple policies. The premium ceded
to the reinsurers for the catastrophe and clash covers and for all exposures
over $500,000 is a fixed percentage of the premium charged by Crusader. On
exposures up to $500,000, the reinsurer charges a provisional rate which is
subject to adjustment and is based on the amount of losses ceded, limited by a
maximum percentage that can be charged by the reinsurer. 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. Crusader does not currently assume any reinsurance
from other insurance companies. The Company intends to continue
3
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.
Unpaid Losses and Loss Adjustment Expenses
Crusader maintains reserves for losses and loss adjustment expenses with respect
to both reported and unreported losses. 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. Historical data includes 12 years that Crusader has
been in operation and the data from its general agent developed with other
insurance companies prior to 1985. Since the ultimate liability of Crusader may
be greater or less than estimated reserves, all reserves are constantly
monitored and adjusted when appropriate. Reserves for loss adjustment expenses
are estimated to cover the direct costs associated with specific claims as well
as an estimate of administrative costs.
The process of establishing loss reserves involves significant judgmental
factors. The following table shows the development of the unpaid losses and loss
adjustment expenses for fiscal years 1987 through 1996. 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, including the estimated losses that had been incurred
but not reported to the Company. 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 deficiencies in Crusader's loss and loss adjustment expense
reserves in 1987 and redundancies thereafter. In January 1988, the Company began
a file-by-file revaluation of all open claims and a revaluation of the estimated
liability for incurred but not reported claims ("IBNR") to insure that its
reserves were adequate. Reserves on casualty claims were reestimated on a
combination of both the estimated liability and the potential exposure. In
addition, minimum reserves on bodily injury claims were substantially increased.
The minimum reserves are the reserves set up after coverage is confirmed on a
reported claim but before the information is received to adequately estimate the
loss. The minimum reserves are based on the average of all bodily injury claims
incurred. Furthermore, procedures were instituted to ensure that loss adjustment
expense reserves were adequate. This revaluation of fiscal 1985 through fiscal
1987 open claims was completed in September 1988 and resulted in significant
adjustments to the loss and loss adjustment expense reserves.
The redundancies in reserves from fiscal 1988 to the present are due to
Crusader's loss reserving practices used in determining its IBNR. Although
redundancies have been reported since fiscal 1988, there is no assurance that
they will continue and the Company believes a change in the way it computes IBNR
is not warranted. Crusader is a relatively small insurance company with 12 years
of its own statistical experience. The Crusader is constantly changing its
product mix and exposures, including the types of businesses insured within its
business package program as well as its lines of business. In addition, it is
regularly expanding its territories both inside and outside of California and is
growing in premium volume. Considering the uncertainties from this changing
environment as well as its limited internal data and history, the Company
recognizes the difficulties in developing its own unique IBNR statistics;
therefore, it incorporates industry standards and averages into its estimates.
When Crusader establishes its IBNR reserves, although conservative, it is still
well below industry average and the Company believes that it is properly stated.
When subsequent development justifies changes in IBNR, 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 LOSSES AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
Fiscal Year Ended March 31,
-------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ---- ----
Reserve for Unpaid
Losses & Loss Adjustment
Expenses $7,510,784 $16,574,249 $23,511,133 $23,601,435 $22,918,442 $21,249,902 $20,824,039
Paid Cumulative as of
1 Year Later 3,558,709 6,924,260 6,326,868 6,204,559 6,425,329 6,368,554 8,904,427
2 Years Later 7,153,804 10,927,698 10,726,038 10,357,708 10,946,318 9,583,885 10,824,024
3 Years Later 9,270,812 13,313,849 13,652,062 12,935,827 12,409,499 11,814,445 13,178,262
4 Years Later 10,154,854 14,639,530 15,121,985 13,561,987 12,951,511 12,667,989 14,462,911
5 Years Later 10,695,504 15,163,791 15,316,299 13,768,277 13,357,941 13,093,970
6 Years Later 10,797,045 15,218,575 15,385,519 13,866,654 13,459,123
7 Years Later 10,817,288 15,382,717 15,416,138 13,923,206
8 Years Later 10,856,723 15,381,552 15,450,239
9 Years Later 10,853,741 15,398,385
10 Years Later 10,870,574
Reserves reestimated as of
1 Year Later 11,694,406 20,893,557 22,315,883 20,990,669 20,153,906 18,562,116 19,599,695
2 Years Later 13,462,872 19,583,939 20,165,458 18,566,956 17,136,498 15,021,149 15,742,478
3 Years Later 12,703,847 17,807,451 18,348,965 15,846,416 14,788,046 13,802,009 15,463,566
4 Years Later 11,863,127 16,729,893 16,385,905 14,631,554 13,961,555 13,620,235 16,174,111
5 Years Later 11,414,661 15,738,815 15,782,294 14,115,281 13,833,745 13,790,786
6 Years Later 10,945,435 15,491,674 15,511,081 14,063,578 13,754,304
7 Years Later 10,887,766 15,419,031 15,471,448 14,063,080
8 Years Later 10,874,035 15,395,735 15,486,955
9 Years Later 10,861,331 15,417,748
10 Years Later 10,879,397
Cumulative
Redundancy
(Deficiency) ($3,368,613) $1,156,501 $8,024,178 $9,538,355 $9,164,138 $7,459,116 $4,649,928
============ ========== ========== ========== ========== ========== ==========
Gross Liability for Unpaid Losses and Loss Adjustment Expenses $23,011,868
Ceded Liability for Unpaid Losses and Loss Adjustment Expenses (2,187,829)
-----------
Net Liability for Unpaid Losses and Loss Adjustment Expenses $20,824,039
==========
Gross Liability Reestimated $22,310,175
Ceded Liability Reestimated (6,136,064)
Net Liability Reestimated $16,174,111
Gross Reserve Redundancy (Deficiency) $701,693
CRUSADER INSURANCE COMPANY
ANALYSIS OF LOSSES AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
Nine Months
Fiscal Year Ended March 31, Ended
------------------------------------------
1994 1995 1996 1996
---- ---- ---- ----
Reserve for Unpaid
Losses & Loss Adjustment
Expenses $21,499,778 $27,633,304 $32,682,153 $37,111,846
Paid Cumulative as of
1 Year Later 7,687,180 8,814,611 7,019,175
2 Years Later 13,453,833 13,502,224
3 Years Later 16,597,366
4 Years Later
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 20,912,743 25,666,251 31,232,388
2 Years Later 20,289,699 24,984,032
3 Years Later 21,217,766
4 Years Later
5 Years Later
6 Years Later
7 Years Later
8 Years Later
9 Years Later
10 Years Later
Cumulative
Redundancy
(Deficiency) $282,012 $2,649,272 $1,449,765
======== ========== ==========
Gross Liability for Unpaid Losses and Loss Adjustment Expenses $26,294,199 $32,370,752 $37,006,458 $39,740,865
Ceded Liability for Unpaid Losses and Loss Adjustment Expenses (4,794,421) (4,737,448) (4,324,305) (2,629,019)
----------- ----------- ----------- -----------
Net Liability for Unpaid Losses and Loss Adjustment Expenses $21,499,778 $27,633,304 $32,682,153 $37,111,846
========== ========== ========== ==========
Gross Liability Reestimated $22,757,720 $28,392,668 $34,756,082
Ceded Liability Reestimated (1,539,954) (3,408,636) (3,523,694)
----------- ---------- -----------
Net Liability Reestimated $21,217,766 $24,984,032 $31,232,388
========== ========== ==========
Gross Reserve Redundancy (Deficiency) $3,536,479 $3,978,084 $2,250,376
========= ========= =========
5
The following table presents an analysis of losses and loss adjusting expenses
and provides a reconciliation of beginning and ending reserves for losses and
loss adjustment expenses net of reinsurance for the nine month period ended
December 31, 1996 and fiscal years ended March 31, 1996 and 1995.
CRUSADER INSURANCE COMPANY
RECONCILIATION OF LOSS RESERVES
Nine Months Fiscal Year
Ended Ended
--------------------------------------
December 31, March 31, March 31,
1996 1996 1995
Reserve for unpaid losses and loss adjustment expenses at beginning
of year $32,682,153 $27,633,304 $21,499,778
---------- ---------- ----------
Incurred losses and loss adjustment expenses
Provision for insured events of current year 16,251,499 19,276,602 18,057,338
Increase (decrease) in provision for events of prior
years (1,449,765) (1,967,053) (587,038)
---------- ---------- --------
Total losses and loss adjustment expenses 14,801,734 17,309,549 17,470,300
---------- ---------- ----------
Payments
Losses and loss adjustment expenses attributable to
insured events of the current year 3,352,866 3,446,088 3,469,594
Losses and loss adjustment expenses attributable to
insured events of prior years 7,019,175 8,814,612 7,867,180
--------- --------- ---------
Total payments 10,372,041 12,260,700 11,336,774
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses
at end of year - net of reinsurance $37,111,846 $32,682,153 $27,633,304
========== ========== ==========
Reconciliation of liability for losses and loss adjustment
expense reserves to Balance Sheet
Reserve for unpaid losses and loss adjustment
expenses at end of year - net of reinsurance $37,111,846 $32,682,153 $27,622,304
Reinsurance recoverable on unpaid losses at end of
year 2,629,019 4,324,305 4,737,448
----------- ----------- -----------
Reserve for unpaid losses and loss adjustment
expenses at end of year - gross of reinsurance $39,740,865 $37,006,458 $32,370,752
========== ========== ==========
6
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 which establishes a permissible net premium to surplus
ratio, guidelines established by the National Association of Insurance
Commissioners provide that such ratio should generally be no greater than 3 to
1.
Calendar Fiscal Year
Year Ended Ended
December 31, March 31,
---------------------------------------------------------------------
1996 1996 1995 1994 1993
---- ---- ---- ---- ----
Net Premiums Written $36,652,776 $32,915,964 $30,785,970 $27,583,084 $16,894,276
Policyholders' Surplus $25,748,757 $22,721,183 $19,585,839 $17,313,744 $16,265,104
Ratio 1.4 to 1 1.4 to 1 1.6 to 1 1.6 to 1 1.0 to 1
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 the 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 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 last
examination of Crusader by the insurance department covered the three years
ended December 31, 1994, and was completed in November of 1995.
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 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. The Company calculated its RBC
requirement as of December 31, 1996 for its 1996 statutory annual statement and
reported that its total adjusted surplus to policyholders was 335% of its
authorized control level RBC.
California Insurance Guarantee Association
In 1969, the California Insurance Guarantee Association ("CIGA") was created
pursuant to California law 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. Crusader 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 incurred in
liquidating an insolvent insurer. In a particular year, Crusader cannot be
7
assessed an amount greater than 1% of its premiums written in the preceding
year. California Insurance Code Sections 1063.5 and 1063.14 allow Crusader to
recoup assessments by surcharging policyholders.
No assessment was made by CIGA for the 1996 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 immediate preceding 12 months involving in the net
aggregate, more than the lesser of one-half of 1 percent of Crusader's admitted
assets or 5% of policyholders' surplus, as of the preceding December 31st.
Effective January 1, 1997, the threshold for these transactions changed to a
single measure, one-half of 1 percent of admitted assets as of the preceding
December 31st and the aggregation calculations will no longer be a part of the
determination as to whether a transaction is material or extraordinary. 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 31st 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 Company
is in compliance with the Holding Company Act.
Rating
Crusader has been rated A- (Excellent) by A.M. Best Company since its initial
rating in 1990.
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 are to maintain the
Company's cash and invested assets in high-grade investments. The Company's
fixed maturity obligations have maturities no greater than eight years and
consist of U.S. treasury securities, high-grade industrial and municipal
obligations, and certificates of deposit. In addition, all investments in
municipal obligations are pre-refunded which are secured by U.S. treasury
securities. The balance of the Company's investments are invested in high-grade
short-term instruments consisting of bank money market accounts, certificates of
deposit and commercial paper. These investments are either FDIC insured or are
in an institution with a Moody's rating of P1 and/or Standard & Poor's rating of
A1. All of the Company's investments are readily marketable and could be
liquidated without any material financial impact.
8
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, As of March 31,
---------------------------------------------------------
1996 1996 1995
---- ---- ----
Amortized Market Amortized Market Amortized Market
Type of Security Cost Value Cost Value Cost Value
---------------- ---- ----- ---- ----- ---- -----
Certificates of deposit $ 798 $ 798 $ 1,111 $ 1,111 $ 1,111 $ 1,111
U.S. Treasury securities 22,447 22,613 18,192 18,325 4,884 4,953
Industrial and miscellaneous
taxable bonds 13,106 13,440 10,655 11,015 12,954 12,941
State and municipal
tax-exempt bonds 39,634 40,258 38,127 38,437 41,759 41,434
------ ------ ------ ------ ------ ------
Total fixed maturity bonds 75,985 77,109 68,085 68,888 60,708 60,439
Short term cash investments 4,862 4,862 3,466 3,466 3,382 3,382
Equity investments - - 995 998 - -
---------- ---------- -------- ---------- ---------- ----------
Total investments $80,847 $81,971 $72,546 $73,352 $64,090 $63,821
====== ====== ====== ====== ====== ======
At December 31, 1996, the Company had a net unrealized gain on all investments
of $1,124,248 before income taxes.
The maturity distributions of the Company's fixed maturity investments at
December 31, 1996 and March 31, 1996 were as follows:
(Amounts in Thousands)
As of December 31, 1996 As of March 31, 1996
----------------------- --------------------
Amortized Market Amortized Market
Fixed maturities due Cost Value Cost Value
------------------------------------------------------------
Within 1 Year $ 9,204 $ 9,274 $ 7,143 $ 7,180
Beyond 1 year but within 5 years 46,501 47,052 37,149 37,499
Beyond 5 years but within 10 years 20,280 20,783 23,793 24,209
------ ------ ------ ------
Total $75,985 $77,109 $68,085 $68,888
====== ====== ====== ======
Competition
General
The property and casualty insurance industry is highly competitive on the basis
of price and service and 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.
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 must be priced before its costs are known.
9
Insurance Company and General Agency Operations (Property & Casualty)
The Company's property and casualty insurance business continues to be very
competitive. There are many substantial competitors who have larger resources,
operate in more states, insure coverages in more lines and in higher limits than
the Company. The principal method of competition among these competitors is
price. While the Company attempts to meet this competition with competitive
prices, its emphasis is on service, promotion and distribution.
Insurance Claim Adjusting Operation
The insurance claim adjusting operation generates all its business from
"in-house production" for a non-affiliated insurance company; thus, competition
is not a major factor as long as U.S. Risk produces a quality product at a fair
price. Its growth is dependent on the growth of the general agency operation
which produces the business.
Insurance Premium Financing Operation
The insurance premium financing operation is currently financing Crusader
policies and commercial automobile policies written through Unifax for a
non-affiliated insurer. 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. Its continued growth is dependent on the growth of Crusader and
Unifax.
Health and Life Insurance Operations
Competition in the health and life insurance business is also intense.
Approximately 90% of the Company's present health and life business is from the
CIGNA HealthCare medical & dental plan programs. This percentage is up from
approximately 87% in the prior year. The Company is continuing its efforts to
diversify and offer a wider variety of products to its customers and believes
that this effort will make it more competitive and should increase future
revenues.
Employees
On March 14, 1997, the Company employed 144 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 rental 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 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 unaffiliated third
parties.
The Company utilizes for its own operations 100% of the space it leases.
10
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. The Company is 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 has issued a policy of
insurance directly or indirectly through the Company. Incidental actions are
sometimes brought by customers or other agents 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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
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) and dividends paid
during the last two comparable twelve month periods are as follows:
High Low Dividend
Quarter Ended Price Price Declared
March 31, 1995 5 3/8 4 1/8
June 30, 1995 5 3/8 4 1/8 $0.07
September 30, 1995 6 1/8 5 1/8
December 31, 1995 6 5/8 5 5/8
March 31, 1996 7 1/8 6
June 30, 1996 7 3/4 6 5/8 $0.07
September 30, 1996 8 3/4 7 1/8
December 31, 1996 11 7 5/8
As of December 31, 1996, the approximate number of shareholders of record of the
Company's common stock was 700. A substantial number of shares of the Company's
stock is held in street name; therefore, the actual number of holders of the
Company's common stock exceeds 700.
The Company has declared a cash dividend on its common stock annually since June
24, 1991 The Company's intention is to declare annual cash dividends subject to
continued profitability and cash requirements. On March 4, 1997, the Company
declared its latest annual cash dividend of $0.07 per common share payable on
August 15, 1997, to shareholders of record on August 1, 1997.
11
From April 1, 1996 to December 31, 1996, the Company issued an aggregate of
114,651 shares of its common stock upon exercise of employee stock options
granted under the Unico American Corporation Employee Incentive Stock Option
Plan. These shares were issued to an aggregate of four employees of the Company.
Of these shares, an aggregate of 114,198 shares were issued in exchange for an
aggregate of 43,674 shares of common stock and an aggregate of 453 shares were
issued in exchange for an aggregate of $1,621.55 in cash. These shares were
acquired for investment and without a view to the public distribution or resale
thereof, and the issuance thereof was exempt from the registration requirements
under the Securities Act of 1933, as amended, under Section 4 (2) thereof as
transactions not involving a public offering.
Item 6. Selected Financial Data
Nine Months Fiscal Year
Ended Ended
December 31, March 31,
------------------------------------------------------------------------
1996 1996 1995 1994 1993
---- ---- ---- ---- ----
Total revenues $34,884,657 $42,468,474 $39,444,223 $32,979,913 $24,784,994
Total costs and expenses 27,505,670 34,060,183 34,486,546 27,931,741 35,466,587
---------- ---------- ---------- ---------- ----------
Income (loss) before taxes $7,378,987 $8,408,291 $4,957,677 $5,048,172 $(10,681,593)
Income (loss) after taxes $5,174,510 $5,947,481 $3,792,179 $3,521,787 $(6,802,146)
Income (loss) per share (1) $0.83 $0.97 $0.63 $0.58 $(1.17)
Cash dividends per share $0.07 $0.07 $0.07 $0.07 $0.06
Total assets $104,451,322 $95,817,377 $87,456,701 $76,999,203 $64,037,036
Long term debt $730,426 $758,135 $750,824 $1,151,834 $1,961,520
Stockholders' equity $37,355,419 $32,387,158 $26,147,827 $22,843,567 $19,708,720
(1) The calculation of earnings per share was based on the weighted average
number of common shares outstanding and common stock equivalents.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
In December 1996, the Company changed its fiscal year from a year ending March
31 to a year ending December 31, effective December 31, 1996. As a result of
this change, the Company's fiscal year ending December 31, 1996 consists of nine
(9) months. For that reason, included in the discussion of results of operations
are many comparisons of the Company's new fiscal year ended December 31, 1996,
which consists of nine (9) months, to the comparable nine month period of the
prior year. The financial information for the nine month period ended December
31, 1995 included in this report for comparisons is unaudited.
Liquidity and Capital Resources:
Due to the nature of the Company's business (insurance and insurance services)
and whereas Company growth does not normally require material reinvestments of
profits into property or equipment, the cash flow generated from operations
usually results in improved liquidity for the Company.
Crusader generates a significant amount of cash as a result of its holdings of
unearned premium reserves, reserves for loss payments, and its capital and
surplus. Crusader's losses 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 unrealized gains) at
12
December 31, 1996 were $80,929,348 compared to $72,700,991 at March 31,
1996, an 11% increase. Crusader's cash and investments amounted to $77,833,104
or 96% of the Company's total.
In accordance with Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
is required to classify its investments in debt and equity securities into one
of three categories: held-to-maturity, available-for-sale or trading securities.
Although all of the Company's investments are classified as available-for-sale,
the Company's investment guidelines place primary emphasis on buying and holding
high-quality investments to maturity.
As of December 31, 1996, the Company had invested $75,984,966 (at amortized
cost) or 94% of its investments in fixed maturity obligations. The balance of
the Company's investments were in high-quality, short-term investments which
included bank money market accounts, certificates of deposit and commercial
paper. The Company had no investments in equity securities as of December 31,
1996, compared to $995,237 as of March 31, 1996. The Company's investments in
fixed maturity obligations included $39,634,159 (52%) of tax-exempt pre-refunded
state and municipal bonds, $22,447,391 (30%) of U.S. treasury securities, and
$13,903,416 (18%) in high-quality industrial bonds and certificates of deposit.
This compares to fixed maturity obligations in the prior fiscal year ended March
31, 1996 of $68,085,376 that included $38,126,835 (56%) of tax-exempt
pre-refunded state and municipal bonds, $18,191,847 (27%) of U.S. treasury
securities, and $11,766,694 (17%) in high-quality industrial bonds and
certificates of deposit. The tax-exempt interest income earned (net of bond
premium and discount amortization) during the nine months ended December 31,
1996, was $1,359,894 compared to $1,328,311 in the same period of the prior
year. In the fiscal year ended March 31, 1996, tax exempt interest income earned
totaled $1,738,799.
The Company's investment policy limits investments in any one company to no more
than $1,000,000. This limitation excludes bond premiums paid in excess of par
value and U.S. Government or U.S. Government guaranteed issues. All of the
Company's investments are high grade investment quality.
The Company's premium finance subsidiary, American Acceptance Corporation, has a
bank line of credit of $4,000,000 with a variable rate of interest based on
fluctuations in the London Interbank Offered Rate ("LIBOR"). At the Company's
request, this line of credit was decreased from $6,000,000 to $4,000,000 in
September 1996. This credit line is only used to provide American Acceptance
Corporation with funds to finance insurance premiums. Although premium notes
receivable increased $78,725 to $5,751,709 in the nine months ended December 31,
1996, the bank note payable has been paid down by $1,250,000 during that period
from cash generated from operations.
The maximum and average bank note payable and weighted average interest rate are
as follows:
Nine Months Fiscal Year
Ended Ended
December 31, March 31,
1996 1996
Maximum bank note payable $2,000,001 $3,975,001
Average bank note payable $1,387,038 $3,388,334
Weighted average interest rate 7.2% 7.7%
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 $2,642,932, statutory deposits of $725,000, and dividend
restriction between Crusader and Unico (as discussed under "Insurance Company
Operation - Holding Company Act") plus the cash to be generated from operations,
should be sufficient to meet its operating requirements (excluding AAC's credit
line discussed above) during the next twelve months without the necessity of
borrowing funds.
Crusader's statutory capital and surplus as of December 31, 1996, was
$25,748,757, an increase of $3,027,574 from the surplus balance at March 31,
1996, of $22,721,183.
There are no material commitments for capital expenditures as of the date of
this report.
13
Results of Operation:
General
The Company had net income after taxes of $5,174,510 for the nine months ended
December 31, 1996, an increase of 21% when compared to $4,272,664 in the same
period of the prior year. For the fiscal year ended March 31, 1996, the Company
had net income after taxes of $5,947,481 compared to $3,792,179 in the prior
fiscal year. Total revenue for the nine months ended December 31, 1996 was
$34,884,657 compared to $31,472,859 in the same period of the prior year. For
the fiscal year ended March 31, 1996, total revenue was $42,468,474 compared to
$39,444,223 in the prior fiscal year.
For the nine months ended December 31, 1996, income before taxes increased by
$1,367,786 (23%) and net income increased by $901,846 (21%) compared to the same
period of the prior year. The increase in net income was primarily due to an
increase of $378,236 (9%) in the pre-tax underwriting profit (net earned premium
less losses and loss adjustment expenses and policy acquisition costs) from
Crusader, an increase in investment income of $369,637 (13%) (excluding realized
gains), a decrease in other operating expenses of $383,821 (16%), and an
increase in gross commissions and fees of $177,172 (4%).
For the fiscal year ended March 31, 1996, income before taxes increased by
$3,450,614 (70%) and net income increased by $2,155,302 (57%) compared to the
prior fiscal year. The increase in net income was primarily due to an increase
of $2,175,220 in the pre-tax underwriting profit from Crusader, an increase in
investment income of $545,783 (16%) (excluding realized gains), a decrease in
other operating expenses of $451,145 (12%), and an increase in gross commissions
and fees of $192,311 (3%).
The effect of inflation on the net income of the Company during the nine months
ended December 31, 1996, 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:
Nine Months Ended Fiscal Year Ended
December 31, March 31,
------------ ---------
1996 1995 1996 1995
---- ---- ---- ----
Gross written premium $31,847,113 $28,052,755 $37,631,357 $39,039,549
Net written premium $28,145,347 $24,695,801 $33,193,911 $30,424,864
Earned premium before reinsurance $29,373,374 $28,260,638 $37,554,830 $38,466,825
Earned premium net of reinsurance $26,066,289 $23,263,600 $31,477,427 $29,208,290
Losses and loss adjustment
expenses $14,801,734 $12,910,188 $17,309,549 $17,470,300
Unpaid losses and loss adjustment
expenses $39,740,865 $36,696,882 $37,006,458 $32,370,752
Gross written premium increased by $3,794,358 (14%) in the nine months ended
December 31, 1996, compared to the same period of the prior year. The increase
in gross written premium was attributable to a 9% increase to $24,983,270 in the
Company's premium written in California and a 33% increase to $6,863,843, in
premiums written outside of California. The Company's Commercial Package premium
increased $2,492,080 (9%) while all other lines increased $1,302,278 from
$127,056 in the same period of the prior year. Gross written premium decreased
$1,408,192 (4%) in the fiscal year ended March 31, 1996 compared to the prior
fiscal year. The decrease was primarily the result of a reduction in the
Company's Other Liability written premium which decreased $4,679,191 when
compared to the prior fiscal year. This decrease was attributable to Crusader's
decision to intentionally reduce its Other Liability line in a effort to improve
the utilization of its surplus. This premium decrease was partially offset by an
increase of $3,304,242 (10%) in the Company's Commercial Package premium. For
the
14
fiscal year ended March 31, 1996, the Commercial Package premium accounted
for 98% of the Company's total written premium. The increase in the Commercial
Package premium was primarily attributable to a $2,318,626 (46%) increase in
premiums written outside of California which includes the states of Arizona,
Nevada, Oregon and Washington. Gross premiums written in California increased
977,207 (3%) to $29,619,604.
Crusader's net earned premium was $26,066,289, an increase of $2,802,689 (12%)
in the nine months ended December 31, 1996, compared to the same period of the
prior year. The increase in net earned premium was primarily the result of an
increase of $1,112,736 (4%) in earned premium before reinsurance and a decrease
in earned premium ceded. The percentage of earned ceded premium to premium
earned was 11% for the nine months ended December 31, 1996, and 18% for the same
period of the prior year. For fiscal year end March 31, 1996, Crusader's net
earned premium was $31,477,427, an increase of $2,269,137 (8%) when compared to
the prior fiscal year. Although earned premium before reinsurance decreased by
$911,995, the increase in net earned premium was primarily the result of a
decrease in earned ceded premium. The percentage of earned premium ceded to
premium earned for the fiscal year ended March 31, 1996, was 16% compared to 24%
for the prior fiscal year. The decrease in earned ceded premium from March 31,
1995, through December 31, 1996, was primarily attributable to a reduction in
Crusader's Other Liability line of business which cedes a higher percentage of
premium than its other lines, to reduced reinsurance cost related to an increase
in loss retention from $100,000 to $150,000 on April 1, 1995, and to other rate
decreases due to the Company's favorable loss experience with its reinsurers and
competition in the reinsurance marketplace.
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)
to net premiums earned (the "loss ratio") and (2) the ratio of policy
acquisition and general operating costs to net premiums earned (the "expense
ratio"). The following table shows the loss ratios, expense ratios, and combined
ratios of Crusader as derived from data prepared in accordance with generally
accepted accounting principles. 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.
Nine Months Ended Fiscal Year Ended
December 31, March 31,
------------ ---------
1996 1995 1996 1995
---- ---- ---- ----
Loss ratio 56.8% 55.5% 55.0% 59.8%
Expense ratio 26.4% 27.3% 27.2% 28.5%
---- ---- ---- ----
Combined ratio 83.2% 82.8% 82.2% 88.3%
==== ==== ==== ====
The Company's future writings and growth is dependent on market conditions,
competition, the Company's ability to introduce new profitable products, and its
ability to expand geographically. Crusader is currently licensed as an admitted
insurance company in the states of California, Arizona, Nevada, Oregon and
Washington and is approved as a non-admitted surplus lines writer in several
other states. Crusader is currently writing in all the states in which it is
licensed.
15
Daily Automobile Rental Insurance Program
The daily automobile rental insurance program is produced by Bedford. Bedford
receives a commission and a claim administration fee from a non-affiliated
insurance company based on premium written. Commission and fee income from the
daily automobile rental insurance program are as follows:
Nine Months Ended Fiscal Year Ended
December 31, March 31,
------------ ---------
1996 1995 1996 1995
---- ---- ---- ----
Daily auto rental program
commission and claim
administration fee $591,124 $665,484 $871,841 $756,162
Revenues during the nine months ended December 31, 1996, were $591,124 a
decrease of $74,360 (11%) compared to the same period of the prior year. Revenue
for the fiscal year ended March 31, 1996, increased 15% compared to the prior
fiscal year.
The daily automobile rental insurance program experienced a decrease in
commission and fee income in the current nine month period due to increased
price competition which resulted in fewer policy renewals. To avoid underwriting
losses for the non-affiliated insurance company which Bedford represents, it
continues to produce business only at rates which it believes to be adequate.
The Company cannot determine how long this "soft market" condition will
continue. The increase in revenues in the fiscal year ended March 31, 1996
compared to the prior fiscal year was primarily attributed to an increase in the
number of new policies written.
Commercial and Personal Automobile Insurance Program
Unifax produces commercial auto policies in California for a non-affiliated
insurer and received a commission from them based on premium written. In
February 1997, management decided to discontinue writing new policies in the
Unifax commercial automobile program, and will only service and renew existing
policies after that date. NCC renewed and serviced existing commercial and
personal automobile policies in California for a non-affiliated insurer until
August 31, 1996 when the NCC program was discontinued. NCC received a commission
and claim administration fee from the non-affiliated insurance company based on
premium written. All commission and fee income due NCC is included in the table
below. Unifax and NCC also received a service fee from the policyholder.
Commercial and personal auto program commission, service fee and claim
administration income are as follows:
Nine Months Ended Fiscal Year Ended
December 31, March 31,
------------ ---------
1996 1995 1996 1995
---- ---- ---- ----
Commercial and personal auto
program commission, service fee
and claim administration income $165,445 $128,457 $183,519 $257,775
Revenue for the nine months ended December 31, 1996, increased $36,988 (29%)
compared to the same period of the prior year. Revenue for the fiscal year ended
March 31, 1996, decreased $74,256 (29%) compared to the prior fiscal year.
Unifax commission and fee income on this program was $151,114 in the nine months
ended December 31, 1996, compared to $115,140 in the same period of the prior
year. Commission and fee income was $166,189 in the fiscal year ended March 31,
1996, compared to $233,267 in the prior fiscal year. NCC commission and fee
income was $14,331 in the nine months ended December 31, 1996, compared to
$13,317 in the same period of the prior year. Commission and fee income was
$17,330 in the fiscal year ended March 31, 1996, compared to $23,849 in the
prior fiscal year.
16
Health and Life Insurance Program
Commission income from the health and life insurance sales of NIB and AIB is as
follows:
Nine Months Ended Fiscal Year Ended
December 31, March 31,
1996 1995 1996 1995
---- ---- ---- ----
Commission income $1,786,012 $1,893,605 $2,539,802 $2,467,003
NIB and AIB market health and life insurance through non-affiliated insurance
companies for individuals and groups. Approximately 90% of the health and life
commission income in the nine months ended December 31, 1996 was from the CIGNA
HealthCare medical and dental plan programs compared to approximately 87% in the
same period of the prior year. Revenues for the nine months ended December 31,
1996 were $1,786,012, a decrease of $107,593 (6%) compared to the same period of
the prior year. Revenues for the fiscal year ended March 31, 1996 increased 3%
compared to the prior fiscal year.
Group health and life insurance programs
Regulations on California health care medical providers to small business of 5
to 50 employees became effective on July 1, 1993 (AB 1672). In July, 1995, small
businesses with as few as 3 employees became affected by these regulations.
These regulations, among other things, created an alliance of health insurance
companies called the Health Insurance Plan of California ("HIPC"). There are
currently 20 insurance companies in the alliance. The premiums charged by the
insurance companies in the alliance were approved by the State of California and
are very competitive. To meet this competition, insurance companies marketing
programs outside of HIPC are forced to lower their rates to small groups. The
impact of these regulations on the Company was and will continue to be, lower
revenues from reduced sales on its small business group programs. Because of the
intense competition among carriers for small groups, many carriers have an
incentive program to increase business. These incentives are based on business
written and retained for a minimum of one year. The incentive program for the
Company began in October 1994. In the fiscal year ended March 31, 1996, $31,575
was earned on this incentive program. In the nine months ended December 31,
1996, $2,310 was earned. Future incentive, if any, cannot yet be determined. In
addition, in July 1996, CIGNA revised its rates. Some rates were increased which
resulted in loss of business, others were decreased to retain existing business.
The decrease in health and life insurance commission income for the nine months
ended December 31, 1996 compared to the same period of the prior year was
primarily from the effect of these CIGNA rate revisions.
Individual medical and dental programs
Individual medical programs are not affected by AB 1672 and all of the Company's
major insurance carriers provide the Company with individual medical insurance
programs. Commission income from the individual medical program continue to
increase due to aggressive marketing and the quality of the Company's customer
service. However, the increases in commission income on the individual programs,
which generally have lower premiums than group programs, were not enough to
offset the loss of commission income from the group program in the nine months
ended December 31, 1996 compared to the same period of the prior year. The
increase in commission income in the fiscal year ended March 31, 1996 compared
to the prior fiscal year was primarily due to an increase in sales of policies
covering individual and family members. This increase in sales was primarily
attributable to rate reductions in March 1995 and July 1995 which made the
products more competitive, and the addition of the CIGNA Dental Health program
which began in July 1995.
Workers' Compensation Program
Unifax produces workers' compensation policies in California and Arizona for a
non-affiliated insurer and receives a commission from them based on premium
written.
Nine Months Ended Fiscal Year Ended
December 31, March 31,
------------ ---------
1996 1995 1996 1995
---- ---- ---- ----
Workers' compensation commission $66,584 $7,598 $15,192 -
17
Association Operation
Membership and fee income from the Association program of AAQHC is as follows:
Nine Months Ended Fiscal Year Ended
December 31, March 31,
------------ ---------
1996 1995 1996 1995
---- ---- ---- ----
Membership and fee income $250,267 $201,531 $277,754 $222,271
Membership and fee income in the nine months ended December 31, 1996, increased
$48,737 (24%) compared to the same period of the prior year. Membership income
increased 25% in the fiscal year ended March 31, 1996 compared to the prior
fiscal year. These increases are attributable to an increase in individual and
family members in the Association.
Premium Finance Program
Premium finance charges and late fees earned from financing policies are as
follows:
Nine Months Ended Fiscal Year Ended
December 31, March 31,
------------ ---------
1996 1995 1996 1995
---- ---- ---- ----
Premium finance charges and late
fees earned $898,171 $986,225 $1,279,850 $1,306,953
New loans 7,045 7,182 10,212 10,523
American Acceptance Corporation, the Company's insurance premium finance
subsidiary, provides premium financing to Crusader and a non-affiliated insurer
on commercial auto policies produced by Unifax. In February 1997, the commercial
auto program with the non-affiliated insurer was discontinued. 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 late fees earned on loans decreased $88,054 (9%) in
the nine months ended December 31, 1996 compared to the same period of the prior
year. For the fiscal year ended March 31, 1996, premium finance charges and late
fees earned on loans decreased $27,103 (2%) compared to the prior fiscal year.
The number of AAC loans decreased in the current nine month period and the prior
fiscal year compared to the same periods of the prior year primarily due to
increased competition from other premium finance companies.
Service Fee Income
Unifax sells and services insurance policies for Crusader. The service fee
charged to the policyholder by Unifax is recognized as income in the
consolidated financial statements. The commissions paid by Crusader to Unifax
are eliminated as intercompany transactions and are not reflected in commission
income or commission expense.
Service fee income from Unifax is as follows:
Nine Months Ended Fiscal Year Ended
December 31, March 31,
------------ ---------
1996 1995 1996 1995
---- ---- ---- ----
Service fee income $1,629,015 $1,414,569 $1,891,405 $1,884,041
Policies written 14,221 12,751 16,881 17,830
Service fee income is primarily related to the number of policies written by
Unifax.
18
Investment Income
Investment income consists of interest, dividends and net realized investment
gain as follows:
Nine Months Ended Fiscal Year Ended
December 31, March 31,
------------ ---------
1996 1995 1996 1995
---- ---- ---- ----
Interest and dividend income
Insurance company operations $3,115,110 $2,750,935 $3,708,891 $3,181,791
Other operations 117,774 112,312 154,842 136,159
---------- ---------- ---------- ----------
Total interest and dividends
on investments 3,232,884 2,863,247 3,863,733 3,317,950
Net realized investment gains 190,491 36,201 55,743 7,552
---------- ----------- ----------- ------------
Total investment income $3,423,375 $2,899,448 $3,919,476 $3,325,502
========= ========= ========= =========
Investment interest and dividends earned (excluding net realized gains)
increased approximately 13% in the nine months ended December 31, 1996, compared
to the same period of the prior year. This increase was primarily due to an
increase in invested assets (at amortized value) of $10,330,317 (15%) at
December 31, 1996 compared to December 31, 1995. The Company's investments at
December 31, 1996 are comprised of $39,634,159 (49%) of tax exempt investments
(at amortized value) and $41,212,552 (51%) of taxable investments.
For the fiscal year ended March 31, 1996, investment interest and dividends
earned (excluding net realized gains) increased approximately 16% compared to
the prior fiscal year. This increase was primarily due to an increase in
invested assets (at amortized value) of $8,457,083 (13%) and, to a lesser
extent, to the mix of taxable and tax-exempt securities in the portfolio.
Tax-exempt investments decreased from $41,758,522 (65% of total investments) at
March 31, 1995 to $38,126,835 (53% of total investments) at March 31, 1996.
Tax-exempt securities carry a lower pre-tax yield than equivalent rated taxable
securities.
Additional information regarding investments and investment income are described
in the "Management Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources."
Operating Expenses
Policy Acquisition Costs consist of commissions, premium taxes, inspection fees,
and certain other underwriting costs which are 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
which represents a reimbursement of the acquisition costs related to the premium
ceded. Policy acquisition costs, net of ceding commission, are deferred and
amortized as the related premiums are earned.
Policy acquisition costs, net of ceding commission, are as follows:
Nine Months Ended Fiscal Year Ended
December 31, March 31,
------------ ---------
1996 1995 1996 1995
---- ---- ---- ----
Policy acquisition costs $6,887,173 $6,354,266 $8,569,395 $8,314,727
Ratio to net earned premium 26% 27% 27% 28%
19
Salaries and Employee Benefits increased $78,677 (3%) for the nine months ended
December 31, 1996 compared to the same period of the prior year. Salaries and
employee benefits decreased $40,214 (1%) during the fiscal year ended March 31,
1996 compared to the prior fiscal year.
Nine Months Ended Fiscal Year Ended
December 31, March 31,
------------ ---------
1996 1995 1996 1995
---- ---- ---- ----
Salaries and employee benefits $2,850,985 $2,772,308 $3,684,989 $3,725,203
Commissions to Agents/Brokers (not including commissions on Crusader policies
which are reflected in policy acquisition costs) are generally related to gross
commission income. Commissions to agents and brokers decreased 75,297 (7%) for
the nine months ended December 31, 1996 compared to the same period of the prior
year. This decrease was primarily related to the 6% decrease in health and life
insurance commission income. During the fiscal year ended March 31, 1996,
commission expense decreased $28,921 (2%) compared to the prior fiscal year.
Nine Months Ended Fiscal Year Ended
December 31, March 31,
------------ ---------
1996 1995 1996 1995
---- ---- ---- ----
Commissions to agents/brokers $946,791 $1,022,088 $1,328,672 $1,357,593
Other Operating Expenses generally do not change significantly with changes in
production. This is true for both increases and decreases in production. Other
operating expenses decreased $383,821 (16%) during the nine months ended
December 31, 1996, compared to the same period of the prior year. This decrease
was primarily due to a decrease in interest expense of $166,893 as a result of
the reduction in the Company's bank note payable.
Other operating expenses decreased $451,145 (12%) during the fiscal year ended
March 31, 1996, compared to the prior fiscal year. This decrease was primarily
due to a decrease in interest expense of $353,424 as a result of the reduction
in the Company's bank note payable and related party note payable.
Nine Months Ended Fiscal Year Ended
December 31, March 31,
------------ ---------
1996 1995 1996 1995
---- ---- ---- ----
Other operating expenses $2,018,987 $2,402,808 $3,167,578 $3,618,723
Forward Looking Statements
Certain statements contained herein that are not historical facts are forward
looking. These statements 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,
regulatory changes or developments, unforeseen calamities, general market
conditions, the Company's ability to introduce new profitable products and the
Company's ability to expand geographically.
20
Item 8. Financial Statements and Supplementary Data
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
Independent Auditors' Report 22
Consolidated Balance Sheets as of December 31, 1996, and March 31, 1996 23
Consolidated Statements of Operations for the nine months ended 24
December 31, 1996, and 1995, and the fiscal years ended March 31, 1996, and 1995
Consolidated Statements of Changes in Stockholders' Equity for the nine months
ended 25 December 31, 1996 and the fiscal years ended March 31, 1996 and
1995
Consolidated Statements of Cash Flows for the nine months ended 26
December 31, 1996 and the fiscal years ended March 31, 1996 and 1995
Notes to Consolidated Financial Statements 27
21
INDEPENDENT AUDITORS' REPORT
Board of Directors
Unico American Corporation
We have audited the accompanying consolidated balance sheets of Unico American
Corporation and its subsidiaries as of December 31, 1996 and March 31, 1996, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the nine months ended December 31, 1996 and each of the years ended
March 31, 1996 and 1995. These 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial position of Unico
American Corporation and its subsidiaries as of December 31, 1996 and March 31,
1996, and the consolidated results of operations and cash flows for the nine
months ended December 31, 1996 and each of the years ended March 31, 1996 and
1995 in conformity with generally accepted accounting principles.
GETZ, KRYCLER & JAKUBOVITS
Sherman Oaks, California
March 20, 1997
22
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1996 1996
ASSETS
Investments
Available for sale:
Fixed maturities, at market value (amortized cost: December 31,
1996 $75,984,966; March 31, 1996 $68,085,376) $77,109,214 $68,888,277
Equity securities at market ( cost: December 31, 1996 ,
$0; March 31, 1996 $995,237) - 998,075
Short-term investments, at cost 4,861,745 3,466,032
----------- -----------
Total Investments 81,970,959 73,352,384
Cash 82,637 154,346
Accrued investment income 1,443,551 1,261,049
Premiums and notes receivable, net 8,898,839 8,141,243
Reinsurance recoverable:
Paid losses and loss adjustment expenses 452,943 212,368
Unpaid losses and loss adjustment expenses 2,629,019 4,324,305
Prepaid reinsurance premiums 1,647,806 1,363,624
Deferred policy acquisition costs 4,953,085 4,333,708
Property and equipment (net of accumulated depreciation) 229,972 278,618
Deferred income taxes 1,503,655 1,523,778
Other assets 638,856 871,954
----------- ----------
Total Assets $104,451,322 $95,817,377
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Unpaid losses and loss adjustment expenses $39,740,865 $37,006,458
Unearned premiums 22,120,241 19,646,502
Advance premiums 1,358,671 1,588,628
Funds held as security for performance 730,426 758,135
Accrued expenses and other liabilities 2,395,699 2,332,398
Income taxes payable - 98,097
Note payable - bank 750,001 2,000,001
---------- ----------
Total Liabilities $67,095,903 $63,430,219
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, no par - authorized 10,000,000 shares, issued and outstanding
shares 6,028,781 at December 31, 1996 and 5,957,738
at March 31, 1996 $2,836,422 $2,834,801
Net unrealized investment gains 742,004 531,787
Retained earnings 33,776,993 29,020,570
---------- ----------
Total Stockholders' Equity $37,355,419 $32,387,158
---------- ----------
Total Liabilities and Stockholders' Equity $104,451,322 $95,817,377
=========== ==========
See accompanying notes to consolidated financial statements.
23
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended Fiscal Year Ended
December 31 March 31
----------- --------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited)
REVENUES
Insurance Company Revenues
Premium earned $29,373,374 $28,260,638 $37,554,830 $38,466,825
Premium ceded 3,307,085 4,997,038 6,077,403 9,258,535
------------ ----------- --------- -----------
Net premium earned 26,066,289 23,263,600 31,477,427 29,208,290
Net investment income 3,115,110 2,750,935 3,708,891 3,181,791
Net realized investment gains 190,491 36,201 55,743 7,552
Other income (expense) 185 773 803 (14,286)
--------------- --------------- -------------- ------------
Total Insurance Company Revenues 29,372,075 26,051,509 35,242,864 32,383,347
Other Revenues from Insurance Operations
Gross commissions and fees 4,488,601 4,311,429 5,779,769 5,587,458
Investment income 117,774 112,312 154,842 136,159
Finance charges and late fees earned 898,171 986,225 1,279,850 1,306,953
Other income 8,036 11,384 11,149 30,306
------------- ------------- ------------- -------------
Total Revenues 34,884,657 31,472,859 42,468,474 39,444,223
---------- ---------- ---------- ----------
EXPENSES
Losses & loss adjustment expenses 14,801,734 12,910,188 17,309,549 17,470,300
Policy acquisition costs 6,887,173 6,354,266 8,569,395 8,314,727
Salaries and employee benefits 2,850,985 2,772,308 3,684,989 3,725,203
Commissions to agents/brokers 946,791 1,022,088 1,328,672 1,357,593
Other operating expenses 2,018,987 2,402,808 3,167,578 3,618,723
----------- ----------- ----------- -----------
Total Expenses 27,505,670 25,461,658 34,060,183 34,486,546
---------- ---------- ---------- ----------
Income Before Taxes 7,378,987 6,011,201 8,408,291 4,957,677
Income Tax Provision 2,204,477 1,738,537 2,460,810 1,165,498
--------- ------------ --------- ---------
Net Income $5,174,510 $4,272,664 $5,947,481 $3,792,179
========= ========= ========= =========
PER SHARE DATA:
Weighted Average Shares Outstanding 6,250,930 6,132,356 6,150,250 6,061,738
Earnings Per Share $0.83 $0.70 $0.97 $0.63
See accompanying notes to consolidated financial statements
24
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND
FISCAL YEARS ENDED MARCH 31, 1996 AND 1995
Unrealized
Common Shares Investment
---------------------------------
Issued and Gains & Retained
Outstanding Amount (Losses) Earnings Total
Balance - March 31, 1994 5,946,603 $2,799,801 $(71,365) $20,115,131 $22,843,567
Shares issued for exercise of
stock options 10,000 35,000 - - 35,000
Shares rescinded, canceled or
adjusted 1,042 - - - -
Cash dividend paid ($0.07
per share) - - - (417,186) (417,186)
Cumulative effect of change
in accounting for fixed
maturities, net of deferred
income tax - - (177,098) - (177,098)
Change in market value of
investments, net of deferred
income tax - - 71,365 - 71,365
Net income - - - 3,792,179 3,792,179
--------------- --------------- ------------ ----------- -----------
Balance - March 31, 1995 5,957,645 2,834,801 (177,098) 23,490,124 26,147,827
Shares rescinded, canceled or
adjusted 93 - - - -
Cash dividend paid ($0.07
per share) - - - (417,035) (417,035)
Change in market value of
investments, net of deferred
income tax - - 708,885 - 708,885
Net income - - - 5,947,481 5,947,481
--------------- --------------- ------------ ----------- -----------
Balance - March 31, 1996 5,957,738 2,834,801 531,787 29,020,570 32,387,158
Shares issued for exercise of
stock option 71,043 1,621 - - 1,621
Cash dividend paid ($0.07
per share) - - - (418,087) (418,087)
Change in market value of
investments, net of deferred
income tax - - 210,217 - 210,217
Net income - - - 5,174,510 5,174,510
--------------- --------------- ------------ ---------- -----------
Balance - December 31, 1996 6,028,781 $2,836,422 $742,004 $33,776,993 $37,355,419
========= ========= ======= ========== ==========
See accompanying notes to consolidated financial statements.
25
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Fiscal Year Fiscal Year
Ended Ended Ended
December 31, March 31, March 31,
1996 1996 1995
Cash flows from operating activities:
Net Income $5,174,510 $5,947,481 $3,792,179
Adjustments to reconcile net income to net cash from
operations
Depreciation & amortization 83,488 142,306 128,210
Bond amortization, net 431,502 577,481 705,176
Net realized (gain) on sale of securities (190,491) (55,743) (7,552)
Changes in assets and liabilities
Premium, notes & investment income receivable (940,098) 27,833 (207,664)
Reinsurance recoverable 1,454,711 256,948 87,251
Prepaid reinsurance premiums (284,182) 1,420,808 443,404
Deferred policy acquisitions costs (619,377) (219,772) (191,372)
Other assets 232,479 (477,399) 80,012
Reserve for unpaid losses & loss adjustment expenses 2,734,407 4,635,706 6,076,553
Unearned premium reserve 2,473,739 76,527 746,480
Funds held as security & advanced premiums (257,666) (56,438) 38,559
Accrued expenses & other liabilities 63,301 157,839 451,261
Income taxes current/deferred (185,648) (496,174) (296,425)
----------- ----------- -----------
Net Cash Provided from Operations 10,170,675 11,937,403 11,846,072
---------- ----------- ----------
Investing Activities
Purchase of fixed maturity investments (12,981,849) (21,591,676) (23,614,690)
Proceeds from maturity of fixed maturity investments 4,628,378 13,643,268 7,924,100
Proceeds from sale of fixed maturity investments - - 4,624,470
Purchase of equity securities-cost (2,253,112) (1,593,401) (5,933)
Proceeds from sale of equity securities 3,438,841 646,714 1,051,216
Net (decrease) in short-term investments (1,373,335) (83,731) (767,119)
Additions to property & equipment (34,841) (85,428) (233,310)
------------ ----------- ------------
Net Cash (Used) by Investing Activities (8,575,918) (9,064,254) (11,021,266)
--------- --------- ----------
Financing Activities
Proceeds from issuance of common stock 1,621 - 35,000
Repayment of note payable - bank (1,250,000) (1,975,000) (225,000)
Repayment of note payable -related party - (500,000) (250,000)
Dividends paid to shareholders (418,087) (417,035) (417,186)
----------- ---------- --------
Net Cash (Used) by Financing Activities (1,666,466) (2,892,035) (857,186)
--------- --------- --------
Net (decrease) in cash (71,709) (18,886) (32,380)
Cash at beginning of period 154,346 173,232 205,612
------- ------- -------
Cash at End of Period $82,637 $154,346 $173,232
====== ======= =======
Supplemental cash flow information Cash paid during the period for:
Interest $76,312 $290,268 $343,692
Income taxes $2,515,000 $2,967,000 $1,202,000
See accompanying notes to consolidated financial statements
26
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. Unico American
Corporation and its subsidiaries, all of which are wholly owned (the "Company"),
provides primarily in California, property, casualty, health and life insurance
and related premium financing.
Change of Fiscal Year
On December 16, 1996, the Board of Directors approved a change in the Company's
fiscal year end from March 31 to December 31 effective December 31, 1996. As a
result of the change, the Company's Consolidated Statements of Operations and
Consolidated Statements of Cash Flows for the period ended December 31, 1996
covers nine months.
Principles of Consolidation
The consolidated financial statements include the accounts of Unico American
Corporation and its subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation.
Basis of Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP). As described in Note 16, the
Company's insurance subsidiary also files financial statements with regulatory
agencies prepared on a statutory basis of accounting which differs from
generally accepted accounting principles.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosure of certain 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 from those estimates.
Investments
In accordance with FASB Statement No. 115 ("Accounting for Certain Investments
in Debt and Equity Securities") 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 fixed maturity investments are classified as
available-for-sale, the Company's 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 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 statement 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 of $742,004 as of December 31,
1996, and net unrealized investment gains of $531,787 as of March 31, 1996.
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.
27
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 the fair values.
Note Payable - Bank - The carrying amounts reported in the balance sheet
for the bank note payable approximates the fair value due to the variable
rate nature of the line of credit.
Income Taxes
The provision for federal income taxes is computed on the basis of income as
reported for financial reporting purposes under generally accepted accounting
principles. Deferred income taxes arise principally from certain revenues and
expenses which are recognized for income tax in different periods than for
financial statements. As required by FASB Statement No. 109 ("Accounting for
Income Taxes"), 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.
Earnings Per Share
Earnings per share is computed by dividing the net income by the weighted
average number of common shares outstanding.
Revenue Recognition
a. General Agency Operations
Commissions and service 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. Ceding commission applicable
to the unexpired terms of policies in force are recorded as unearned ceding
commission which is included in deferred policy acquisition costs.
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
which approximates the interest (actuarial) method.
28
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Losses and Loss Adjustment Expenses
The process of establishing loss reserves involves significant judgmental
factors. The reserves for unpaid losses and loss adjustment expenses are based
on estimates of ultimate claim cost, including claims incurred but not reported.
These estimates are reviewed regularly and, as experience develops and new
information becomes known, the reserves are adjusted as necessary. Such
adjustments are reflected in results of operations in the period in which they
become known. 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.
Nine Months Fiscal Year
Ended Ended
December 31, March 31,
1996 1996
Restricted Funds:
Premium trust funds (1) $2,642,932 $2,465,923
Assigned to state agencies (2) 725,000 725,000
---------- ----------
Total restricted funds $3,367,932 $3,190,923
========= =========
(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 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 direct and indirect costs associated with
the production of insurance policies such as commissions, premium taxes and
certain other underwriting expenses which 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.
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.
Reclassifications
Certain reclassifications have been made to prior year balances to conform to
the current year presentation.
29
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - ADVANCE PREMIUMS
Unico subsidiaries selling auto, health, life and dental insurance policies
require payments of premium prior to the effective date of coverage. To conform
with the above requirement, invoices are sent out as early as two months prior
to the effective date of the policy and payments are received prior to the
policy effective date. Insurance premiums received by these subsidiaries for
coverage effective after the balance sheet date are recorded as advance
premiums.
NOTE 3 - INVESTMENTS
A summary of net investments and related income is as follows:
Investment Income
Investment income is summarized as follows:
Nine Months Fiscal Year
Ended Ended
-------------------------------------
December 31, March 31, March 31,
1996 1996 1995
Fixed maturities $3,041,485 $3,587,856 $3,085,667
Equity securities 46,144 5,886 15,909
Short-term investments 145,855 264,956 234,909
---------- ---------- ----------
Total investment income 3,233,484 3,858,698 3,336,485
Less investment expenses 600 (5,035) 18,535
------------- ----------- -----------
Net investment income $3,232,884 $3,863,733 $3,317,950
========= ========= =========
Net realized investment gains and (losses) are summarized as follows:
Nine Months Fiscal Year
Ended Ended
--------------------------------------
December 31, March 31, March 31,
1996 1996 1995
Gross realized gains:
Fixed maturities $ - $ 7,193 $131,199
Equity securities 196,413 48,550 -
Gross realized (losses):
Equity securities (5,922) - (123,647)
-------- ----------- -------
Net realized investment gains $190,491 $55,743 $ 7,552
======= ======= ======
30
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENTS (continued)
A summary of the net change in unrealized appreciation (depreciation) on
investments carried at market and the applicable deferred federal income taxes
is shown below:
Nine Months Fiscal Year
Ended Ended
-------------------------------------
December 31, March 31, March 31,
1996 1996 1995
Gross unrealized appreciation:
Fixed maturities $1,183,881 $954,381 $ -
Equity securities - 2,838 -
Gross unrealized (depreciation):
Fixed maturities (59,633) (151,480) (268,331)
------- ------- -------
Net unrealized appreciation
(depreciation) on investments 1,124,248 805,739 (268,331)
Deferred federal income taxes (382,244) (273,952) 91,233
-------- ------- ------
Net unrealized appreciation
(depreciation), net of deferred
income taxes $742,004 $531,787 $(177,098).
======= ======= =======
The amortized cost and estimated market value of fixed maturity investments at
December 31, 1996, by contractual maturity are as follows:
Estimated
Amortized Market
Cost Value
Due in one year or less $ 9,203,735 $ 9,274,016
Due after one year through five years 46,501,041 47,051,996
Due after five years through ten years 20,280,190 20,783,202
---------- ----------
Total fixed maturities $75,984,966 $77,109,214
========== ==========
31
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENTS (continued)
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, 1996
Available for sale
Fixed maturities
Certificates of deposit $ 798,000 $ - $ - $ 798,000
U.S. Treasury securities 22,447,391 185,410 19,699 22,613,102
State and municipal
tax-exempt bonds 39,634,159 657,634 33,652 40,258,141
Industrial and miscellaneous
taxable bonds 13,105,416 340,837 6,282 13,439,971
---------- --------- ------- ----------
Total fixed maturities $75,984,966 $1,183,881 $ 59,633 $77,109,214
========== ========= ====== ==========
March 31, 1996
Available for sale
Fixed maturities
Certificates of deposit $ 1,111,378 $ - $ - $ 1,111,378
U.S. Treasury securities 18,191,847 157,987 24,468 18,325,366
State and municipal
tax-exempt bonds 38,126,835 437,470 127,012 38,437,293
Industrial and miscellaneous
taxable bonds 10,655,316 358,924 - 11,014,240
---------- ------- ------- ----------
Total fixed maturities $68,085,376 $ 954,381 $151,480 $68,888,277
========== ======= ======= ==========
Equity securities:
Common stocks $995,237 $2,838 $ - $998,075
======= ===== ======= =======
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without penalties.
Short-term investments have an initial maturity of one year or less and consist
of the following:
Nine Months Fiscal Year
Ended Ended
December 31, March 31,
1996 1996
Certificates of deposit $ 125,000 $ 25,000
Commercial paper 2,810,000 2,230,000
Commercial bank money market accounts 1,144,292 1,186,602
Short term U.S. treasury note 757,653 -
Savings account 24,800 24,430
----------- -----------
Total short-term investments $4,861,745 $3,466,032
========= =========
32
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PREMIUMS AND NOTES RECEIVABLE, NET
Premiums and notes receivable consist of the following:
Nine Months Fiscal Year
Ended Ended
December 31, March 31,
1996 1996
Premiums receivable $3,171,706 $2,493,592
Premium finance notes receivable 5,751,709 5,672,984
--------- ---------
Total premiums and notes receivable 8,923,415 8,166,576
Less allowance for doubtful accounts 24,576 25,333
----------- -----------
Net premiums and notes receivable $8,898,839 $8,141,243
========= =========
The allowance for doubtful accounts is maintained at a minimum since the
receivables are secured by unearned premiums and funds held as security for
performance. Bad debt expense for the nine months ended December 31, 1996 and
the fiscal year ended March 31, 1996 was $22,387 and $38,815 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.
NOTE 5 - DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs, net of ceding commission, consist of
commissions, premium taxes, inspection fees, and certain other underwriting
costs which are related to and vary with the production of Crusader Insurance
Company policies. These costs are incurred by Crusader and include allocated
expenses of other Unico subsidiaries. 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.
Nine Months Fiscal Year
Ended Ended
---------------------------------------
December 31, March 31, March 31,
1996 1996 1995
Deferred policy acquisition costs at beginning of year $4,333,708 $4,113,936 $3,922,564
Policy acquisition costs incurred during year 7,506,550 8,789,167 8,506,099
Policy acquisition cost amortized during year (6,887,173) (8,569,395) (8,314,727)
--------- --------- ---------
Deferred policy acquisition costs at end of year $4,953,085 $4,333,708 $4,113,936
========= ========= =========
33
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - PROPERTY AND EQUIPMENT (NET OF ACCUMULATED DEPRECIATION)
Property and equipment consist of the following:
Nine Months Fiscal Year
Ended Ended
December 31, March 31,
1996 1996
Furniture, fixtures, computer, office and transportation equipment $2,449,581 $2,414,739
Accumulated Depreciation 2,219,609 2,136,121
--------- ---------
Net property and equipment $ 229,972 $ 278,618
======= =======
NOTE 7 - UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table sets forth a reconciliation of the liabilities for losses
and loss adjustment expenses for the periods shown:
Nine Months Fiscal Year
Ended Ended
------------------------------------
December 31, March 31, March 31,
1996 1996 1995
Reserve for unpaid losses and loss adjustment
expenses at beginning of year $32,682,153 $27,633,304 $21,499,778
---------- ---------- ----------
Incurred losses and loss adjustment expenses
Provision for insured events of current year 16,251,499 19,276,602 18,057,338
(Decrease) in provision for events of prior years (1,449,765) (1,967,053) (587,038)
---------- ---------- -----------
Total losses and loss adjustment expenses 14,801,734 17,309,549 17,470,300
---------- ---------- ----------
Payments
Losses and loss adjustment expenses attributable
to insured events of the current year 3,352,866 3,446,088 3,469,594
Losses and loss adjustment expenses attributable
to insured events of prior years 7,019,175 8,814,612 7,867,180
----------- ----------- -----------
Total payments 10,372,041 12,260,700 11,336,774
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses
at end of year - net of reinsurance $37,111,846 $32,682,153 $27,633,304
========== ========== ==========
Reconciliation of liability for loss and loss adjustment expense reserves to
Balance Sheet Reserve for unpaid losses and loss adjustment expenses
at end of year - net of reinsurance $37,111,846 $32,682,153 $27,633,304
Reinsurance recoverable on unpaid losses at end of year 2,629,019 4,324,305 4,737,448
----------- ----------- -----------
Reserve for unpaid losses and loss adjustment expenses
at end of year - gross of reinsurance $39,740,865 $37,006,458 $32,370,752
========== ========== ==========
34
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FUNDS HELD AS SECURITY FOR PERFORMANCE
Funds held as security for performance represent funds received in order to
guarantee the contractual obligations entered into with customers and are
treated as restricted funds.
NOTE 9 - ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
Nine Months Fiscal Year
Ended Ended
December 31, March 31,
1996 1996
Premium payable $ 708,733 $ 696,997
Unearned adjustment income 300,000 300,000
Profit sharing contributions 375,000 480,863
Accrued interest payable 300,000 300,000
Accrued salaries 404,350 406,638
Other 307,616 147,900
---------- ----------
Total accrued expenses
and other liabilities $2,395,699 $2,332,398
========= =========
NOTE 10 - NOTE PAYABLE - BANK
American Acceptance Corporation ("AAC"), the Company's premium finance
subsidiary, has a line of credit with Union Bank which can be used only to fund
its premium finance operation. At the Company's request, this line of credit was
decreased from $6,000,000 to $4,000,000 in September 1996. Interest on the note
is referenced to the London Interbank Offered Rate ("LIBOR"). The note amount is
collateralized by the assets of AAC and is guaranteed by the Company. The loan
agreement contains certain covenants including restrictions on certain
transactions between AAC and the Company and the maintenance of certain
financial ratios. The note matures September 2, 1997, and is expected to be
renewed. The terms of the note call for monthly payments of interest only. The
interest rate at December 31, 1996, was 7.25%
Nine Months Fiscal Year
Ended Ended
December 31, March 31,
1996 1996
Note payable bank $750,001 $2,000,001
======== =========
Maximum bank note payable $2,000,001 $3,975,001
Average bank note payable $1,387,038 $3,388,334
Weighted average interest rate 7.2% 7.7%
In addition to the AAC line of credit, Unico has a $2,000,000 line of credit
with Union Bank. Interest on this line is referenced to LIBOR and is payable
monthly. The agreement contains certain covenants including maintenance of
certain financial ratios. This credit line expires September 2, 1997 at which
time it is expected to be renewed. As of December 31, 1996, no amounts have been
borrowed.
35
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - CLAIMS AND LITIGATION
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. The Company is 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 has issued a policy of
insurance directly or indirectly through the Company. Incidental actions are
sometimes brought by customers or other agents 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.
NOTE 12 - LEASE COMMITMENT
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 $769,464
for the nine month period ended December 31, 1996 and $1,025,952 for the fiscal
years ended March 31, 1996 and March 31, 1995.
The lease provides for the following minimum annual rental commitments:
Fiscal Year Ending
December 31, 1997 $ 1,025,952
December 31, 1998 $ 1,025,952
December 31, 1999 $ 1,025,952
December 31, 2000 $ 1,025,952
December 31, 2001 $ 1,025,952
December 31, 2002 (through March 31, 2007) $ 5,386,248
----------
Total minimum payments $10,516,008
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 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 unaffiliated third
parties. The Company utilizes for its own operations 100% of the space it
leases.
NOTE 13 - REINSURANCE
A reinsurance transaction occurs when an insurance company transfers (cedes) a
portion of its exposure on business written by it to a reinsurer which assumes
that risk for a premium (ceded premium). Reinsurance does not legally discharge
the company from primary liability under its policies and if the reinsurer fails
to meet the obligations, the company must nonetheless pay its policy
obligations. The Company continually monitors and evaluates the liquidity and
financial strength of its reinsurers to determine their ability to fulfill
obligations assumed under the reinsurance contracts.
36
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - REINSURANCE (continued)
Crusader has reinsurance agreements with National Reinsurance Corporation, a
California admitted reinsurance company which was acquired by General
Reinsurance Corporation in 1996. These reinsurance agreements help protect
Crusader against liabilities in excess of certain retentions, including major or
catastrophic losses which may occur from any one or more of the property and/or
casualty risks which Crusader insures. In August 1992 Crusader purchased
additional catastrophe reinsurance from various California admitted reinsurance
companies. Crusader's retention increased from $100,000 to $150,000 per risk on
April 1, 1995. This retention is subject to a maximum dollar amount and to
catastrophe and clash covers. The catastrophe and clash covers (subject to a
maximum occurrence and annual aggregate amount) help protect the Company from
one loss occurrence affecting multiple policies. The premium ceded to the
reinsurers for the catastrophe and clash covers and for all exposures over
$500,000 is a fixed percentage of the premium charged by Crusader. On exposures
up to $500,000, the reinsurer charges a provisional rate which is subject to
adjustment and is based on the amount of losses ceded, limited by a maximum
percentage that can be charged by the reinsurer. 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 that is ceded. Crusader does not currently assume any reinsurance from
other insurance companies. The Company intends to continue obtaining reinsurance
although the availability and cost may vary from time to time.
The effect of reinsurance on premiums written and earned is as follows:
Nine Months Fiscal Year
Ended Ended
----------------------------------------
December 31, March 31, March 31,
1996 1996 1995
Premiums written:
Direct business $31,847,113 $37,631,357 $39,039,549
Reinsurance assumed - - -
Reinsurance ceded $(3,701,766) $(4,437,446) $(8,614,685)
Premiums earned:
Direct Business $29,373,374 $37,554,830 $38,466,825
Reinsurance assumed - - -
Reinsurance ceded $(3,307,085) $(6,077,403) $(9,258,535)
NOTE 14 - CONTINGENCIES
The Company's federal income tax returns for the fiscal years ended March 31,
1990, through March 31, 1994, were examined by the Internal Revenue Service. The
primary issue of the examination was the loss reserve deductions for the fiscal
years under audit. Any changes in the these deductions resulting from the
examination would be a temporary difference. Since any tax increase from this
temporary difference should be offset by a tax decrease in subsequent years, no
tax liability has been accrued. The issue is currently under appeal. Management
estimated and accrued $300,000 of interest expense in the fiscal year ended
March 31, 1995, related to this temporary difference. No change was made to this
accrual as of December 31, 1996.
37
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - 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 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.
Contributions to the plan were as follows:
Profit
Sharing Plan
Nine months ended December 31, 1996 $364,226
Fiscal year ended March 31, 1995 $484,715
Fiscal year ended March 31, 1994 $477,028
NOTE 16 - STATUTORY CAPITAL AND SURPLUS
Crusader is required to file an annual statement with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (i.e., statutory basis). Prescribed statutory accounting practices
include state laws, regulations, and general administrative rules, as well as a
variety of publications of the National Association of Insurance Commissioners
(NAIC). Permitted statutory accounting practices encompass all accounting
practices not so prescribed.
The NAIC has a project to codify statutory accounting practices, the result of
which is expected to constitute the only source of "prescribed" statutory
accounting practices. The codification, when completed, will likely change the
definitions of what comprises prescribed as opposed to permitted statutory
accounting practices and may result in changes to the accounting policies that
insurance companies use to prepare the statutory financial statements.
Crusader Insurance Company statutory capital and surplus is as follows:
As of December 31, 1996 $25,748,757
As of March 31, 1996 $22,721,183
Crusader Insurance Company statutory net income is as follows:
Nine months ended December 31, 1996 $3,526,515
Fiscal year ended March 31, 1996 $4,639,537
Fiscal year ended March 31, 1995 $2,661,428
Crusader's statutory capital and surplus was deemed 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 Unico
without prior approval
38
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - STATUTORY CAPITAL AND SURPLUS (continued)
the California Department of Insurance. Presently, without prior approval,
Crusader may pay a dividend to Unico equal to the greater of (1) 10% of
Crusader's statutory policyholders' surplus or (2) Crusader's statutory net
income for the preceding calendar year. The maximum dividend which may be made
without prior approval in calendar year 1997 is $3,862,115.
NOTE 17 - INCENTIVE STOCK OPTION PLAN
The Company under its 1985 stock option plan provides for the grant of
"incentive stock options" to officers and key employees. The options and prices
set forth below have been adjusted, where applicable, for all subsequent stock
splits, reverse stock splits and stock dividends. All options were granted at
fair market value. As of December 31, 1996, of the 560,699 options outstanding,
433,226 options were currently exercisable. There are no additional options
available for future grant under the 1985 plan. The changes in the number of
common shares under option are summarized as follows:
Options Exercise Price
Outstanding at March 31, 1994 609,836 $3.4375 to $3.85
Options granted 90,164 $4.375
Options exercised -
Options terminated (20,000) $3.50
--------
Outstanding at March 31, 1995 680,000 $3.4375 to $4.375
Options granted -
Options exercised -
Options terminated -
--------
Outstanding at March 31, 1996 680,000 $3.4375 to $4.375
Options granted -
Options exercised (114,651) $3.4375 to $3.85
Options terminated (4,650) $3.50
--------
Outstanding at December 31, 1996 560,699 $3.4375 to $4.375
=======
39
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - TAXES ON INCOME
The provision for taxes on income consists of the following:
Nine Months Fiscal Year
Ended Ended
------------------------------------
December 31, March 31, March 31,
1996 1996 1995
Current provision:
Federal $2,133,283 $2,574,766 $1,583,545
State 159,364 164,931 102,529
---------- ---------- ----------
Total federal and state 2,292,647 2,739,697 1,686,074
Deferred (88,170) (278,887) (520,576)
---------- ---------- ----------
Provision for taxes $2,204,477 $2,460,810 $1,165,498
========= ========= =========
The income tax provision reflected in the consolidated statement of operations
is less than the expected federal income tax on income as shown in the table
below.
Nine Months Fiscal Year
Ended Ended
------------------------------------
December 31, March 31, March 31,
1996 1996 1995
Computed tax expense at 34% $2,508,855 $2,858,819 $1,685,610
Tax effect of:
Tax exempt income (393,009) (502,513) (548,745)
Dividend exclusion (9,335) (1,191) -
Other (56,354) (49,847) (69,580)
State income tax expense 154,320 155,542 98,213
---------- ---------- -----------
Tax per financial statement $2,204,477 $2,460,810 $1,165,498
========= ========= =========
The provision for deferred income taxes results from the following temporary
differences between taxable income and income reported in the accompanying
financial statements.
Nine Months Fiscal Year
Ended Ended
------------------------------------
December 31, March 31, March 31,
1996 1996 1995
Deferred policy acquisition costs $244,793 $74,722 $65,066
Discounting of losses and unearned premium
reserves (275,432) (295,375) (439,127)
Accrued interest not currently deductible - - (102,000)
Other (57,531) (58,234) (44,515)
------- ------- -------
Tax per financial statement $(88,170) $(278,887) $(520,576)
======== ======== =======
40
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - TAXES ON INCOME (continued)
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:
Nine Months Fiscal Year
Ended Ended
December 31, March 31,
1996 1996
Deferred tax asset:
Discount on loss reserves $2,121,793 $2,000,235
Unearned premiums 1,335,620 1,194,244
Other 121,284 86,330
---------- -----------
Total deferred tax assets $3,578,697 $3,280,809
--------- ---------
Deferred tax liabilities:
Deferred acquisition costs $1,684,049 $1,473,461
Discount on salvage & subrogation 8,749 9,618
Unrealized gain on investments 382,244 273,952
---------- ----------
Total deferred tax liabilities $2,075,042 $1,757,031
--------- ---------
Net deferred tax asset $1,503,655 $1,523,778
========= =========
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
As a California insurance company, Crusader is obligated to pay a premium tax on
gross premiums written in the states of California, Arizona, Nevada, Oregon, and
Washington. The premium tax is in lieu of state franchise taxes; thus, the above
provision for state taxes does not include the premium tax.
NOTE 19 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly financial data for each of the calendar years
1995 and 1996 is set forth below. These quarters include each full quarter
within the fiscal year ended March 31, 1996 and the nine-month period ended
December 31, 1996.
Comparable Period by Quarter Ended
----------------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Calendar year 1996
Total Revenue $10,995,615 $11,338,697 $11,784,899 $11,761,061
Earnings before taxes 2,397,090 2,394,096 2,517,121 2,467,770
Net earnings 1,674,817 1,674,094 1,748,741 1,751,675
Earnings per share $0.27 $0.27 $.028 $0.28
Calendar year 1995
Total Revenue $9,971,662 $10,169,592 $10,400,201 $10,903,066
Earnings before taxes 1,603,092 1,827,849 2,003,588 2,179,764
Net earnings 1,250,357 1,327,306 1,414,145 1,531,213
Earnings per share $0.21 $0.22 $0.23 $.025
41
11
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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
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.
42
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements and Schedules Filed as a Part of this Report:
1. Financial statements:
The consolidated financial statements for the nine months ended December
31, 1996, are contained herein as listed in the index to consolidated
financial statements on page 21.
2. Financial schedules:
Index to Consolidated Financial Statements
Independent Auditors' Report on Financial Statement Schedules
Schedule I - Summary of Investments Other than Investments in
Related Parties
Schedule II - Condensed Financial Information of Registrant
Schedule III - Supplemental Insurance Information
Schedule IV - Reinsurance
Schedule VI - Supplemental Information Concerning Property/Casualty
Insurance Operations
Schedules other than those listed above are omitted, since they are not
applicable, not required, or the information required to be 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 Unico American Corporation Employee Incentive Stock Option Plan
(1985). (Incorporated herein by reference to Exhibit 10.3 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1985). (*)
10.3 Amendment to Unico American Corporation Incentive Stock Option Plan
(1985).(Incorporated herein by reference to Exhibit 10.4 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1987). (*)
10.4 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).
10.5 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).
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).
27 Financial Data Schedule
(*) Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K:
On Form 8-K with date of earliest event reported being December 16, 1996,
Registrant reported under Item 8, a change in its fiscal year end from March
31 to December 31 effective December 31, 1996.
43
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 26, 1997
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 26, 1997
------------------
Erwin Cheldin President and Chief
Executive Officer,
(Principal Executive Officer
/s/ LESTER A. AARON Treasurer, Chief Financial March 26, 1997
--------------------
Lester A. Aaron Officer and Director
(Principal Accounting and
Principal Financial Officer
/s/ CARY L. CHELDIN Executive Vice President March 26, 1997
--------------------
Cary L. Cheldin and Director
/s/ GEORGE C. GILPATRICK Vice President, Secretary March 26, 1997
-------------------------
George C. Gilpatrick and Director
/s/ ROGER H. PLATTEN Vice President and Director March 26, 1997
---------------------
Roger H. Platten
44
INDEPENDENT AUDITOR'S REPORT
ON FINANCIAL STATEMENT SCHEDULES
Board of Directors
Unico American Corporation
Under date of March 20, 1997, we reported on the consolidated balance sheets of
Unico American Corporation and subsidiaries as of December 31, 1996, and March
31, 1996 and the related consolidated statement of operations, shareholders'
equity and cash flows for the nine months ended December 31, 1996 and each of
the years ended March 31, 1996 and 1995, as contained in the annual report of
Form 10-K for the nine months ended December 31, 1996. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related consolidated financial statement schedules as listed under Item
14(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 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.
GETZ, KRYCLER & JAKUBOVITS
Sherman Oaks, California
March 20, 1997
45
SCHEDULE I
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
Column A Column B Column C Column D
Amount at which
shown in the
Type of Investment Cost Value Balance Sheet
Fixed maturities:
U.S. Treasury securities $22,447,391 $22,613,102 $22,613,102
State and municipal tax-exempt bonds 39,634,159 40,258,141 40,258,141
Industrial and miscellaneous bonds 13,105,416 13,439,971 13,439,971
Certificates of deposit 798,000 798,000 798,000
---------- --------- ----------
Total fixed maturities 75,984,966 77,109,214 77,109,214
Short-term investments 4,861,745 4,861,745 4,861,745
---------- ---------- ----------
Total investments $80,846,711 $81,970,959 $81,970,959
========== ========== ==========
46
SCHEDULE II
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS - PARENT COMPANY ONLY
Nine Months Fiscal Year
Ended Ended
December 31, March 31,
1996 1996
ASSETS
Cash $ 29,325 $ 53,148
Investments in subsidiaries 44,167,914 39,016,614
Property and equipment (net of accumulated depreciation) 229,972 278,618
Other assets 103,251 79,361
---------- ----------
Total Assets $44,530,462 $39,427,741
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accrued expenses and other liabilities $1,114,647 $1,110,039
Payables to subsidiaries (net of receivables) 6,060,396 5,930,544
--------- ---------
Total Liabilities $7,175,043 $7,040,583
--------- ---------
STOCKHOLDERS' EQUITY
Common stock $ 2,836,422 $ 2,834,801
Net unrealized investment gains 742,004 531,787
Retained earnings 33,776,993 29,020,570
---------- ----------
Total Stockholders' Equity $37,355,419 $32,387,158
---------- ----------
Total Liabilities and Stockholders' Equity $44,530,462 $39,427,741
========== ==========
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
47
SCHEDULE II (continued)
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS - PARENT COMPANY ONLY
Nine Months Ended Fiscal Year Ended
December 31 March 31
----------- --------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited)
REVENUES
General and administrative expenses
allocated to subsidiaries $3,870,364 $3,980,416 $5,237,708 $5,218,234
Net investment income 82,569 2,145 12,422 1,802
Other income 7,414 12,421 12,138 12,083
------------ ----------- ----------- -----------
Total Revenue 3,960,347 3,994,982 5,262,268 5,232,119
EXPENSES
General and administrative 3,937,137 3,966,651 5,246,708 5,227,521
--------- --------- --------- ---------
Income before equity in net income
of subsidiaries 23,210 28,331 15,560 4,598
Equity in net income of subsidiaries 5,151,300 4,244,333 5,931,921 3,787,581
--------- --------- --------- ---------
Net Income $5,174,510 $4,272,664 $5,947,481 $3,792,179
========= ========= ========= =========
The Company and its subsidiaries file a consolidated federal income tax return.
Unico received cash dividends from Crusader of $500,000 in the nine months ended
December 31, 1996, $1,500,000 in the fiscal year ended March 31, 1996, and
$500,000 in the fiscal year ended March 31, 1995.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
48
SCHEDULE II (continued)
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS - PARENT COMPANY ONLY
Nine Months
Ended Fiscal Year Ended
December 31 March 31
1996 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income $5,174,510 $5,947,481 $3,792,179
Adjustments to reconcile net income to net cash
from operations
Undistributed equity in net (income) of
subsidiaries (5,151,300) (5,931,921) (3,787,581)
Depreciation and amortization 83,488 142,306 128,210
Accrued expenses and other liabilities 4,608 112,016 463,549
Accrued investment income (2,500) - -
Other assets (21,390) (1,621) 175,501
------ --------- -------
Net cash provided from operations 87,416 268,261 771,858
------ ------- -------
Cash flows from investing activities
Purchase of property and equipment (34,841) (85,428) (233,310)
------ ------ -------
Net cash (used) by investing activities (34,841) (85,428) (233,310)
------ ------ -------
Cash flows from financing activities
Proceeds from issuance of common stock 1,621 - 35,000
Dividends paid to stockholders (418,087) (417,035) (417,186)
Repayment of notes payable - (500,000) (250,000)
Net change in payables and receivables
from subsidiaries 340,068 724,698 147,353
------- ------- -------
Net cash (used) by financing activities (76,398) (192,337) (484,833)
------ ------- -------
Net increase (decrease) in cash (23,823) (9,504) 53,715
Cash at beginning of year 53,148 62,652 8,937
------ ------ -------
Cash at end of year $29,325 $53,148 $62,652
====== ====== ======
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
49
SCHEDULE III
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Future
Deferred benefits,
policy losses, Net
acquisition and loss Unearned Premium investment
cost expenses premiums revenue income
-----------------------------------------------------------------------
Nine Months
Ended
December 31, 1996
Property &
Casualty $4,953,085 $39,740,865 $22,120,241 $26,066,289 $3,115,110
Fiscal Year Ended
March 31, 1996
Property &
Casualty $4,333,708 $37,006,458 $19,646,502 $31,477,427 $3,708,891
Fiscal Year Ended
March 31, 1995
Property &
Casualty $4,113,936 $32,370,752 $19,569,975 $29,208,290 $3,181,791
Benefits, Amortization
claims, of deferred
losses and policy Other
settlement acquisition operating Premium
expenses costs costs written
---------------------------------------------------------
Nine Months
Ended
December 31, 1996
Property &
Casualty $14,801,734 $6,887,173 $1,653,077 $28,145,347
Fiscal Year Ended
March 31, 1996
Property &
Casualty $17,309,549 $8,569,395 $2,419,635 $33,193,911
Fiscal Year Ended
March 31, 1995
Property &
Casualty $17,470,300 $8,314,727 $2,571,538 $30,424,864
50
SCHEDULE IV
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
REINSURANCE
Ceded to
Gross other
amount companies
---------------------------------------------------
Nine Months Ended
December 31, 1996
Property & Casualty $29,373,374 $3,307,085
Fiscal Year Ended
March 31, 1996
Property & Casualty $37,554,830 $6,007,403
Fiscal Year Ended
March 31, 1995
Property & Casualty $38,466,825 $9,258,535
Assumed Percentage of
from other Net amount assumed
companies amount to net
----------------------------------------------------------------------------
Nine Months Ended
December 31, 1996
Property & Casualty - $26,066,289 -
Fiscal Year Ended
March 31, 1996
Property & Casualty - $31,477,427 -
Fiscal Year Ended
March 31, 1995
Property & Casualty - $29,208,290 -
51
SCHEDULE VI
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY - CASUALTY
INSURANCE OPERATIONS
Reserves for
Unpaid Discount
Deferred Claims if any,
Affiliation Policy and Claim Deducted Net
with Acquisition Adjustment in Unearned Earned Investment
Registrant Costs Expenses Column C Premiums Premiums Income
(A) (B) (C) (D) (E) (F) (G)
- -----------------------------------------------------------------------------------------------------------------
Company &
Consolidated
Subsidiaries
Nine Months
Ended
December 31, 1996 $4,953,085 $39,740,865 - $22,120,241 $26,066,289 $3,115,110
Fiscal
Year Ended
March 31,
1996 $4,333,708 $37,006,458 - $19,646,502 $31,477,427 $3,708,891
1995 $4,113,936 $32,370,752 - $19,569,975 $29,208,290 $3,181,791
Claims and
Claim
Adjustment Amortization
Expenses Incurred of Deferred Paid Claims
Affiliation Related to Policy and Claim
with (1) Current Year Acquisition Adjustment Premiums
Registrant (2) Prior Year Costs Expenses written
(A) (H) (I) (J) (K)
- ----------------------------------------------------------------------------------------------
Company &
Consolidated
Subsidiaries
Nine Months
Ended
December 31, 1996 $16,251,499 (1) $6,887,173 $10,372,041 $28,145,347
$(1,449,765) (2)
Fiscal
Year Ended
March 31,
1996 $19,276,602 (1) $8,569,395 $12,260,700 $33,193,911
$(1,967,053) (2)
1995 $18,057,338 (1) $8,314,727 $11,336,774 $30,424,864
$ (587,038) (2)
52
EXHIBIT INDEX
TO
UNICO AMERICAN CORPORATION ANNUAL REPORT ON FORM 10-K
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996
No. Item Page
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
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 Unico American Corporation Employee Incentive Stock Option Plan (1985). (Incorporated herein
by reference to Exhibit to Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1985).
10.3 Amendment to Unico American Corporation Incentive Stock Option Plan (1985).
(Incorporated herein by reference to Exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 1987).
10.4 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).
10.5 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).
21 Subsidiaries of Registrant. (Incorporated herein by reference to Exhibit 22 to Registrant's Annual
Report on Form 10-K forthe fiscal year ended March 31, 1984).
27 Financial Date Schedule
53