SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Under Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2003 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-3978
UNICO AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 95-2583928
(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification No.)
23251 Mulholland Drive, Woodland Hills, California 91364
(Address of Principal Executive Offices) (Zip Code)
(818) 591-9800
(Registrant's telephone number, Including Area Code)
No Change
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
5,489,533
Number of shares of common stock outstanding as of May 12, 2003
1
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31 December 31
2003 2002
---- ----
ASSETS
- ------
Investments
Available for sale:
Fixed maturities, at market value (amortized cost: March 31,
2002 $91,046,642; December 31, 2002 $93,649,468) $95,733,296 $98,373,350
Short-term investments, at cost 16,053,753 9,024,382
----------- -----------
Total Investments 111,787,049 107,397,732
Cash 46,736 19,766
Accrued investment income 1,305,263 1,470,333
Premiums and notes receivable, net 7,097,948 6,699,909
Reinsurance recoverable:
Paid losses and loss adjustment expenses 2,595,234 2,805,048
Unpaid losses and loss adjustment expenses 19,123,213 21,308,339
Prepaid reinsurance premiums 72,803 95,304
Deferred policy acquisition costs 6,069,673 5,947,010
Property and equipment (net of accumulated depreciation) 345,554 354,194
Deferred income taxes - 57,951
Income taxes receivable 1,683,034 1,590,970
Other assets 629,664 940,049
----------- -----------
Total Assets $150,756,171 $148,686,605
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
- -----------
Unpaid losses and loss adjustment expenses $73,768,219 $74,905,284
Unearned premiums 24,916,360 24,381,583
Advance premium and premium deposits 1,671,324 1,607,272
Notes payable-related parties 750,000 750,000
Deferred income taxes 148,391 -
Accrued expenses and other liabilities 10,884,374 8,633,476
----------- -----------
Total Liabilities $112,138,668 $110,277,615
----------- -----------
STOCKHOLDERS' EQUITY
- ---------------------
Common stock, no par - authorized 10,000,000 shares; issued and outstanding
shares 5,489,533 at March 31, 2003, and 5,489,533 at December 31, 2002 $ 2,700,272 $ 2,700,272
Accumulated other comprehensive income 3,093,192 3,117,762
Retained earnings 32,824,039 32,590,956
---------- ----------
Total Stockholders' Equity $38,617,503 $38,408,990
---------- ----------
Total Liabilities and Stockholders' Equity $150,756,171 $148,686,605
=========== ===========
See notes to unaudited consolidated financial statements.
2
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31
2003 2002
---- ----
REVENUES
- --------
Insurance Company Revenues
Premium earned $11,424,920 $9,252,973
Premium ceded 3,464,096 1,661,230
--------- ---------
Net premium earned 7,960,824 7,591,743
Net investment income 1,266,918 1,389,665
Net realized investment (losses) - (216)
Other income 18,770 2,247
--------- ---------
Total Insurance Company Revenues 9,246,512 8,983,439
Other Revenues from Insurance Operations
Gross commissions and fees 1,937,509 1,438,987
Investment income 13,085 6,571
Finance charges and late fees earned 220,178 218,926
Other income (693) 4,070
---------- ----------
Total Revenues 11,416,591 10,651,993
---------- ----------
EXPENSES
- --------
Losses and loss adjustment expenses 6,680,163 6,329,563
Policy acquisition costs 1,783,891 2,150,291
Salaries and employee benefits 1,193,410 987,221
Commissions to agents/brokers 402,578 302,609
Other operating expenses 996,469 745,871
---------- ----------
Total Expenses 11,056,511 10,515,555
---------- ----------
Income Before Taxes 360,080 136,438
Income Tax Provision 126,997 30,386
------- -------
Net Income $233,083 $106,052
======= =======
PER SHARE DATA
- --------------
Basic Shares Outstanding 5,489,533 5,482,091
Basic Earnings Per Share $0.04 $0.02
Diluted Shares Outstanding 5,506,962 5,486,622
Diluted Earnings Per Share $0.04 $0.02
See notes to unaudited consolidated financial statements.
3
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended
March 31
--------
2003 2002
---- ----
Net Income $233,083 $106,052
Other changes in comprehensive income, net of tax:
Unrealized (losses) on securities classified
as available-for-sale arising during the period (24,570) (788,884)
Less: reclassification adjustment for (gains)
and losses included in net income - 143
------- -------
Comprehensive Income (Loss) $208,513 $(682,689)
======= =======
See notes to unaudited consolidated financial statements.
4
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
2003 2002
---- ----
Cash Flows from Operating Activities:
Net Income $233,083 $106,052
Adjustments to reconcile net income to net cash from operations
Depreciation 20,986 17,959
Bond amortization, net 80,076 94,513
Net realized loss on sale of securities - 216
Changes in assets and liabilities
Premium, notes and investment income receivable (232,969) 27,594
Reinsurance recoverable 2,394,940 (362,751)
Prepaid reinsurance premiums 22,501 (4,032)
Deferred policy acquisitions costs (122,663) (129,006)
Other assets 310,386 40,928
Reserve for unpaid losses and loss adjustment expenses (1,137,065) 114,600
Unearned premium reserve 534,777 677,357
Funds held as security and advanced premiums 64,052 343,302
Accrued expenses and other liabilities 2,250,898 28,108
Income taxes current/deferred 219,000 287,327
Federal income tax recoverable (92,065) (306,569)
--------- -------
Net Cash Provided from Operations 4,545,937 935,598
--------- -------
Investing Activities
Purchase of fixed maturity investments (7,117,250) (5,231,342)
Proceeds from maturity of fixed maturity investments 9,640,000 3,520,000
Net (increase) decrease in short-term investments (7,029,371) 879,949
Additions to property and equipment (12,346) (9,094)
--------- -------
Net Cash (Used) by Investing Activities (4,518,967) (840,487)
--------- -------
Financing Activities
Proceeds from issuance of common stock - 11,357
------ ------
Net Cash Provided by Financing Activities - 11,357
------ ------
Net increase in cash 26,970 106,468
Cash at beginning of period 19,766 45,001
------ -------
Cash at end of Period $46,736 $151,469
====== =======
Supplemental Cash Flow Information Cash paid during the period for:
Interest $9,699 -
Income taxes $636 $479
See notes to unaudited consolidated financial statements.
5
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Nature of Business
- ------------------
Unico American Corporation is an insurance holding company that underwrites
property and casualty insurance through its insurance company subsidiary;
provides property, casualty, health and life insurance through its agency
subsidiaries; and provides insurance premium financing, claim administration
services, and membership association services through its other subsidiaries.
Unico American Corporation is referred to herein as the "Company" or "Unico" and
such references include both the corporation and its subsidiaries, all of which
are wholly owned, unless otherwise indicated. Unico was incorporated under the
laws of Nevada in 1969.
Principles of Consolidation
- ---------------------------
The accompanying unaudited consolidated financial statements include the
accounts of Unico American Corporation and its subsidiaries. All significant
inter-company accounts and transactions have been eliminated in consolidation.
Basis of Presentation
- ---------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America (GAAP) for interim financial information and the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 2003, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. Quarterly financial statements should be read in conjunction
with the consolidated financial statements and related notes in the Company's
2002 Annual Report on Form 10-K as filed with the Securities and Exchange
Commission.
NOTE 2 - INCENTIVE STOCK PLANS
- ------------------------------
The Company's 1999 Omnibus Stock Plan covers 500,000 shares of the Company's
common stock (subject to adjustment in the case of stock splits, reverse stock
splits, stock dividends, etc.). Shareholders approved the plan on June 4, 1999.
On August 26, 1999, the Company granted 135,000 incentive stock options of which
40,000 were terminated, 95,000 were outstanding, and 85,000 were exercisable as
of March 31, 2003. On December 18, 2002, the Company granted an additional
182,000 incentive stock options under the Company's 1999 Omnibus Stock Plan. All
options expire 10 years from the date of the grant. Options granted as of March
31, 2003, are exercisable as follows:
Grant Date Grant Date
Date Exercisable August 26, 1999 December 18, 2002 Total
- ---------------- --------------- ----------------- -----
Currently Exercisable 85,000 - 85,000
September 1, 2003 10,000 - 10,000
January 1, 2004 - 57,000 57,000
January 1, 2005 - 57,500 57,500
January 1, 2006 - 37,500 37,500
January 1, 2007 - 30,000 30,000
------ ------- ------
Total 95,000 182,000 277,000
====== ======= =======
The Company applies APB Opinion No. 25 in accounting for its incentive stock
option plans. Accordingly, no compensation cost has been recognized in the
accompanying statements of operations. Had compensation cost for the Company's
stock-based compensation plan been reflected in the accompanying consolidated
financial statements based on the fair value at the grant dates for option
awards consistent with the method of SFAS 123, the Company's net income would
have been reduced to the pro forma amounts indicated below:
6
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 2 - INCENTIVE STOCK PLANS (continued)
- -----------------------------------------
Three Months Ended
March 31
--------
2003 2002
---- ----
Net income
As reported $233,083 $106,052
Pro forma $220,173 $93,225
Income per share
As reported $0.04 $0.02
Pro forma $0.04 $0.02
Income per share - assuming dilution:
As reported $0.04 $0.02
Pro forma $0.04 $0.02
Calculations of the fair value under the method prescribed by SFAS No. 123 were
made using the Black-Scholes Option-Price Model with the following weighted
average assumptions used for the 1999 and 2002 grants:
2002 1999
Grant Grant
---- ----
Dividend yield 1.40% 2.46%
Expected volatility 34% 43%
Expected lives 10 Years 10 Years
Risk-free interest rates 4.05% 6.09%
Fair value of options granted $1.32 $4.30
NOTE 3 - REPURCHASE OF COMMON STOCK - EFFECT ON STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------
The Company has previously announced that its Board of Directors had authorized
the repurchase in the open market from time to time of up to an aggregate of
945,000 shares of the common stock of the Company. During the three months ended
March 31, 2003, the Company did not repurchase any shares of the Company's
common stock. As of March 31, 2003, the Company had purchased and retired under
the Board of Directors' authorization an aggregate of 868,958 shares of its
common stock at a cost of $5,517,465.
NOTE 4 - EARNINGS PER SHARE
- ---------------------------
The following table represents the reconciliation of the numerators and
denominators of the Company's basic earnings per share and diluted earnings per
share computations reported on the Consolidated Statements of Operations for the
three months ended March 31, 2003 and 2002:
Three Months Ended
March 31
--------
2003 2002
---- ----
Basic Earnings Per Share
- ------------------------
Net income numerator $233,083 $106,052
======= =======
Weighted average shares outstanding denominator 5,489,533 5,482,091
========= =========
Basic Earnings Per Share $0.04 $0.02
7
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 4 - EARNINGS PER SHARE (continued)
- --------------------------------------
Diluted Earnings Per Share
- --------------------------
Net income numerator $233,083 $106,052
======= =======
Weighted average shares outstanding 5,489,533 5,482,091
Effect of diluted securities 17,429 4,531
--------- ---------
Diluted shares outstanding denominator 5,506,962 5,486,622
========= =========
Diluted Earnings Per Share $0.04 $0.02
NOTE 5 - SEGMENT REPORTING
- --------------------------
Statement of Financial Accounting Standards No. 131 (SFAS No. 131), Disclosures
about Segments of an Enterprise and Related Information, became effective for
fiscal years effective after December 15, 1997. SFAS No. 131 establishes
standards for the way information about operating segments is reported in
financial statements. The Company has adopted SFAS No. 131 and has identified
its insurance company operation, Crusader Insurance Company (Crusader), as its
primary reporting segment. Revenues from this segment comprised 81% of
consolidated revenues for the three months ended March 31, 2003, and 84% of
revenues for the three months ended March 31, 2002. The Company's remaining
operations constitute a variety of specialty insurance services, each with
unique characteristics and individually insignificant to consolidated revenues.
Revenues, income before income taxes, and assets by segment are as follows:
Three Months Ended
March 31
--------
2003 2002
---- ----
Revenues
- --------
Insurance company operation $9,246,512 $8,983,439
Other insurance operations 5,461,868 4,637,457
Intersegment elimination (1) (3,291,789) (2,968,903)
--------- ---------
Total other insurance operations 2,170,079 1,668,554
--------- ---------
Total Revenues $11,416,591 $10,651,993
========== ==========
Income (Loss) Before Income Taxes
- ----------------------------------
Insurance company operation $90,687 $(260,388)
Other insurance operations 269,393 396,826
------- -------
Total Income (Loss) Before Income Taxes $360,080 $136,438
======= =======
As of March 31
2003 2002
---- ----
Assets
Insurance company operation $132,362,561 $108,470,555
Intersegment eliminations (2) (1,877,859) (2,113,647)
----------- -----------
Total insurance company operation 130,484,702 106,356,908
Other insurance operations 20,271,469 22,958,400
----------- -----------
Total Assets $150,756,171 $129,315,308
=========== ===========
(1) Intersegment revenue eliminations reflect commission paid by Crusader to
Unifax Insurance Systems, Inc., (Unifax) a wholly owned subsidiary of the
Company.
(2) Intersegment asset eliminations reflect the elimination of Crusader
receivables and Unifax payables.
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
(a) Liquidity and Capital Resources:
- ------------------------------------
Due to the nature of the Company's business (insurance and insurance services)
and whereas Company growth does not normally require material reinvestments of
profits into property or equipment, the cash flow generated from operations
usually results in improved liquidity for the Company.
Crusader generates a significant amount of cash as a result of its holdings of
unearned premium reserves, reserves for loss payments, and its capital and
surplus. Crusader's loss and loss adjustment expense payments are the most
significant cash flow requirement of the Company. These payments are continually
monitored and projected to ensure that the Company has the liquidity to cover
these payments without the need to liquidate its investments. As of March 31,
2003, the Company had cash and investments of $107,147,131 (at amortized cost)
of which $103,945,349 (97%) were investments of Crusader.
As of the quarter ended March 31, 2003, the Company had invested $91,046,642 (at
amortized cost) or 85% of its invested assets in fixed maturity obligations. In
accordance with Statement of Financial Accounting Standard No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," the Company is required
to classify its investments in debt and equity securities into one of three
categories: held-to-maturity, available-for-sale, or trading securities.
Although all of the Company's investments are classified as available-for-sale,
the Company's investment guidelines place primary emphasis on buying and holding
high-quality investments.
The Company's investments in fixed maturity obligations of $91,046,642 (at
amortized cost) include $2,738,415 (3%) of pre-refunded state and municipal
tax-exempt bonds, $7,614,213 (8%) of U.S. treasury securities, $12,000,000 (13%)
of U.S. government agency securities, $68,294,014 (75%) of industrial and
miscellaneous securities, and $400,000 of certificates of deposit. The
tax-exempt interest income earned for the three months ended March 31, 2003 and
2002 was $35,304 and $96,523, respectively.
The balance of the Company's investments is in short-term investments that
include, bank money market accounts, certificates of deposit, commercial paper
and a short-term treasury money market fund.
The Company's investment guidelines on equity securities limit investments in
equity securities to an aggregate maximum of $2,000,000. The Company's
investment guidelines on fixed maturities limit fixed maturity investments to
high-grade obligations with a maximum term of eight years. The maximum
investment authorized in any one issuer is $2,000,000 and any one U.S.
government agency to $3,000,000. This dollar limitation excludes bond premiums
paid in excess of par value and U.S. government or U.S. government guaranteed
issues. All investments in municipal securities are pre-refunded and secured by
U.S. treasury securities. Short-term cash investments consist of bank money
market accounts, certificates of deposit, commercial paper, a U.S. government
obligation money market fund, and U.S. treasury bills. These short-term
investments are either U.S. government obligations, FDIC insured or are in an
institution with a Moody's rating of P1 and/or Standard & Poor's rating of A1.
All of the Company's fixed maturity investment securities are rated and readily
marketable and could be liquidated without any material financial impact.
The Company has previously announced that its Board of Directors had authorized
the repurchase in the open market from time to time of up to an aggregate of
945,000 shares of the common stock of the Company (See Note 3). No shares were
repurchased in the three months ended March 31, 2003.
Although material capital expenditures may also be funded through borrowings,
the Company believes that its cash and short-term investments as of the date of
this report, net of trust restriction of $1,575,827, statutory deposits of
$2,525,000, other deposits of $200,000, and the dividend restriction between
Crusader and Unico plus the cash to be generated from operations, should be
sufficient to meet its operating requirements during the next twelve months
without the necessity of borrowing funds.
State of California Regulatory Proceedings
- ------------------------------------------
On June 27, 2002, Crusader filed a lawsuit against California Insurance
Commissioner Harry Low over a Market Conduct Report that was made public by that
Commissioner. The report, which was adopted by the Commissioner on June 17,
2002, was based on an examination conducted by the California Department of
Insurance around May 10, 2001. Crusader brought an action to correct what it
concluded were inaccuracies in the report. The Insurance Commissioner responded
to Crusader's lawsuit with a demurrer that was overruled by the Los Angeles
Superior
9
Court on September 30, 2002. Thereafter, on October 24, 2002, the Insurance
Commissioner ordered Crusader to appear before the Office of Administrative
Hearing on January 28, 2003, to show cause why the Insurance Commissioner should
not issue an order requiring the Company to pay penalties on the violations
alleged in the report. The January 28, 2003, hearing has been continued to July
22, 2003. Crusader's lawsuit has been stayed pending the outcome of the order to
show cause on July 22, 2003. Crusader contends that its conduct was reasonable
and intends to vigorously defend these charges. The Company does not believe
that the outcome of this matter will have a materially adverse effect on its
financial statements. No penalties on the violations alleged in the report have
been accrued in the financial statements.
(b) Results of Operations:
- -------------------------
All comparisons made in this discussion are comparing the three months ended
March 31, 2003, to the three months ended March 31, 2002, unless otherwise
indicated.
The Company had a net income of $233,083 for the three months ending March 31,
2003, compared to net income of $106,052 for the three months ended March 31,
2002, an increase in net income of $127,031. Total revenues for the three months
ended March 31, 2003, increased $764,598 (7%) to $11,416,591, compared to total
revenues of $10,651,993 for the three months ended March 31, 2002.
PREMIUM WRITTEN before reinsurance increased $2,029,367 (20%) to $11,959,697 for
the three months ended March 31, 2003, compared to $9,930,330 for the three
months ended March 31, 2002. The Company primarily writes commercial multiple
peril business package policies. This line of business represents approximately
97% and 95% of Crusader's total written premium for the three months ended March
31, 2003 and 2002, respectively.
Crusader's written premium by state is as follows:
Three Months Ended
March 31 Increase (Decrease)
-------- ------------------
2003 2002 Amount %
---- ---- ------ -
California $11,960,669 $8,849,954 $3,110,715 35
Ohio (13,598) 283,232 (296,830) (105)
Arizona 8,789 237,580 (228,791) (96)
Pennsylvania (3,681) 175,751 (179,432) (102)
Oregon (7,841) 140,164 (148,005) (106)
Montana 18,391 122,597 (104,206) (85)
Washington (2,894) 91,415 (94,309) (103)
Texas - 13,591 (13,591) (100)
Nevada (2,049) 9,244 (11,293) (122)
Idaho 1,911 6,802 (4,891) (72)
---------- --------- --------- --
Total $11,959,697 $9,930,330 $2,029,367 20
========== ========= ========= ==
The growth in written premium in the three months ended March 31, 2003, was the
result of an increase in written premium in California. The increase in premium
in California is primarily the result of the continued subsidence in
priced-based competition in the property casualty insurance market that has
resulted in the Company's products becoming more competitive. In addition, the
Company has increased rates on some of its California products, is in the
process of filing for rate increases on some of its California products, and is
waiting for regulatory approval of rate increases on some of its products that
have already been filed with California regulatory authorities. The Company
believes that a "hard market" cycle has begun in California. Industry-wide
underwriting losses, decreases in investment yield, and increases in reinsurance
cost have all contributed to the change from the "soft market" to the "hard
market." The Company is also benefiting from the fact that some of its
competitors have gone out of business and others have recently raised rates or
adopted more restrictive rules. The Company cannot determine how long the
existing market conditions will continue, nor in which direction they might
change.
The Company's average gross written premium per policy issued is as follows:
Quarter Ended Gross Written Policies Average Gross
March 31 Premium Issued Written Premium
-------- ------- ------ ---------------
2003 $11,959,697 4,623 $2,587
2002 $9,930,330 4,415 $2,249
10
Primarily as a result of losses from liquor and premise liability coverages,
much of the Company's business outside of California has not been profitable. In
August 2002, the Company placed moratoriums on a substantial amount of
non-California business until further studies can be completed regarding
underwriting and pricing. As a result of these moratoriums, written premium
outside California was ($972) in the three months ended March 31, 2003, compared
to written premium of $1,080,376 in the three months ended March 31, 2002. The
Company has no short-term plan to expand into additional states, nor to expand
its marketing channels. Instead, the Company intends to allocate its resources
toward improving its California business rates, rules, and forms.
PREMIUM EARNED before reinsurance increased $2,171,947 (23%) to $11,424,920 for
the three months ended March 31, 2003, compared to $9,252,973 for the three
months ended March 31, 2002. The Company writes annual policies and, therefore,
earns written premium over the one-year policy term. The increase in earned
premium is a direct result of the related increase in written premium previously
discussed.
Premium ceded increased $1,802,866 (109%) to $3,464,096 for the three months
ended March 31, 2003, compared to ceded premium of $1,661,230 in the three
months ended March 31, 2002. Earned premium ceded consists of both premium ceded
under the Company's current reinsurance contracts and premium ceded to the
Company's provisionally rated reinsurance contracts. The change in premium ceded
between the quarters ended March 31, 2003, and March 31, 2002, is as follows:
Increase in ceded premium under current reinsurance contracts $ 1,971,416
(Decrease) in provisionally rated premium ceded (168,550)
---------
Net increase in ceded premium $1,802,866
=========
The increase in ceded premium for the three months ended March 31, 2003, is
primarily due to rate increases on reinsurance contracts effective January 1,
2003. The rate increases are primarily due to the Company's ceded loss
experience and to the hardening of the reinsurance marketplace and to the
increase in earned premium on which these rates are based. Premium ceded under
the provisionally rated contract, which was canceled on a runoff basis effective
December 31, 1997, is subject to adjustment based on the amount of losses ceded,
limited by a maximum percentage that can be charged by the reinsurer.
NET INVESTMENT INCOME, excluding realized investment gains, decreased $116,233
(8%) to $1,280,003 for the three months ended March 31, 2003, compared to
investment income of $1,396,236 for the three months ended March 31, 2002. The
decrease in investment income is primarily due to a lowering of yields on new
and reinvested assets.
At March 31, 2003, the Company held securities with unrealized appreciation of
$4,724,836 and securities with unrealized depreciation of $38,182. The Company
does not deem the unrealized depreciation to be significant or indicative of an
other-than-temporary decline, either individually, or in the aggregate. At
December 31, 2002, the Company held investments with unrealized appreciation of
$4,828,956 and securities with unrealized depreciation of $105,074. The
securities with unrealized depreciation at March 31, 2003, consisted of four
fixed maturity investments with a total par value of $4,015,000 and are the same
securities with unrealized depreciation as of December 31, 2002. As of both
March 31, 2003, and December 312, 2002, only one of the securities with
unrealized depreciation was rated below investment grade.
The Company continually evaluates the recoverability of its investment holdings.
When a decline in value of fixed maturities or equity securities is considered
other than temporary, a loss is recognized in the consolidated statement of
operations. During the quarter ended March 31, 2003, the Company had no
investments with a decline in market value that was considered other than
temporary. No investments were sold in the quarter ended March 31, 2003.
GROSS COMMISSION AND FEE INCOME increased $498,522 (35%) to $1,937,509 for the
three months ended March 31, 2003, compared to commission and fee income of
$1,438,987 for the three months ended March 31, 2002.
The increase in gross commission and fee income for the three months ended March
31, 2003, compared to the three months ended March 31, 2002, are as follows:
11
Three Month Ended
March 31
-------- Increase
2003 2002 (Decrease)
---- ---- --------
Policy fee income $740,082 $428,521 $311,561
Health and life insurance program commission and fee income 889,651 658,404 231,247
Other commission and fee income 133,129 106,285 26,844
Daily automobile rental insurance program:
Commission income (excluding contingent commission) 174,647 178,830 (4,183)
Contingent commission - 66,947 (66,947)
--------- --------- -------
Total $1,937,509 1,438,987 $498,522
========= ========= =======
The increase in policy fee income was primarily due to an increase in the policy
fee from $100 to $165 per policy written in California by Unifax. The increase
in health and life insurance program commission and fee income is primarily due
to an increase in premium written in the CIGNA HealthCare programs. This
increase in health and life insurance income is primarily due to both increased
marketing efforts and the fact that in November 2002 CIGNA terminated their
contract with another administrator and approximately 2,000 affected members
were transitioned into the Company's health and life insurance program effective
January 1, 2003.
Beginning in April 2003, CIGNA plans to discontinue its individual and family
health insurance programs to all policyholders in the state of California. Over
the next eighteen months, the Company's membership association and heath and
life insurance subsidiaries will assist its discontinued policyholders with the
purchase of new health coverage through other insurance carriers. These
subsidiaries have secured both commission and override commission relationships
with other carriers including Health Net and Nationwide (formerly CalFarm) and
will continue to diversify and offer a wider variety of products to its
customers. Overall, the commissions/overrides from other carriers are generally
higher than the commission structure paid by CIGNA.
LOSSES AND LOSS ADJUSTMENT EXPENSES were 84% of net premium earned for the three
months ended March 31, 2003, compared to 83% of net premium earned for the three
months ended March 31, 2002. The increase in incurred losses of prior years was
approximately $496,000 (adverse development) in the three months ended March 31,
2003, compared to an increase in incurred losses of prior years of approximately
$940,000 (adverse development) in the three months ended March 31, 2002. The
adverse development in the three months ended March 31, 2003, was primarily from
continued losses due to the impact of changes in California case law that
expanded coverage and increased loss exposure primarily on construction defect
claims for losses occurring in or prior to the Company's revision of its policy
forms in 1995.
Estimating loss reserves is a difficult process as there are many factors that
can ultimately affect the final settlement of a claim and, therefore, the
reserve that is needed. Changes in the regulatory and legal environment, results
of litigation, medical costs, the cost of repair materials and labor rates can
all impact ultimate claim costs. In addition, time can be a critical part of
reserving determinations since the longer the span between the incidence of a
loss and the payment or settlement of the claim, the more variable the ultimate
settlement amount can be. Accordingly, short-tail claims, such as property
damage claims, tend to be more reasonably predictable than long-tail liability
claims. The liability for unpaid losses and loss adjustment expenses is based
upon the accumulation of individual case estimates for losses reported prior to
the close of the accounting period plus estimates based on experience and
industry data for development of case estimates and for unreported losses and
loss adjustment expenses. Since the emergence and disposition of claims are
subject to uncertainties, the net amounts that will ultimately be paid to settle
claims may vary significantly from the estimated amounts provided for in the
accompanying consolidated financial statements. Any adjustments to reserves are
reflected in the operating results of the periods in which they are made.
Management believes that the aggregate reserves for losses and loss adjustment
expenses are reasonable and adequate to cover the cost of claims, both reported
and unreported.
POLICY ACQUISITION COSTS consist of commissions, premium taxes, inspection fees,
and certain other underwriting costs, which are related to the production of
Crusader insurance policies. These costs include both Crusader expenses and
allocated expenses of other Unico subsidiaries. Crusader's reinsurers pay
Crusader a ceding commission, which is primarily a reimbursement of the
acquisition cost related to the ceded premium. Policy acquisition costs, net of
ceding commission, are deferred and amortized as the related premiums are
earned. These costs were 22% of net premium earned for the three months ended
March 31, 2003, and 28% of net earned premium for the three months ended March
31, 2002. The decrease in policy acquisition costs is primarily the result of an
increase in the ceding commission rate paid to Crusader on the reinsurance
contract effective January 1, 2003.
12
SALARIES AND EMPLOYEE BENEFITS increased $206,189 (21%) to $1,193,410 for the
three months ended March 31, 2003, compared to salary and employee benefits of
$987,221 for the three months ended March 31, 2002. Factors that affected the
increase include the hiring of higher-level employees, general salary increases
(less than 6%), and increases in employee benefits costs.
COMMISSIONS TO AGENTS/BROKERS increased $99,969 (33%) to $402,578 for the three
months ended March 31, 2003, compared to commission expense of $302,609 for the
three months ended March 31, 2002. The increase is primarily the result of an
increase in premiums written in the health and life insurance program and
related to the increase in commission income.
OTHER OPERATING EXPENSES increased $250,598 (34%) to $996,469 for the three
months ended March 31, 2003, compared to $745,871 for the three months ended
March 31, 2002. The increase is primarily the result of increased legal expenses
of $155,000. The increase in legal fees was primarily attributable to litigation
by the Company against a former stock transfer agent for the recovery of
approximately $225,000 in damages and litigation by the Company against several
surplus lines brokers for illegal exportation of insurance. In addition to the
remedies sought by the Company in these matters, the Company is also seeking
recovery of a significant portion of the legal fees incurred in the litigation.
There is no assurance that the Company will be successful in recovering any
damages or legal fees.
INCOME TAX PROVISION was an expense of $126,997 (35% of pre-tax income) for the
three months ended March 31, 2003, compared to an income tax expense of $30,386
in the three months ended March 31, 2002. This change was primarily due to a
pre-tax income of $360,080 (including tax-exempt investment income of $35,304)
in the three months ended March 31, 2003, compared to pre-tax income of $136,438
(including tax-exempt investment income of $96,523) in the three months ended
March 31, 2002.
The effect of inflation on net income of the Company during the three months
ended March 31, 2003, and the three months ended March 31, 2002, was not
significant.
Forward Looking Statements
- --------------------------
Certain statements contained herein, including the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," that are not historical facts are forward looking. These
statements, which may be identified by forward-looking words or phrases such as
"anticipate," "believe," "expect," "intend," "may," "should," and "would,"
involve risks and uncertainties, many of which are beyond the control of the
Company. Such risks and uncertainties could cause actual results to differ
materially from these forward-looking statements. Factors which could cause
actual results to differ materially include underwriting actions not being
effective, rate increases for coverages not being sufficient, premium rate
adequacy relating to competition or regulation, actual versus estimated claim
experience, regulatory changes or developments, unforeseen calamities, general
market conditions, the Company's ability to introduce new profitable products,
and the Company's ability to expand geographically.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company's consolidated balance sheet includes a substantial amount of
invested assets whose fair values are subject to various market risk exposures
including interest rate risk and equity price risk.
The Company's invested assets consist of the following:
March 31 December 31 Increase
2003 2002 (Decrease)
---- ---- --------
Fixed maturity bonds (at amortized value) $90,646,642 $93,249,468 $(2,602,826)
Short-term cash investments (at cost) 16,053,753 9,024,382 7,029,371
Certificates of deposit (over 1 year, at cost) 400,000 400,000 -
----------- ----------- ---------
Total invested assets $107,100,395 $102,673,850 $4,426,545
=========== =========== =========
There have been no material changes in the composition of the Company's invested
assets or market risk exposures since the end of the preceding fiscal year end.
13
ITEM 4 - CONTROLS AND PROCEDURES
- --------------------------------
Within the 90-day period prior to the filing of this report, an evaluation was
carried out by the Company's management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-14(c)
under the Securities Exchange Act of 1934). Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the design
and operation of these disclosure controls and procedures were effective. No
significant changes were made in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
PART II - OTHER INFORMATION
- ---------------------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
99.1 Certification of Chief Executive Officer under Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
None.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNICO AMERICAN CORPORATION
Date: May 13, 2003 By: /s/ ERWIN CHELDIN
----------------------
Erwin Cheldin
Chairman of the Board, President and Chief
Executive Officer, (Principal Executive Officer)
Date: May 13, 2003 By: /s/ LESTER A. AARON
------------------------
Lester A. Aaron
Treasurer, Chief Financial Officer, (Principal
Accounting and Principal Financial Officer)
14
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Erwin Cheldin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Unico American
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003.
/s/ Erwin Cheldin
- ------------------
Erwin Cheldin
Chairman of the Board, President and Chief Executive Officer
15
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Lester A. Aaron, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Unico American
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003.
/s/ Lester A. Aaron
- --------------------
Lester A. Aaron
Treasurer, Chief Financial Officer
16
EXHIBIT INDEX
Exhibit No. Description
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)