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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the quarterly period ended March 31, 2005 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
--- ---
5,496,315
Number of shares of common stock outstanding as of May 10, 2005
1
PART 1 - FINANCIAL INFORMATION
------------------------------
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31 December 31
2005 2004
---- ----
ASSETS
- ------
Investments
Available for sale:
Fixed maturities, at market value (amortized cost: March 31,
2005 $133,930,281; December 31, 2004 $128,989,658) $133,541,399 $129,559,615
Short-term investments, at cost 3,194,066 3,118,118
----------- -----------
Total Investments 136,735,465 132,677,733
Cash 21,500 15,016
Accrued investment income 1,068,551 1,047,278
Premiums and notes receivable, net 6,952,575 7,770,560
Reinsurance recoverable:
Paid losses and loss adjustment expenses 363,178 18,512
Unpaid losses and loss adjustment expenses 21,024,435 20,119,011
Deferred policy acquisition costs 7,741,435 8,203,238
Property and equipment (net of accumulated depreciation) 283,836 278,404
Deferred income taxes 1,779,996 1,667,195
Other assets 805,706 773,329
----------- -----------
Total Assets $176,776,677 $172,570,276
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
- -----------
Unpaid losses and loss adjustment expenses $90,962,233 $87,469,000
Unearned premiums 33,090,324 35,656,393
Advance premium and premium deposits 928,793 1,067,224
Income taxes payable 590,494 227,551
Notes payable-related parties 250,000 500,000
Accrued expenses and other liabilities 7,644,722 5,224,783
----------- -----------
Total Liabilities $133,464,566 $130,144,951
----------- -----------
STOCKHOLDERS' EQUITY
- --------------------
Common stock, no par - authorized 10,000,000 shares; issued and outstanding
shares 5,496,315 at March 31, 2005, and 5,492,315 at December 31, 2004 $2,720,487 $2,708,047
Accumulated other comprehensive income (256,662) 376,172
Retained earnings 40,846,286 39,341,106
---------- ----------
Total Stockholders' Equity $43,310,111 $42,425,325
---------- ----------
Total Liabilities and Stockholders' Equity $176,776,677 $172,570,276
=========== ===========
See notes to unaudited consolidated financial statements.
2
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31
--------
2005 2004
---- ----
REVENUES
- --------
Insurance Company Revenues
Premium earned $16,675,645 $16,474,958
Premium ceded 3,849,687 3,888,639
---------- ----------
Net premium earned 12,825,958 12,586,319
Net investment income 1,035,847 1,091,591
Other income 25,824 30,291
---------- ----------
Total Insurance Company Revenues 13,887,629 13,708,201
Other Revenues from Insurance Operations
Gross commissions and fees 1,373,325 1,710,597
Investment income 13,421 9,827
Finance charges and fees earned 203,042 246,965
Other income 3,697 4,601
---------- ----------
Total Revenues 15,481,114 15,680,191
---------- ----------
EXPENSES
- --------
Losses and loss adjustment expenses 8,372,112 8,956,987
Policy acquisition costs 2,605,672 2,478,410
Salaries and employee benefits 1,287,357 1,216,119
Commissions to agents/brokers 185,040 271,123
Other operating expenses 674,606 789,108
---------- ----------
Total Expenses 13,124,787 13,711,747
---------- ----------
Income Before Taxes 2,356,327 1,968,444
Income Tax Provision 851,147 710,447
--------- ---------
Net Income $1,505,180 $1,257,997
========= =========
PER SHARE DATA
- --------------
Basic Shares Outstanding 5,494,847 5,489,815
Basic Earnings Per Share $0.27 $0.23
Diluted Shares Outstanding 5,615,644 5,577,686
Diluted Earnings Per Share $0.27 $0.23
See notes to unaudited consolidated financial statements.
3
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended
March 31
--------
2005 2004
---- ----
Net Income $1,505,180 $1,257,997
Other changes in comprehensive income, net of tax:
Unrealized gains (losses) on securities
classified as available-for-sale
arising during the period (632,834) 141,252
------- ---------
Comprehensive Income $872,346 $1,399,249
======= =========
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,
2005 2004
---- ----
Cash Flows from Operating Activities:
Net Income $1,505,180 $1,257,997
Adjustments to reconcile net income to net cash from operations
Depreciation 23,877 23,139
Bond amortization, net 47,540 81,500
Changes in assets and liabilities
Premium, notes and investment income receivable 796,712 (214,070)
Reinsurance recoverable (1,250,090) (2,722,135)
Prepaid reinsurance premiums - 11,224
Deferred policy acquisitions costs 461,803 41,975
Other assets (32,377) 546,837
Reserve for unpaid losses and loss adjustment expenses 3,493,233 3,297,428
Unearned premium reserve (2,566,069) (324,907)
Funds held as security and advanced premiums (138,431) (61,542)
Accrued expenses and other liabilities 2,419,939 (1,013,578)
Income taxes current/deferred 576,147 315,446
--------- ---------
Net Cash Provided from Operations 5,337,464 1,239,314
--------- ---------
Investing Activities
Purchase of fixed maturity investments (7,488,163) (20,987,800)
Proceeds from maturity of fixed maturity investments 2,500,000 16,470,000
Net (increase) decrease in short-term investments (75,948) 3,315,278
Additions to property and equipment (29,309) (30,290)
--------- ---------
Net Cash (Used) by Investing Activities (5,093,420) (1,232,812)
--------- ---------
Financing Activities
Proceeds from issuance of common stock 12,440 -
Repayment of notes payable - related parties (250,000) -
-------
Net Cash (Used) by Financing Activities (237,560) -
-------
Net increase in cash 6,484 6,502
Cash at beginning of period 15,016 37,988
------ ------
Cash at End of Period $21,500 $44,490
====== ======
Supplemental Cash Flow Information Cash paid during the period for:
Interest $5,000 $14,087
Income taxes $275,000 $395,000
See notes to unaudited consolidated financial statements.
5
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
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 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, 2005, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005. Quarterly financial statements should be read in conjunction
with the consolidated financial statements and related notes in the Company's
2004 Annual Report on Form 10-K as filed with the Securities and Exchange
Commission.
NOTE 2 - OMNIBUS STOCK PLAN
- ---------------------------
The Company's 1999 Omnibus Stock Plan that covers 500,000 shares of the
Company's common stock (subject to adjustment in the case of stock splits,
reverse stock splits, stock dividends, etc.) was approved by shareholders June
4, 1999. On August 26, 1999, the Company granted 135,000 incentive stock options
of which 40,000 were terminated and 95,000 were outstanding and exercisable as
of March 31, 2005. These options expire 10 years from the date of the grant.
On December 18, 2002, the Company granted an additional 182,000 incentive stock
options under the Company's 1999 Omnibus Stock Plan of which 6,500 options were
exercised, 2,500 options were terminated and 173,000 were outstanding as of
March 31, 2005. These options expire 10 years from the date of the grant. These
options become exercisable as follows:
Currently Exercisable 105,500
January 1, 2006 37,500
January 1, 2007 30,000
-------
Total 173,000
=======
The Company applies the intrinsic-value based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations including FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB Opinion No. 25, to account for its fixed-plan stock
options. Under this method, compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. FASB Statement No. 123, "Accounting for Stock-Based
Compensation," and FASB Statement No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure," an amendment of FASB Statement No.
123, established accounting and disclosure requirements using a fair-value based
method of accounting for stock-based employee compensation plans. As permitted
by existing accounting standards, the Company has elected to continue to apply
the intrinsic-value based method of accounting described above and has adopted
only the disclosure requirements of Statement 123, as amended.
6
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
NOTE 2 - OMNIBUS STOCK PLAN (continued)
- --------------------------------------
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:
Three Months Ended
March 31
--------
2005 2004
---- ----
Net income
As reported $1,505,180 $1,257,997
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 7,432 11,396
--------- -----------
Pro forma $1,497,748 $1,246,601
========= =========
Income per share
As reported $0.27 $0.23
Pro forma $0.27 $0.23
Income per share - assuming dilution:
As reported $0.27 $0.23
Pro forma $0.27 $0.22
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, 2005, the Company did not repurchase any shares of the Company's
common stock. As of March 31, 2005, 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, 2005 and 2004:
Three Months Ended
March 31
2005 2004
---- ----
Basic Earnings Per Share
- ------------------------
Net income numerator $1,505,180 $1,257,997
========= =========
Weighted average shares outstanding denominator 5,494,847 5,489,815
========= =========
Basic Earnings Per Share $0.27 $0.23
7
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
NOTE 4 - EARNINGS PER SHARE (continued)
- --------------------------------------
Diluted Earnings Per Share
- --------------------------
Net income numerator $1,505,180 $1,257,997
========= =========
Weighted average shares outstanding 5,494,847 5,489,815
Effect of diluted securities 120,797 87,871
--------- ---------
Diluted shares outstanding denominator 5,615,644 5,577,686
========= =========
Diluted Earnings Per Share $0.27 $0.23
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 90% of
consolidated revenues for the three months ended March 31, 2005, and 87% of
revenues for the three months ended March 31, 2004. 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
--------
2005 2004
---- ----
Revenues
- --------
Insurance company operation $13,887,629 $13,708,201
Other insurance operations 5,462,244 6,404,849
Intersegment elimination (1) (3,868,759) (4,432,859)
--------- ---------
Total other insurance operations 1,593,485 1,971,990
---------- ----------
Total Revenues $15,481,114 $15,680,191
========== ==========
Income Before Income Taxes
- --------------------------
Insurance company operation $2,398,193 $1,330,058
Other insurance operations (41,866) 638,386
--------- ---------
Total Income Before Income Taxes $2,356,327 $1,968,444
========= =========
As of March 31
--------------
2005 2004
---- ----
Assets
- -----
Insurance company operation $157,219,525 $143,961,736
Intersegment eliminations (2) (1,770,109) (3,129,884)
----------- -----------
Total insurance company operation 155,099,416 140,831,852
Other insurance operations 21,327,261 23,842,041
----------- -----------
Total Assets $176,776,677 $164,673,893
=========== ===========
(1) Intersegment revenue eliminations reflect commission paid by Crusader to
Unifax Insurance Systems, Inc., (Unifax) a wholly owned subsidiary of the
Company.
(2) Intersegment asset eliminations reflect the elimination of Crusader
receivables and Unifax payables.
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
OVERVIEW
- --------
General
- -------
Unico American Corporation is an insurance holding company that underwrites
property and casualty insurance through its insurance company subsidiary;
provides property, casualty, health and life insurance through its agency
subsidiaries; and through its other subsidiaries provides insurance premium
financing and membership association services.
The Company had a net income of $1,505,180 for the three months ending March 31,
2005, compared to net income of $1,257,997 for the three months ended March 31,
2004, an increase in net income of $247,183.
This overview discusses some of the relevant factors that management considers
in evaluating the Company's performance, prospects and risks. It is not
all-inclusive and is meant to be read in conjunction with the entirety of the
management discussion and analysis, the Company's financial statements and notes
thereto and all other items contained within the report on this Form 10-Q.
Revenue and Income Generation
- -----------------------------
The Company receives its revenue primarily from earned premium derived from the
insurance company operations, commission and fee income generated from the
insurance agency operations, finance charges and fee income from the premium
finance operations, and investment income from cash generated primarily from the
insurance operation. The insurance company operation generates approximately 90%
of the Company's total revenue. The Company's remaining operations constitute a
variety of specialty insurance services, each with unique characteristics and
individually not material to consolidated revenues.
Insurance Company Operation
- ---------------------------
The property and casualty insurance industry is highly competitive and includes
many insurers, ranging from large companies offering a wide variety of products
worldwide to smaller, specialized companies in a single state or region offering
only a single product. Many of the Company's existing or potential competitors
have considerably greater financial and other resources, have a higher rating
assigned by independent rating organizations such as A.M. Best Company, have
greater experience in the insurance industry and offer a broader line of
insurance products than the Company. Currently, Crusader is writing primarily
Commercial Multiple Peril business only in the state of California and is rated
B+ (Very Good) by A.M. Best Company.
A primary challenge of the property and casualty insurance company operation is
contending with the fact that the Company sells its products before the ultimate
costs are actually known. When pricing its products, the Company projects the
ultimate claim and loss adjustment cost that it anticipates will be incurred
after the policy is sold. In addition, factors such as changes in, among other
things, regulations, the legal environment, and inflation can all impact the
ultimate cost.
The Company's future writings growth is dependent on market conditions,
competition, and the Company's ability to introduce new and profitable products.
The Company believes that the "hard market" condition experienced by the Company
in the last few years no longer exists. The Company believes that rate adequacy
is more important than premium growth and that underwriting profit is the
Company's primary goal. Management's assessment of trends and underwriting
results is a primary factor in its decisions to expand or contract its business.
The Company has no plan to expand into additional states or to expand its
marketing channels. Instead, the Company intends to allocate its resources
toward improving its California business rates, rules, and forms.
As a result of underwriting losses, in 2000 through 2002, management analyzed
and acted upon various components of its underwriting activity. The Company
believes that the implementation of these actions contributed to the improved
underwriting results.
9
Crusader's underwriting results are as follows:
Three Months Ended Three Months Ended Increase
March 31, 2005 March 31, 2004 (Decrease)
-------------- -------------- --------
Net premium earned $12,825,958 $12,586,319 $239,639
Less:
Losses and loss adjustment expenses 8,372,112 8,956,987 (584,875)
Policy acquisition costs 2,605,672 2,478,410 127,262
---------- ---------- -------
Total 10,977,784 11,435,397 (457,613)
---------- ---------- -------
Underwriting profit (before income taxes) $1,848,174 $1,150,922 $697,252
========= ========= =======
Premium written before reinsurance decreased $2,040,494 (13%) to $14,109,556 for
the three months ended March 31, 2005, compared to $16,150,050 for the three
months ended March 31, 2004. Policies issued also decreased to 4,695 for the
three months ended March 31, 2005, compared to 5,142 for the three months ended
March 31, 2004. The decrease in written premium and policies issued in the three
months ended March 31, 2005, compared to the three months ended March 31, 2004,
was primarily the result of the change in the current market conditions from a
"hard market " to a "soft market."
Other Operations
- ----------------
The Company's other operations generate commissions, fees, and finance charges
from various insurance products. The events that have the most significant
economic impact on other operations are as follows:
Unifax primarily sells and services insurance policies for Crusader. The
commissions paid by Crusader to Unifax are eliminated as intercompany
transactions and are not reflected as income in the financial statements. Unifax
also receives policy fee income that is directly related to the Crusader
policies it sells. As a result of the decrease in Crusader policies sold by
Unifax, policy fee income decreased $102,925 (13%) in the three months ended
March 31, 2005, compared to the three months ended March 31, 2004.
American Insurance Brokers, Inc. (AIB) sells and services health insurance
policies for individual/family and small business groups and receives commission
and fee income based on the premiums that it writes. Commission income in this
program decreased $213,342 (34%) in the three months ended March 31, 2005;
compared to the three months ended March 31, 2004. The decrease is primarily a
result of CIGNA HealthCare's (CIGNA) decision to discontinue its
individual/family health insurance program over the period from November 1,
2003, through October 1, 2004. AIB had been assisting former CIGNA policyholders
to find health coverage with other insurance carriers that AIB represents.
Investments and Liquidity
- -------------------------
The Company generates revenue from its investment portfolio, which consisted of
approximately $133.9 million (at amortized cost) at March 31, 2005, compared to
$129.0 million (at amortized cost) at December 31, 2004. Although the portfolio
slightly increased in 2005, investment income decreased $52,150. Although
investment yield have been rising, the decrease in investment income is
primarily the result of a decline over the last five years in yields in the
marketplace and a shorter weighted average maturity of the Company's portfolio.
Due to the current interest rate environment, management believes it is prudent
to purchase fixed maturity investments with approximately two-year maturities
and with minimal credit risk.
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,
2005, the Company had cash and investments of $137,145,847 (at amortized cost)
of which $134,881,803 (98%) were investments of Crusader.
10
As of the quarter ended March 31, 2005, the Company had invested $133,930,281
(at amortized cost) or 98% 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 $133,930,281 (at
amortized cost) include $961,514(0.7%) of pre-refunded state and municipal
tax-exempt bonds, $85,269,032 (63.7%) of U.S. treasury securities, $11,999,143
(8.9%) of U.S. government sponsored enterprise securities, $35,200,592 (26.3%)
of industrial and miscellaneous securities, and $500,000 (0.4%) of long-term
certificates of deposit. The tax-exempt interest income earned for the three
months ended March 31, 2005 and 2004 was $3,724 and $17,087, 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 in any one U.S.
government agency or U.S. government sponsored enterprise is $3,000,000. This
dollar limitation excludes bond premiums paid in excess of par value and U.S.
government or U.S. government guaranteed issues. All investments in municipal
securities are pre-refunded and secured by U.S. treasury securities. The
short-term investments are either U.S. government obligations, FDIC insured, or
are in an institution with a Moody's rating of P2 and/or a Standard & Poor's
rating of A1. All of the Company's fixed maturity investment securities are
rated and readily marketable and could be liquidated without any materially
adverse financial impact.
On September 29, 2003, the Company borrowed $1,000,000 from Erwin Cheldin, a
director and the Company's principal shareholder, president and chief executive
officer. As of December 31, 2004, the Company repaid $500,000 of the Erwin
Cheldin note and on January 31, 2005, the Company repaid an additional $250,000.
The note from Erwin Cheldin is unsecured and it is payable upon demand of lender
(on no less than fourteen days' notice) and, if no demand is made, then it is
payable in full on September 28, 2007. The note may be prepaid at any time
without penalty. The note bears an adjustable interest of 6.0% as of March 31,
2005. The interest is payable monthly and is adjustable every third month by
adding a margin of one percentage point to the prime rate. On April 29, 2005,
the Company repaid the remaining $250,000.
The Company anticipates incurring approximately $600,000 of capital expenditures
in 2005 for computer hardware and software related to its conversion to a
"paperless office." The Company expects this project to be completed in 2005.
The Company's analysis of its potential return on this capital expenditure is
estimated to be approximately two years due to anticipated productivity
improvements and lower operating costs.
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, 2005.
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 $825,025, statutory deposits of
$700,000, cash of $200,000 deposited with superior courts in lieu of bonds, and
the dividend restriction between Crusader and Unico plus the cash to be
generated from operations, should be sufficient to meet its operating
requirements during the next twelve months without the necessity of borrowing
funds.
RESUTLS OF OPERATIONS
- ---------------------
All comparisons made in this discussion are comparing the three months ended
March 31, 2005, to the three months ended March 31, 2004, unless otherwise
indicated.
The Company had net income of $1,505,180 for the three months ending March 31,
2005, compared to net income of $1,257,997 for the three months ended March 31,
2004, an increase in net income of $247,183 (20%). Total revenue for the three
months ended March 31, 2005, decreased $199,077 (1%) to $15,481,114, compared to
total revenue of $15,680,191 for the three months ended March 31, 2004.
11
Premium written before reinsurance decreased $2,040,494 (13%) to $14,109,556 for
the three months ended March 31, 2005, compared to $16,150,050 for the three
months ended March 31, 2004. The Company primarily writes commercial multiple
peril business package policies in California. This line of business represents
approximately 98% of Crusader's total written premium for the three months ended
March 31, 2005 and 2004, respectively.
The $2,040,494 decrease in written premium in the three months ended March 31,
2005, compared to the three months ended March 31, 2004, was primarily the
result of the change in the current market conditions from a "hard market " to a
"soft market." A decrease in the Industry-wide underwriting losses, an increase
in investment yield, and decreases in reinsurance cost have all contributed to
the change from the "hard market" that existed in California in the past few
years to a "soft market." The Company cannot determine how long the existing
market conditions will continue, nor in which direction they might change. The
Company's future writings and growth are dependent on market conditions,
competition, and the Company's ability to introduce new and profitable products.
The Company's average gross written premium per policy issued is as follows:
Gross
Quarter Ended Written Policies Average Gross
March 31 Premium Issued Written Premium
-------- ------- ------ ---------------
2005 $14,109,556 4,695 $3,005
2004 $16,150,050 5,142 $3,141
Beginning July 1, 2003, the Company had placed moratoriums on all non-California
business, primarily due to the fact that much of the Company's business outside
of California has not been profitable. The Company has no current plan to
expand into additional states or to expand its marketing channels. Instead, the
Company intends to allocate its resources toward improving its California
business rates, rules, and forms. The Company continues to believe that it can
compete effectively and profitably by offering better service and by marketing
its policies through its current independent agents and brokers.
PREMIUM EARNED before reinsurance increased $200,687 (1%) to $16,675,645 for the
three months ended March 31, 2005, compared to $16,474,958 for the three months
ended March 31, 2004. The Company writes annual policies and, therefore, earns
written premium over the one-year policy term. The slight increase in direct
earned premium, in spite of the 13% decrease in direct written premium, is a
direct result of the increase in direct premium written during 2004 over 2003.
Premium ceded decreased $38,952 (1%) to $3,849,687 for the three months ended
March 31, 2005, compared to ceded premium of $3,888,639 in the three months
ended March 31, 2004. 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. Prior to January 1, 1998, the
Company's reinsurer charged a provisional rate on exposures up to $500,000 that
was subject to adjustment and was based on the amount of losses ceded, limited
by a maximum percentage that could be charged. That provisionally rated treaty
was cancelled on a runoff basis in 1997. Direct earned premium, earned ceded
premium, and ceding commission are as follows:
Three Months Ended
March 31
--------
Increase
2005 2004 (Decrease)
---- ---- --------
Direct earned premium $16,675,645 $16,474,958 $200,687
Earned ceded premium
Excluding provisionally rated ceded premium 3,650,109 4,196,062 (545,953)
Provisionally rated ceded premium 199,578 (307,423) 507,001
--------- --------- -------
Total earned ceded premium 3,849,687 3,888,639 (38,952)
Ceding commission 1,198,403 1,463,636 (265,233)
--------- --------- -------
Earned ceded premium, net of ceding commission $2,651,284 $2,425,003 $226,281
========= ========= =======
The decrease in earned ceded premium (excluding provisionally rated ceded
premium) for the three months ended March 31, 2005, is primarily related to the
decrease in the reinsurance rate charged by the Company's reinsurers.
In 2005 and 2004 Crusader retained a participation in its excess of loss
reinsurance treaties of 10% in its 1st layer ($750,000 in excess of $250,000),
10% in its 2nd layer ($1,000,000 in excess of $1,000,000), and 30% in its
property clash treaty.
12
Beginning January 1, 2005, Crusader increased its retention from $250,000 to
$300,000 per risk. There has been no change in the annual aggregate deductible
or participation rates compared to 2004. The 2005 1st layer primary excess of
loss treaty does not provide for a contingent commission.
Crusader's 2004 and 2003 1st layer primary excess of loss treaty provides for a
contingent commission equal to 45% of the net profit, if any, accruing to the
reinsurer. The first accounting period for the contingent commission is December
31, 2005. Based on losses and loss adjustment expenses ceded (including incurred
but not reported losses) as of March 31, 2005, no contingent commission has been
accrued.
NET INVESTMENT INCOME, excluding realized investment gains, decreased $52,150
(5%) to $1,049,268 for the three months ended March 31, 2005, compared to
investment income of $1,101,418 for the three months ended March 31, 2004. The
decrease in investment income is primarily the result of a decline in the
average return on reinvested assets in the Company's investment portfolio. Also
contributing to the decline in average return is a shorter weighted average
maturity of new and reinvested assets. Due to the current interest rate
environment, management believes it is prudent to purchase fixed maturity
investments with approximately two-year maturities and with minimal credit risk.
At March 31, 2005, the Company held fixed maturity investments with unrealized
appreciation of $677,726 and fixed maturity investments with unrealized
depreciation of $1,066,608. The Company monitors its investments closely. If an
unrealized loss is determined to be other than temporary, it is written off as a
realized loss through the Consolidated Statements of Operations. The Company's
methodology of assessing other-than-temporary impairments is based on
security-specific analysis as of the balance sheet date and considers various
factors including the length of time and the extent to which the fair value has
been less than the cost, the financial condition and the near term prospects of
the issuer, whether the debtor is current on its contractually obligated
interest and principal payments, and the Company's intent to hold the investment
for a period of time sufficient to allow the Company to recover its costs. The
Company has concluded that the gross unrealized losses of $1,066,608 at March
31, 2005, were temporary in nature. However, facts and circumstances may change
which could result in a decline in market value considered to be other than
temporary. The following table summarizes, for all fixed maturities in an
unrealized loss position at March 31, 2005, the aggregate fair value and gross
unrealized loss by length of time those fixed maturities have been continuously
in an unrealized loss position:
Gross
Fair Value Unrealized Loss
---------- ---------------
0-6 months $32,528,497 $315,912
7-12 months 56,474,085 597,571
Over 12 months 8,807,414 153,125
---------- ---------
Total $97,809,996 $1,066,608
========== =========
As of March 31, 2005, the fixed maturity investments with a gross unrealized
loss for a continuous period of 0 to 6 months consisted of U.S. treasury
securities and industrial securities. The fixed maturity investments with a
gross unrealized loss position for a continuous period of 7 to 12 months
consisted of U.S. treasury securities and U.S. government sponsored enterprise
securities. The fixed maturity investments with a gross unrealized loss position
for a continuous period over 12 months consisted of U.S. treasury securities,
U.S. government sponsored enterprise securities and pre-refunded state bonds.
GROSS COMMISSION AND FEE INCOME decreased $337,272 (20%) to $1,373,325 for the
three months ended March 31, 2005, compared to commission and fee income of
$1,710,597 for the three months ended March 31, 2004.
13
The decrease in gross commission and fee income for the three months ended March
31, 2005, compared to the three months ended March 31, 2004, are as follows:
Three Months Ended
March 31
--------
Increase
2005 2004 (Decrease)
---- ---- --------
Policy fee income $738,021 $840,946 $(102,925)
Health and life insurance program commission and fee income 416,174 629,516 (213,342)
Other commission and fee income 98,254 98,536 (282)
Daily automobile rental insurance program:
Commission income (excluding contingent commission) 120,876 132,111 (11,235)
Contingent commission - 9,488 (9,488)
--------- --------- -------
Total $1,373,325 $1,710,597 $(337,272)
========= ========= =======
The decrease in policy fee income is a result of a decrease in the number of
policies issued during the three months ended March 31, 2005, as compared to the
three months ended March 31, 2004. The Company has increased its policy fee
approximately 8% for policies effective on or after June 26, 2005. The effect of
this increase should be recognized beginning in the quarter ending September 30,
2005.
Commission and fee income in the health and life program decreased 34% in the
three months ended March 31, 2005, compared to the three months ended March 31,
2004. The decrease is a result of CIGNA's decision to discontinue its
individual/family health insurance program over the period from November 1,
2003, through October 1, 2004. AIB had been assisting former CIGNA policyholders
to find health coverage with other insurance carriers that AIB represents.
LOSSES AND LOSS ADJUSTMENT EXPENSES were 65% of net premium earned for the three
months ended March 31, 2005, compared to 71% of net premium earned for the three
months ended March 31, 2004. In the quarter ended March 31, 2005, current year
losses incurred were 71% of net premium earned and the Company incurred
favorable development of prior years' losses of approximately $739,000. In the
quarter ended March 31, 2004, current year losses incurred were 71% of net
earned premium and the Company incurred favorable development of prior years'
losses of approximately $10,000.
As a result of Crusader underwriting losses that began in year ended December
31, 2000, Crusader's management has been analyzing and acting upon various
components of its underwriting activity. These components include the following:
1. Business Outside of California
2. Habitability Exposure
3. Construction Defect Exposure
4. Special Risk Class of Business
5. Increased Cost of Settling Claims, Indemnity and Expense
6. Increased Cost of Reinsurance
7. Mold Exposure
8. Terrorism Exposure
Crusader believes that implementation of management's actions on the
underwriting components discussed above have contributed to improved operating
results.
The Company`s consolidated financial statements include estimated reserves for
unpaid losses and related claim settlement or loss adjustment expenses of the
insurance company operation. Crusader sets loss and loss adjustment expense
reserves at each balance sheet date as management's best estimate of the
ultimate payments that it anticipates will be made to settle all losses incurred
and related expenses incurred as of that date for both reported and unreported
losses. Estimating loss reserves is a difficult process as there are many
factors that can ultimately affect the final settlement of a claim and,
therefore, the reserve that is needed. Changes in the regulatory and legal
environment, results of litigation, medical costs, the cost of repair materials
and labor rates can all impact ultimate claim costs. In addition, time can be a
critical part of reserving determinations since the longer the span between the
incidence of a loss and the payment or settlement of the claim, the more
variable the ultimate settlement amount can be. Accordingly, short-tail claims,
such as property damage claims, tend to be more reasonably predictable than
long-tail liability claims. The liability for unpaid losses and loss adjustment
expenses is based upon the accumulation of individual case estimates for losses
reported prior to the close of the accounting period plus estimates based on
experience and industry data for development of case estimates and for
unreported losses and loss adjustment expenses. Since the emergence and
disposition of claims are subject
14
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. The
Company 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 approximately 20% of net premium earned for the three
months ended March 31, 2005 and 2004.
SALARIES AND EMPLOYEE BENEFITS increased $71,238 (6%) to $1,287,357 for the
three months ended March 31, 2005, compared to salary and employee benefits of
$1,216,119 for the three months ended March 31, 2004.
COMMISSION TO AGENTS/BROKERS decreased $86,083 (32%) to $185,040 for the three
months ended March 31, 2005, compared to commission expense of $271,123 for the
three months ended March 31, 2004. The decrease is primarily the result of a
decrease in premiums written in the health and life insurance program and is
related to the decrease in the health and life insurance program commission
income.
OTHER OPERATING EXPENSES decreased $114,502 (15%) to $674,606 for the three
months ended March 31, 2005, compared to $789,108 for the three months ended
March 31, 2004. The decrease in other operating expenses is primarily due to a
decrease of approximately $93,000 in legal expenses.
INCOME TAX PROVISION was an expense of $851,147 (36% of pre-tax income) for the
three months ended March 31, 2005, compared to an income tax expense of $710,447
in the three months ended March 31, 2004 (36% of pre-tax income). The increase
in tax expense was primarily due to a pre-tax income of $2,356,326 (including
tax-exempt investment income of $3,724) in the three months ended March 31,
2005, compared to pre-tax income of $1,968,444 (including tax-exempt investment
income of $17,087) in the three months ended March 31, 2004.
The effect of inflation on net income of the Company during the three months
ended March 31, 2005, and the three months ended March 31, 2004, 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
2005 2004 Increase
---- ---- --------
Fixed maturity bonds (at amortized value) $133,430,281 $128,489,658 $4,940,623
Short-term cash investments (at cost) 3,194,066 3,118,118 75,948
Certificates of deposit (over 1 year, at cost) 500,000 500,000 -
----------- ----------- ---------
Total invested assets $137,124,347 $132,107,776 $5,016,571
=========== =========== =========
15
There have been no material changes in the composition of the Company's invested
assets or market risk exposures since the end of the preceding fiscal year
end.
ITEM 4 - CONTROLS AND PROCEDURES
- --------------------------------
An evaluation was carried out by the Company's management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
March 31, 2005 (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities
Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the design and operation of these
disclosure controls and procedures were effective.
During the period covered by this report, there have been no changes in the
Company's internal control over financial reporting that have materially
affected or are reasonably likely to materially affect the Company's internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS
- -----------------
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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 11, 2005 By: /s/ ERWIN CHELDIN
-----------------
Chairman of the Board, President and Chief
Executive Officer, (Principal Executive Officer)
Date: May 11, 2005 By: /s/ LESTER A.AARON
------------------
Lester A. Aaron
Treasurer, Chief Financial Officer, (Principal
Accounting and Principal Financial Officer)
16
EXHIBIT INDEX
- -------------
Exhibit No. Description
- ---------- -----------
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)