SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period from April 1, 2001 to June 30, 2001
Commission File No. 0-3978
UNICO AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 95-2583928
(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification No.)
23251 Mulholland Drive, Woodland Hills, California 91364
(Address of Principal Executive Offices) (Zip Code)
(818) 591-9800
Registrant's telephone number
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of each class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
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
5,453,219
Number of shares of common stock outstanding as of August 10, 2001
1
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30 December 31
2001 2000
---- ----
ASSETS
- ------
Investments
Available for sale:
Fixed maturities, at market value (amortized cost: June 30,
2001 $91,867,642; December 31, 2000 $94,798,077) $93,204,140 $94,982,630
Equity securities at market (cost: June 30, 2001
$2,400; December 31, 2000 $25,920) 2,400 25,920
Short-term investments, at cost 3,125,120 3,355,354
---------- ----------
Total Investments 96,331,660 98,363,904
Cash 115,399 54,806
Accrued investment income 1,772,075 1,908,547
Premiums and notes receivable, net 6,235,577 5,807,731
Reinsurance recoverable:
Paid losses and loss adjustment expenses 972,141 393,198
Unpaid losses and loss adjustment expenses 10,464,858 10,671,343
Prepaid reinsurance premiums 62,323 29,531
Deferred policy acquisition costs 4,813,375 4,500,147
Property and equipment (net of accumulated depreciation) 258,028 114,107
Deferred income taxes 431,726 948,442
Other assets 1,917,326 1,154,064
----------- -----------
Total Assets $123,374,488 $123,945,820
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
- -----------
Unpaid losses and loss adjustment expenses $45,614,076 $45,217,369
Unearned premiums 18,601,164 17,099,927
Advance premium and premium deposits 2,381,993 2,316,016
Income taxes payable 4,123 -
Accrued expenses and other liabilities 7,299,959 7,899,179
---------- ----------
Total Liabilities $73,901,315 $72,532,491
---------- ----------
STOCKHOLDERS' EQUITY
- ---------------------
Common stock, no par - authorized 10,000,000 shares; issued and outstanding
shares 5,453,219 at June 30, 2001, and 5,692,699 at December 31, 2000 $ 2,671,750 $ 2,789,494
Accumulated other comprehensive income 882,089 121,805
Retained earnings 45,919,334 48,502,030
---------- ----------
Total Stockholders' Equity $49,473,173 $51,413,329
---------- ----------
Total Liabilities and Stockholders' Equity $123,374,488 $123,945,820
=========== ===========
See notes to unaudited consolidated financial statements.
2
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
2001 2000 2001 2000
---- ---- ---- ----
REVENUES
- --------
Insurance Company Revenues
Premium earned $8,680,327 $8,093,893 $16,989,613 $16,210,445
Premium ceded 1,093,666 1,614,606 2,770,489 2,954,112
--------- --------- ---------- ----------
Net premium earned 7,586,661 6,479,287 14,219,124 13,256,333
Net investment income 1,391,162 1,411,869 2,800,178 2,843,359
Net realized investment (losses) - - (23,520) -
Other income 11,733 4,613 14,753 9,648
--------- --------- ---------- ----------
Total Insurance Company Revenues 8,989,556 7,895,769 17,010,535 16,109,340
Other Revenues from Insurance Operations
Gross commissions and fees 1,388,032 1,469,708 2,748,799 2,884,060
Investment income 40,303 102,688 98,621 195,355
Net realized investment gains 3,212 - 3,212 -
Finance charges and late fees earned 216,414 208,898 421,207 416,032
Other income 3,470 3,057 6,481 4,619
---------- --------- ---------- ----------
Total Revenues 10,640,987 9,680,120 20,288,855 19,609,406
========== ========= ========== ==========
EXPENSES
- --------
Losses and loss adjustment expenses 8,210,872 4,739,888 13,676,767 9,690,427
Policy acquisition costs 2,138,850 2,003,216 4,167,089 4,106,567
Salaries and employee benefits 1,116,585 1,098,302 2,230,290 2,179,863
Commissions to agents/brokers 316,810 323,667 639,817 656,795
Other operating expenses 593,286 706,577 1,322,143 1,338,969
---------- --------- ---------- ----------
Total Expenses 12,376,403 8,871,650 22,036,106 17,972,621
---------- --------- ---------- ----------
Income (Loss) Before Taxes (1,735,416) 808,470 (1,747,251) 1,636,785
Income Tax Provision (638,691) 196,398 (702,630) 389,704
---------- ------- --------- ---------
Net Income (Loss) $(1,096,725) $ 612,072 $(1,044,621) $1,247,081
========= ======= ========= =========
PER SHARE DATA
- --------------
Basic Shares Outstanding 5,453,219 6,270,012 5,550,799 6,287,488
Basic Earnings (Loss) Per Share $(0.20) $0.10 $(0.19) $0.20
Diluted Shares Outstanding 5,482,752 6,311,950 5,580,094 6,330,371
Diluted Earnings (Loss) Per Share $(0.20) $0.10 $(0.19) $0.20
See notes to unaudited consolidated financial statements.
3
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2001 2000 2001 2000
---- ---- ---- ----
Net income (loss) $(1,096,725) $612,072 $(1,044,621) $1,247,081
Other changes in comprehensive income,
net of tax:
Unrealized gains (losses) on securities
classified as available-for-sale arising
during the period (249,647) 19,064 746,880 (189,672)
Less: reclassification adjustment for (gains)
and losses included in net income (2,120) - 13,403
--------- ------- ------- ---------
Comprehensive Income (loss) $(1,348,492) $631,136 $(284,338) $1,057,409
========= ======= ======= =========
See notes to unaudited consolidated financial statements.
4
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
2001 2000
---- ----
Cash Flows from Operating Activities:
Net Income (Loss) $(1,044,621) $1,247,081
Adjustments to reconcile net income to net cash from operations
Depreciation and amortization 45,511 31,473
Bond amortization, net 196,338 289,649
Net realized loss on sale of securities 20,308 -
Changes in assets and liabilities
Premium, notes and investment income receivable (291,374) (45,605)
Reinsurance recoverable (372,458) (1,048,588)
Prepaid reinsurance premiums (32,792) (10,797)
Deferred policy acquisitions costs (313,228) (149,806)
Other assets (763,263) 227,002
Reserve for unpaid losses and loss adjustment expenses 396,707 (1,926,253)
Unearned premium reserve 1,501,237 338,219
Funds held as security and advanced premiums 65,977 (50,697)
Accrued expenses and other liabilities (599,220) (36,419)
Income taxes current/deferred 129,179 106,573
--------- ---------
Net Cash (Used) from Operations (1,061,699) (1,028,168)
--------- ---------
Investing Activities
Purchase of fixed maturity investments (4,154,470) (4,469,270)
Proceeds from maturity of fixed maturity investments 6,872,180 6,355,600
Net decrease in short-term investments 249,833 763,854
Additions to property and equipment (189,432) (6,537)
--------- ---------
Net Cash Provided by Investing Activities 2,778,111 2,643,647
--------- ---------
Financing Activities
Repurchase of common stock (1,383,186) (509,926)
Dividends paid to shareholders (272,633) (945,745)
--------- ---------
Net Cash (Used) by Financing Activities (1,655,819) (1,455,671)
--------- ---------
Net increase in cash 60,593 159,808
Cash at beginning of period 54,806 105,439
------- -------
Cash at End of Period $115,399 $265,247
======= =======
Supplemental Cash Flow Information Cash paid during the period for:
Interest $ 75 $ -
Income taxes $10,000 $100,025
See notes to unaudited consolidated financial statements.
5
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
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 generally accepted accounting principles ("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 and six months ended June 30, 2001, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001. Quarterly financial statements should be read in conjunction with the
financial statements and related notes in the Company's 2000 Annual Report on
Form 10-K as filed with the Securities and Exchange Commission.
NOTE 2 - INCENTIVE STOCK PLANS
- ------------------------------
The Company's 1985 stock option plan provided for the grant of incentive stock
options to officers and key employees. The plan covers an aggregate of 1,500,000
shares of the Company's common stock (subject to adjustment in the case of stock
splits, reverse stock splits, stock dividends, etc.). As of June 30, 2001, there
were 71,275 options outstanding and all are currently exercisable. There are no
additional options available for future grant under the 1985 plan.
The Company's 1999 Omnibus Stock Plan also provides, among other things, for the
grant of incentive options to officers and key employees. The plan covers an
aggregate of 500,000 shares of the Company's common stock (subject to adjustment
in the case of stock splits, reverse stock splits, stock dividends, etc.). As of
June 30, 2001, there were options covering 105,000 shares of common stock
outstanding under this plan. Options covering 40,000 of these shares of common
stock were exercisable.
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 six months ended
June 30, 2001, the Company retired an aggregate of 239,600 shares of its common
stock at a cost of $1,383,187 of which $117,744 was allocated to capital and
$1,265,443 was allocated to retained earnings. As of June 30, 2001, the Company
had purchased and retired under the Board of Directors' authorization an
aggregate of 868,200 shares of its common stock at a cost of $5,513,255.
6
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
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 June 30, 2001 and 2000, and for the six months ended June 30,
2001 and 2000:
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2001 2000 2001 2000
---- ---- ---- ----
Basic Earnings (Loss) Per Share
- -------------------------------
Net income (loss) numerator $(1,096,725) $612,072 $(1,044,621) $1,247,081
========= ======= ========= =========
Weighted average shares outstanding denominator 5,453,219 6,270,012 5,550,799 6,287,488
========= ========= ========= =========
Basic Earnings (Loss) Per Share $(0.20) $0.10 $(0.19) $0.20
Diluted Earnings (Loss) Per Share
- ---------------------------------
Net income (loss) numerator $(1,096,725) $612,072 $(1,044,621) $1,247,081
========= ======= ========= =========
Weighted average shares outstanding 5,453,219 6,270,012 5,550,799 6,287,488
Effect of diluted securities 29,533 41,938 29,295 42,883
--------- --------- --------- ---------
Diluted shares outstanding denominator 5,482,752 6,311,950 5,580,094 6,330,371
========= ========= ========= =========
Diluted Earnings (Loss) Per Share $(0.20) $0.10 $(0.19) $0.20
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 84% of
consolidated revenues for the three and six months ended June 30, 2001, and 82%
of revenues for the three and the six months ended June 30, 2000. The Company's
remaining operations constitute a variety of specialty insurance services, each
with unique characteristics and individually insignificant to consolidated
revenues.
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2001 2000 2001 2000
---- ---- ---- ----
Revenues
- --------
Insurance company operation $8,989,556 $7,895,769 $17,010,535 $16,109,340
Other insurance operations 4,524,309 4,254,558 8,802,162 8,437,907
Intersegment elimination (1) (2,872,878) (2,470,207) (5,523,842) (4,937,841)
--------- --------- --------- ---------
Total other insurance operations 1,651,431 1,784,351 3,278,320 3,500,066
--------- --------- --------- ---------
Total Revenues $10,640,987 $9,680,120 $20,288,855 $19,609,406
========== ========= ========== ==========
Income (Loss) Before Income Taxes
- ----------------------------------
Insurance company operation $(2,134,389) $631,244 $(2,307,685) $1,381,761
Other insurance operations 398,973 177,226 560,434 255,024
--------- ------- --------- ---------
Total Income (Loss) Before Income Taxes $(1,735,416) $808,470 $(1,747,251) $1,636,785
========= ======= ========= =========
7
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 5 - SEGMENT REPORTING (continued)
- --------------------------------------
As of June 30
-------------
2001 2000
---- ----
Assets
Insurance company operation $106,352,408 $103,136,569
Intersegment eliminations (2) (1,298,145) (459,126)
----------- -----------
Total insurance company operation 105,054,263 102,677,443
Other insurance operations 18,320,225 17,227,900
----------- -----------
Total Assets $123,374,488 $119,905,343
=========== ===========
(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.
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 June 30,
2001, the Company had cash and investments of $95,110,561 (at amortized cost) of
which $91,231,964 (96%) were investments of Crusader.
As of the quarter ended June 30, 2001, the Company had invested $91,867,642 (at
amortized cost) or 97% of its invested assets in fixed maturity obligations. In
accordance with Statement of Financial Accounting Standard No. 115, Accounting
for Certain Investments in Debt and Equity Securities, the Company is required
to classify its investments in debt and equity securities into one of three
categories: held-to-maturity, available-for-sale or trading securities. Although
all of the Company's investments are classified as available-for-sale, the
Company's investment guidelines place primary emphasis on buying and holding
high-quality investments.
The Company's investments in fixed maturity obligations of $91,867,642 (at
amortized cost) include $17,344,603 (19%) of pre-refunded state and municipal
tax-exempt bonds, $6,127,756 (7%) of U.S. treasury securities, $67,995,283 (74%)
of high-quality industrial and miscellaneous bonds, and $400,000 of certificates
of deposit. The tax-exempt interest income earned for the three and six months
ended June 30, 2001, was $221,066 and $454,229, respectively. The tax-exempt
interest income earned for the three and six months ended June 30, 2000, was
$308,286 and $640,681, respectively.
The balance of the Company's investments are in equity securities and
high-quality, short-term investments that include a U.S. treasury bill, bank
money market accounts, certificates of deposit, commercial paper and a
short-term treasury money market fund.
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS (continued)
- ------------------------
(a) Liquidity and Capital Resources: (continued)
- ------------------------------------------------
The Company's investment policy limits investments in any one company to
$2,000,000. This limitation excludes bond premiums paid in excess of par value
and U.S. government or U.S. government guaranteed issues. The Company's
investment guidelines on equity securities limit investments in equity
securities to an aggregate maximum of $2,000,000. All of the Company's
investments are high-grade investment quality, all state and municipal
tax-exempt fixed maturity investments are pre-refunded issues, and all
certificates of deposits are FDIC insured.
Cash flow used from operations for the six months ended June 30, 2001, was
$1,061,699 and was primarily due to the net loss of $1,044,621 for the period.
On May 18, 2001, the Company paid the five-cent ($0.05) per share cash dividend
that was declared by the Board of Directors on March 1, 2001, to shareholders of
record at the close of business on April 27, 2001.
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). During the six
months ended June 30, 2001, the Company retired an aggregate of 239,600 shares
of its common stock at a cost of $1,383,187. Of this amount, $427,836 came from
cash on hand and the proceeds from the maturities of short-term investments, and
$955,351 from the proceeds of the sale of U.S. treasury notes. No shares of the
common stock of the Company were repurchased in the three months ended June 30,
2001.
Although material capital expenditures may also be funded through borrowings,
the Company believes that its cash and short-term investments at June 30, 2001,
net of trust restriction of $2,789,125, statutory deposits of $2,725,000, 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.
The Company has completed its upgrade and replacement of computer systems at a
cost of approximately $150,000. There are no other material commitments for
capital expenditures as of the date of this report.
City of Los Angeles Business License
- ------------------------------------
On September 13, 2000, the City of Los Angeles audited Unico (parent company
only) for the years 1997, 1998 and 1999 with respect to its Los Angeles business
license gross receipts tax. The audit resulted in an assessment of $97,681 in
gross receipts tax, interest of $24,196, and penalties of $39,072, resulting in
a total amount claimed due of $160,949. The assessment was based on the city's
position that expenses of Unico's subsidiaries that are paid by Unico (parent
company) are subject to the gross receipts business tax when those expenses are
reimbursed by the subsidiaries to Unico. The Company disagreed with the audit
findings and has appealed the matter. A formal hearing was held on January 3,
2001, that resulted in a reduction in the gross receipts tax due from $97,681 to
$32,636. The Company has also requested that all penalties be waived and that
interest be adjusted to reflect the decrease in tax due. As of March 31, 2001,
the Company has expensed the revised tax due.
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS (continued)
- ------------------------
(b) Results of Operations:
- --------------------------
All comparisons made in this discussion are comparing the three and six months
ended June 30, 2001, to the three and six months ended June 30, 2000, unless
otherwise indicated.
The Company had a net loss of $1,096,725 for the three months ending June 30,
2001, compared to net income of $612,072 for the three months ended June 30,
2000, a decrease in net income of $1,708,797. For the six months ended June 30,
2001, the Company had a net loss $1,044,621, compared to net income of
$1,247,081 for the six months ended June 30, 2000, a decrease in net income of
$2,291,702. Total revenues increased $960,867 (10%) for the three months and
$679,449 (3%) for the six months ended June 30, 2001, when compared to the three
and six months ended June 30, 2000.
PREMIUM WRITTEN before reinsurance increased $1,337,963 (16%) to $9,615,414 for
the three months and increased $1,942,185 (12%) to $18,490,849 for the six
months ended June 30, 2001, compared to the three and six months ended June 30,
2000. Although the Company attempts to be competitive on price, it believes that
maintaining adequate rates on the insurance policies it sells is a better
business strategy than increasing total written premium by selling more policies
at inadequate rates. The Company believes that the growth in written premium in
the current quarter and year-to-date periods is the result of a continued
subsidence in the intensity of price-based competition in the property/casualty
insurance market. The Company cannot determine how long the existing market
conditions will continue, nor in which direction they might change.
The increase in written premium in California accounted for $969,456 (72%) of
this increase in the three months and $1,408,186 (73%) of the increase in the
six months ended June 30, 2001. Crusader's written premium by state is as
follows:
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
Increase Increase
2001 2000 (Decrease) 2001 2000 (Decrease)
---- ---- -------- ---- ---- --------
California $8,043,077 $7,073,621 $969,456 $15,533,228 $14,125,042 $1,408,186
Ohio 385,195 189,191 196,004 696,346 305,337 391,009
Arizona 353,151 320,552 32,599 633,782 681,050 (47,268)
Pennsylvania 156,229 130,324 25,905 400,006 347,477 52,529
Montana 192,317 175,445 16,872 308,592 256,667 51,925
Washington 179,604 176,396 3,208 295,078 392,815 (97,737)
Oregon 109,412 128,794 (19,382) 242,448 278,423 (35,975)
Texas 70,359 60,083 10,276 233,015 109,148 123,867
Nevada 115,208 17,551 97,657 127,803 40,124 87,679
Idaho 6,018 4,402 1,616 15,707 4,402 11,305
Kentucky 4,844 1,092 3,752 4,844 8,179 (3,335)
--------- --------- --------- ---------- ---------- ---------
Total $9,615,414 $8,277,451 $1,337,963 $18,490,849 $16,548,664 $1,942,185
========= ========= ========= ========== ========== =========
PREMIUM EARNED before reinsurance increased $586,434 (7%) to $8,680,327 for the
three months and increased $779,168 (5%) to $16,989,613 for the six months ended
June 30, 2001, compared to the three and six months ended June 30, 2000. The
increase in earned premium is a direct result of the related increase in written
premium previously discussed.
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS (continued)
- ------------------------
PREMIUM CEDED decreased $520,940 (32%) to $1,093,666 for the three months and
$183,623 (6%) to $2,770,489 for the six months ended June 30, 2001, compared to
the three and six months ended June 30, 2000. 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 decrease
in ceded premium is primarily the result of the decrease in premium ceded by the
Company under its provisionally rated reinsurance contract. 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. The change
in premium ceded between the quarter and year-to-date periods is as follows:
Three Months Six Months
Ended Ended
June 30, 2001 June 30, 2001
------------- -------------
Increase in ceded premium (excluding
provisionally rated premium ceded) $ 62,760 $ 85,471
(Decrease) in provisionally rated
premium ceded (583,700) (269,094)
------- -------
Net decrease in ceded premium $(520,940) $(183,623)
======= =======
NET INVESTMENT INCOME, excluding realized investment gains, decreased $83,092
(5%) to $1,431,465 for the three months and $139,915 (5%) to $2,898,799 for the
six months ended June 30, 2001, compared to investment income of $1,514,557 for
the three months and $3,038,714 for the six months ended June 30, 2000. The
decrease in investment income is primarily due to a decrease in invested assets
due to the cost of the repurchase of the Company's common stock. The Company has
funded the common stock repurchase from cash on hand, the maturities of
short-term investments, and the proceeds of the sale of U.S. treasury bonds.
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, 2001, the Company realized a loss
of $23,520 on one equity security where a decline in market value was considered
other than temporary. During the quarter ended June 30, 2001, the Company had no
realized losses due to a decline in market value considered other than
temporary.
GROSS COMMISSION AND FEE INCOME decreased $81,676 (6%) to $1,388,032 for the
three months and decreased $135,261 (5%) to $2,748,799 for the six months ended
June 30, 2001, compared to the three and six months ended June 30, 2000. The
decrease for the three and six months consisted of the following:
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
------------- -------------
Service fee income $ 24,903 $ 15,803
Other commission and fee income 11,104 15,226
Health and life insurance program (7,770) (21,629)
Workers' compensation program (13,205) (25,936)
Daily automobile rental insurance program:
Excluding contingent commission * (26,729) (58,891)
Contingent commission (69,979) (59,834)
------ ------
Net (decrease) in commission
and fee income $(81,676) $(135,261)
====== =======
* Due to intense price competition, written premium in the daily automobile
rental insurance program has decreased approximately 15% for both the three
months and six months ended June 30, 2001. This decrease in written premium
has resulted in a decrease in commission and fee income (excluding
contingent commission) of $26,729 for the three months and $58,891 for the
six months ended June 30, 2001. To avoid underwriting losses for the
non-affiliated insurer, the Company continues to produce business only at
rates that it believes to be adequate. The Company cannot determine how
long the existing market conditions will continue, nor in which direction
they might change.
11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS (continued)
- ------------------------
LOSSES AND LOSS ADJUSTMENT EXPENSES were 108% of net premium earned for the
three months and 96% of net premium earned for the six months ended June 30,
2001, compared to 73% of net premium earned for the three months and six months
ended June 30, 2000. This increase was primarily due to an increase in incurred
losses of prior years of approximately $2,992,000 (adverse development) in the
three months and $3,877,000 (adverse development) in the six months ended June
30, 2001, compared to an increase in incurred losses of prior years of
approximately $528,000 (adverse development) in the three months and an increase
in incurred losses for prior years of approximately $1,031,000 (adverse
development) in the six months ended June 30, 2000.
The Company's incurred losses and loss adjustment expenses for the quarter ended
June 30, 2001, continued to be negatively impacted by higher than anticipated
claim cost from business outside of California (primarily from liquor liability
claims) and from continued losses due to the impact of changes in California law
that expanded coverage and increased loss exposure (primarily on construction
defect claims - Montrose Chemical Corp. v. Admiral Insurance Co. (1995) and
Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co. (1996). The most
significant of these factors in both the first and second quarter were from
liquor liability claims for losses occurring outside California in 1999 that
were reported to the Company in 2001. These claims arise from the liability of
tavern owners related to the sale of alcoholic beverages. The frequency and
severity of these claims were significantly greater than had been anticipated by
the Company. The Company is taking corrective actions to address the adverse
development on its non-California liquor liability coverages. These actions
include instituting more stringent underwriting criteria, limiting coverages
offered, and increasing rates.
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 28% of net premium earned for the three months and 29%
of net earned premium for the six months ended June 30, 2001, compared to 31% of
net premium earned for both the three months and six months ended June 30, 2000.
SALARIES AND EMPLOYEE BENEFITS increased $18,283 (2%) to $1,116,585 for the
three months and increased $50,427 (2%) to $2,230,290 for the six months ended
June 30, 2001, compared to salary and employee benefits of $1,098,302 for the
three months and $2,179,863 for the six months ended June 30, 2000.
COMMISSIONS TO AGENTS/BROKERS decreased $6,857 (2%) to $316,810 for the three
months and decreased $16,978 (3%) to $639,817 for the six months ended June 30,
2001, compared to the three and six months ended June 30, 2000.
OTHER OPERATING EXPENSES decreased $113,291 (16%) for the three months and
$16,826 (1%) for the six months ended June 30, 2001, compared to the three and
six months ended June 30, 2000. The decrease in the three months was primarily
due to a reduction in legal fees of $49,057 related to the settlement of the
State of Washington regulatory proceedings on January 31, 2001, and a decrease
in marketing expenses of $46,732.
INCOME TAX PROVISION provided a benefit of $638,691 for the three months and a
benefit of $702,630 for the six months ended June 30, 2001, compared to income
tax expense of $196,398 (24% of income before taxes) in the three months and
$389,704 (24% of income before taxes) in the six months ended June 30, 2000.
This change was primarily due to a pre-tax loss of $1,735,416 (including tax
exempt investment income of $197,906) in the three months and a pre-tax loss of
$1,747,251 (including tax exempt investment income of $386,094) in the six
months ended June 30, 2001, compared to pre-tax income of $808,470 (including
tax exempt investment income of $262,044) in the three months and pre-tax income
of $1,636,785 (including tax exempt investment income of $544,579) in the six
month ended June 30, 2000.
The effect of inflation on net income of the Company during the three and six
months ended June 30, 2001, and the three and six months ended June 30, 2000,
was not significant.
12
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 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:
June 30 December 31 Increase
2001 2000 (Decrease)
---- ---- --------
Fixed maturity bonds (at amortized value) $91,467,642 $94,398,077 $(2,930,435)
Short-term cash investments (at cost) 3,125,120 3,355,354 (230,234)
Equity securities (at cost) 2,400 25,920 (23,520)
Certificates of deposit (over 1 year, at cost) 400,000 400,000 -
---------- ---------- ---------
Total invested assets $94,995,162 $98,179,351 $(3,184,189)
========== ========== =========
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.
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
- --------------------------------------------------------
(a) On June 1, 2001, the Company held its Annual Meeting of Stockholders.
(b) Proxies for the meeting were solicited pursuant to Regulation 14 under the
Securities Exchange Act of 1934; there was no solicitation in opposition to
nominees of the Board of Directors as listed in the Proxy Statement and all
such nominees were elected.
(c) At the meeting, the following persons were elected by the vote indicated as
directors to serve until the next annual meeting of shareholders and until
their successors are duly elected and qualified. There were 27,080 no
broker non-votes.
Name For Against or Withheld
---- --- -------------------
Erwin Cheldin 4,738,841 2,936
Lester A. Aaron 4,738,841 2,936
Cary L. Cheldin 4,738,841 2,936
George C. Gilpatrick 4,738,941 2,836
David A. Lewis 4,738,914 2,863
Warren D. Orloff 4,737,929 3,848
Donald B. Urfrig 4,738,941 2,836
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits: None
(b) Reports on Form 8-K:
None.
13
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 there unto authorized.
UNICO AMERICAN CORPORATION
Date: August 10, 2001 By: /s/ Erwin Cheldin
-----------------
Erwin Cheldin
Chairman of the Board, President and Chief
Executive Officer, (Principal Executive Officer)
Date: August 10, 2001 By: /s/ Lester A. Aaron
-------------------
Lester A. Aaron
Treasurer, Chief Financial Officer, (Principal
Accounting and Principal Financial Officer)
14