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 July 1, 2001 to September 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
5,452,461
Number of shares of common stock outstanding as of November 9, 2001
1
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30 December 31
2001 2000
---- ----
ASSETS
- ------
Investments
Available for sale:
Fixed maturities, at market value (amortized cost: September 30,
2001 $92,195,438; December 31, 2000 $94,798,077) $95,691,113 $94,982,630
Equity securities at market (cost: September 30, 2001
$2,400; December 31, 2000 $25,920) 2,400 25,920
Short-term investments, at cost 2,987,946 3,355,354
---------- ----------
Total Investments 98,681,459 98,363,904
Cash 69,806 54,806
Accrued investment income 1,536,078 1,908,547
Premiums and notes receivable, net 6,333,353 5,807,731
Reinsurance recoverable:
Paid losses and loss adjustment expenses 13,278 393,198
Unpaid losses and loss adjustment expenses 9,910,069 10,671,343
Prepaid reinsurance premiums 47,632 29,531
Deferred policy acquisition costs 4,953,673 4,500,147
Property and equipment (net of accumulated depreciation) 277,563 114,107
Deferred income taxes - 948,442
Other assets 3,481,846 1,154,064
----------- -----------
Total Assets $125,304,757 $123,945,820
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
- -----------
Unpaid losses and loss adjustment expenses $50,826,865 $45,217,369
Unearned premiums 18,984,678 17,099,927
Advance premium and premium deposits 1,466,518 2,316,016
Deferred Income taxes payable 60,237 -
Accrued expenses and other liabilities 6,580,991 7,899,179
---------- ----------
Total Liabilities $77,919,289 $72,532,491
---------- ----------
STOCKHOLDERS' EQUITY
- ---------------------
Common stock, no par - authorized 10,000,000 shares; issued and
outstanding shares 5,452,461 at September 30, 2001, and 5,692,699 at
December 31, 2000 $ 2,671,377 $ 2,789,494
Accumulated other comprehensive income 2,307,146 121,805
Retained earnings 42,406,945 48,502,030
---------- ----------
Total Stockholders' Equity $47,385,468 $51,413,329
---------- ----------
Total Liabilities and Stockholders' Equity $125,304,757 $123,945,820
=========== ===========
See notes to unaudited consolidated financial statements.
2
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
------------------- ------------------
2001 2000 2000 2001
---- ---- ---- ----
REVENUES
- --------
Insurance Company Revenues
Premium earned $9,014,402 $8,226,204 $26,004,015 $24,436,649
Premium ceded 1,523,605 2,136,835 4,294,094 5,090,947
--------- --------- ---------- ----------
Net premium earned 7,490,797 6,089,369 21,709,921 19,345,702
Net investment income 1,395,287 1,451,540 4,195,465 4,294,899
Net realized investment (losses) - - (23,520) -
Other income 2,572 34,286 17,325 43,934
--------- --------- ---------- ----------
Total Insurance Company Revenues 8,888,656 7,575,195 25,899,191 23,684,535
Other Revenues from Insurance Operations
Gross commissions and fees 1,375,654 1,383,049 4,124,453 4,267,109
Investment income 30,656 78,874 129,277 274,229
Net realized investment gains - 2,508 3,212 2,508
Finance charges and late fees earned 223,722 209,423 644,929 625,455
Other income 5,517 4,402 11,998 9,021
---------- --------- ---------- ----------
Total Revenues 10,524,205 9,253,451 30,813,060 28,862,857
---------- --------- ---------- ----------
EXPENSES
- --------
Losses and loss adjustment expenses 11,636,974 5,054,246 25,313,741 14,744,673
Policy acquisition costs 2,233,370 2,098,883 6,400,459 6,205,450
Salaries and employee benefits 1,052,922 1,067,731 3,283,212 3,247,594
Commissions to agents/brokers 304,355 330,569 944,172 987,364
Other operating expenses 606,386 575,917 1,928,529 1,914,886
---------- --------- ---------- ----------
Total Expenses 15,834,007 9,127,346 37,870,113 27,099,967
---------- --------- ---------- ----------
Income (Loss) Before Taxes (5,309,802) 126,105 (7,057,053) 1,762,890
Income Tax Provision (Benefit) (1,801,252) (29,325) (2,503,882) 360,379
--------- ------- --------- ---------
Net Income (Loss) $(3,508,550) $ 155,430 $(4,553,171) $1,402,511
========= ======= ========= =========
PER SHARE DATA
- --------------
Basic Shares Outstanding 5,453,118 5,923,682 5,518,239 6,166,220
Basic Earnings (Loss) Per Share $(0.64) $0.03 $(0.83) $0.23
Diluted Shares Outstanding 5,453,118 5,972,337 5,518,239 6,211,027
Diluted Earnings (Loss) Per Share $(0.64) $0.03 $(0.83) $0.23
See notes to unaudited consolidated financial statements.
3
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2001 2000 2001 2000
---- ---- ---- ----
Net income (loss) $(3,508,550) $155,430 $(4,553,171) $1,402,511
Other changes in comprehensive income,
net of tax:
Unrealized gains (losses) on securities
classified as available-for-sale arising
during the period 1,425,058 615,760 2,171,938 426,088
Less: reclassification adjustment for (gains)
and losses included in net income - 13,403
- -
--------- ------- --------- ---------
Comprehensive income (loss) $(2,083,492) $771,190 $(2,367,830) $1,828,599
========= ======= ========= =========
See notes to unaudited consolidated financial statements.
4
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2001 2000
---- ----
Cash Flows from Operating Activities:
Net Income (Loss) $(4,553,171) $1,402,511
Adjustments to reconcile net income to net cash from operations
Depreciation and amortization 52,871 49,184
Bond amortization, net 288,065 412,056
Net realized (gain) loss on sale of securities 20,308 (2,508)
Changes in assets and liabilities
Premium, notes and investment income receivable (153,153) 94,140
Reinsurance recoverable 1,141,194 (1,886,669)
Prepaid reinsurance premiums (18,101) 21
Deferred policy acquisitions costs (453,526) (171,468)
Other assets (2,327,782) 216,594
Reserve for unpaid losses and loss adjustment expenses 5,609,496 (2,001,294)
Unearned premium reserve 1,884,751 558,545
Funds held as security and advanced premiums (849,498) (196,316)
Accrued expenses and other liabilities (1,318,188) 1,707,999
Income taxes current/deferred (117,103) 81,080
------- -------
Net Cash Provided (Used) from Operations (793,837) 263,875
------- -------
Investing Activities
Purchase of fixed maturity investments (10,399,695) (8,703,237)
Proceeds from maturity of fixed maturity investments 12,692,180 10,201,450
Net decrease in short-term investments 392,710 3,071,080
Additions to property and equipment (216,327) (25,386)
--------- ---------
Net Cash Provided by Investing Activities 2,468,868 4,543,907
--------- ---------
Financing Activities
Repurchase of common stock (1,387,398) (3,784,934)
Dividends paid to shareholders (272,633) (945,510)
--------- ---------
Net Cash (Used) by Financing Activities (1,660,031) (4,730,444)
--------- ---------
Net increase in cash 15,000 77,338
Cash at beginning of period 54,806 105,439
------ -------
Cash at End of Period $69,806 $182,777
====== =======
Supplemental Cash Flow Information
Cash paid during the period for:
Interest $ 75 $ -
Income taxes $25,416 $210,025
See notes to unaudited consolidated financial statements.
5
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine months ended September 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 September 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
September 30, 2001, there were options covering 105,000 shares of common stock
outstanding under this plan. Options covering 70,000 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 nine months ended
September 30, 2001, the Company retired an aggregate of 240,358 shares of its
common stock at a cost of $1,387,398 of which $118,117 was allocated to capital
and $1,269,281 was allocated to retained earnings. As of September 30, 2001, 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.
6
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 2001 and 2000, and for the nine months ended
September 30, 2001 and 2000:
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2001 2000 2001 2000
---- ---- ---- ----
Basic Earnings (Loss) Per Share
- -------------------------------
Net income (loss) numerator $(3,508,550) $155,430 $(4,553,171) $1,402,511
========= ======= ========= =========
Weighted average shares outstanding denominator 5,453,118 5,923,682 5,518,239 6,166,220
========= ========= ========= =========
Basic Earnings (Loss) Per Share $(0.64) $0.03 $(0.83) $0.23
Diluted Earnings (Loss) Per Share
- ---------------------------------
Net income (loss) numerator $(3,508,550) $155,430 $(4,553,171) $1,402,511
========= ======= ========= =========
Weighted average shares outstanding 5,453,118 5,923,682 5,518,239 6,166,220
Effect of diluted securities (*) 0 48,655 0 44,807
--------- --------- --------- ---------
Diluted shares outstanding denominator 5,453,118 5,972,337 5,518,239 6,211,027
========= ========= ========= =========
Diluted Earnings (Loss) Per Share $(0.64) $0.03 $(0.83) $0.23
* In loss periods options are excluded from the calculation of diluted EPS, as
the inclusion of such options would have an antidilutive effect.
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 nine months ended September 30, 2001,
and 82% of revenues for the three and the nine months ended September 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 Nine Months Ended
September 30 September 30
------------ ---------
2001 2000 2001 2000
---- ---- ---- ----
Revenues
- --------
Insurance company operation $8,888,656 $7,575,195 $25,899,191 $23,684,535
Other insurance operations 4,442,261 4,198,046 13,244,423 12,635,953
Intersegment elimination (1) (2,806,712) (2,519,790) (8,330,554) (7,457,631)
--------- --------- --------- ---------
Total other insurance operations 1,635,549 1,678,256 4,913,869 5,178,322
--------- --------- --------- ---------
Total Revenues $10,524,205 $9,253,451 $30,813,060 $28,862,857
========== ========= ========== ==========
Income (Loss) Before Income Taxes
- ---------------------------------
Insurance company operation $(5,587,410) $(47,421) $(7,895,095) $1,334,340
Other insurance operations 277,608 173,526 838,042 428,550
--------- ------- --------- ---------
Total Income (Loss) Before Income Taxes $(5,309,802) $126,105 $(7,057,053) $1,762,890
========= ======= ========= =========
7
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
NOTE 5 - SEGMENT REPORTING (continued)
- --------------------------------------
As of September 30
------------------
2001 2000
---- ----
Assets
Insurance company operation $107,924,575 $104,723,107
Intersegment eliminations (2) (1,605,532) (397,339)
----------- -----------
Total insurance company operation 106,319,043 104,325,768
Other insurance operations 18,985,714 14,820,077
----------- -----------
Total Assets $125,304,757 $119,145,845
=========== ===========
(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 September
30, 2001, the Company had cash and investments of $95,255,590 (at amortized
cost) of which $92,392,389 (97%) were investments of Crusader.
As of the quarter ended September 30, 2001, the Company had invested $92,195,438
(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 $92,195,438 (at
amortized cost) include $11,780,331 (13%) of pre-refunded state and municipal
tax-exempt bonds, $6,118,244 (7%) of U.S. treasury securities, $73,896,863 (80%)
of high-quality industrial and miscellaneous bonds, and $400,000 of certificates
of deposit. The tax-exempt interest income earned for the three and nine months
ended September 30, 2001, was $170,962 and $625,191, respectively. The
tax-exempt interest income earned for the three and nine months ended September
30, 2000, was $289,585 and $930,266, 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.
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 nine
months ended September 30, 2001, the Company retired an aggregate of 240,358
shares of its common stock at a cost of $1,387,398. Of this amount, $432,047
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 US Treasury notes.
758 shares of the common stock of the Company, at a cost of $4,211, were
repurchased in the three months ended September 30, 2001.
Although material capital expenditures may also be funded through borrowings,
the Company believes that its cash and short-term investments at year end, net
of trust restriction of $1,832,392, 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 appealed the matter. A formal hearing was held on January 3, 2001.
The Company received the decision of the board of review that resulted in a
revised gross receipts tax of $46,589 and a reduction in the interest assessment
by $13,500. The Company is awaiting a decision on its request that all penalties
be waived. As of September 30, 2001, the Company has expensed the revised tax
due and recorded the interest expense adjustment.
(b) Results of Operations:
- --------------------------
All comparisons made in this discussion are comparing the three and nine months
ended September 30, 2001, to the three and nine months ended September 30, 2000,
unless otherwise indicated.
The Company had a net loss of $3,508,550 for the three months ending September
30, 2001, compared to net income of $155,430 for the three months ended
September 30, 2000 a decrease in net income of $3,663,980. For the nine months
ended September 30, 2001, the Company had a net loss $4,553,171, compared to net
income of $1,402,511 for the nine months ended September 30, 2000, a decrease in
net income of $5,955,682. Total revenues increased $1,270,754 (14%) for the
three months and $1,950,203 (7%) for the nine months ended September 30, 2001,
when compared to the three and nine months ended September 30, 2000.
Premium written before reinsurance increased $951,386 (11%) to $9,397,916 for
the three months and increased $2,893,571 (12%) to $27,888,765 for the nine
months ended September 30, 2001, compared to the three and nine months ended
September 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.
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS (continued)
- ------------------------
The increase in written premium in California accounted for $925,011 (97%) of
the total increase in the three months and $2,333,197 (81%) of the total
increase in the nine months ended September 30, 2001. Crusader's written premium
by state is as follows:
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
Increase Increase
2001 2000 (Decrease) 2001 2000 (Decrease)
---- ---- -------- ---- ---- --------
California $8,300,859 $7,375,848 $925,011 $23,834,087 $21,500,890 $2,333,197
Ohio 268,826 205,523 63,303 965,172 510,860 454,312
Arizona 198,166 253,954 (55,788) 831,948 935,004 (103,056)
Pennsylvania 122,986 116,978 6,008 522,992 464,455 58,537
Washington 169,494 215,380 (45,886) 464,572 608,195 (143,623)
Montana 125,112 116,421 8,691 433,704 373,088 60,616
Oregon 77,325 105,254 (27,929) 319,773 383,677 (63,904)
Texas 64,623 19,503 45,120 297,638 128,651 168,987
Nevada 48,722 7,801 40,921 176,525 47,925 128,600
Kentucky 16,902 16,503 399 21,746 24,682 (2,936)
Idaho 4,901 13,365 (8,464) 20,608 17,767 2,841
--------- --------- ------- ---------- ---------- ---------
Total $9,397,916 $8,446,530 $951,386 $27,888,765 $24,995,194 $2,893,571
========= ========= ======= ========== ========== =========
PREMIUM EARNED before reinsurance increased $788,198 (10%) to $9,014,402 for the
three months and increased $1,567,366 (6%) to $26,004,015 for the nine months
ended September 30, 2001, compared to the three and nine months ended September
30, 2000. The increase in earned premium is a direct result of the related
increase in written premium previously discussed.
PREMIUM CEDED decreased $613,230 (29%) to $1,523,605 for the three months and
$796,853 (16%) to $4,294,094 for the nine months ended September 30, 2001,
compared to the three and nine months ended September 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 Nine Months
Ended Ended
September 30,2001 September 30, 2001
----------------- ------------------
Increase in ceded premium (excluding
provisionally rated premium ceded) $ 82,355 $ 167,826
(Decrease) in provisionally rated
premium ceded (695,585) (964,679)
------- -------
Net (decrease) in ceded premium $(613,230) $(796,853)
======= =======
NET INVESTMENT INCOME, excluding realized investment gains, decreased $104,471
(7%) to $1,425,943 for the three months and $244,386 (5%) to $4,324,742 for the
nine months ended September 30, 2001, compared to investment income of
$1,530,414 for the three months and $4,569,128 for the nine months ended
September 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 and a general lowering of yields on new and reinvested assets. 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 US 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. There was no realized loss recognized in the quarter ended
September 30, 2001.
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS (continued)
- ------------------------
GROSS COMMISSION AND FEE INCOME decreased $7,395 (1%) to $1,375,654 for the
three months and decreased $142,656 (3%) to $4,124,453 for the nine months ended
September 30, 2001, compared to the three and nine months ended September 30,
2000. The decrease for the three and nine months consisted of the following:
Three Months Nine Months
Ended Ended
September 30, 2001 September 30, 2001
------------------ ------------------
Service fee income $ 29,725 $ 45,528
Other commission and fee income 832 16,058
Workers' compensation program 3,952 (21,984)
Health and life insurance program (16,072) (37,701)
Daily automobile rental insurance program:
Excluding contingent commission (25,832) (84,723)
Contingent commission - (59,834)
------ ------
Net (decrease) in commission
and fee income $(7,395) $(142,656)
===== =======
Due to intense price competition, written premium in the daily automobile rental
insurance program has decreased approximately 14% for the three months and
approximately 15% for the nine months ended September 30, 2001. This decrease in
written premium has resulted in a decrease in commission and fee income
(excluding contingent commission) of $25,832 for the three months and $84,723
for the nine months ended September 30, 2001. To avoid underwriting losses for
the non-affiliated insurance company it represents, 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.
LOSSES AND LOSS ADJUSTMENT EXPENSES were 155% of net premium earned for the
three months and 117% of net premium earned for the nine months ended September
30, 2001, compared to 83% of net premium earned for the three months and 76% of
net earned premium for the nine months ended September 30, 2000. This increase
was primarily due to an increase in incurred losses of prior years of
approximately $6,222,000 (adverse development) in the three months and
$10,099,000 (adverse development) in the nine months ended September 30, 2001,
compared to an increase in incurred losses of prior years of approximately
$1,096,000 (adverse development) in the three months and an increase in incurred
losses for prior years of approximately $2,170,000 (adverse development) in the
nine months ended September 30, 2000.
The Company's incurred losses and loss adjustment expenses for the quarter ended
September 30, 2001, continued to be negatively impacted by higher than
anticipated claim cost from business outside of California (primarily from
liquor liability claims occurring in 1999), and 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). Liquor
liability claims arise from the liability of tavern owners related to the sale
of alcoholic beverages. The Company was also negatively impacted in the quarter
ended September 30, 2001, by claim settlements on its apartment house program in
excess of the amounts previously estimated.
In the quarter ended September 30, 2001, the Company increased its estimate of
ultimate losses for both reported and unreported claims primarily occurring from
1998 through 2000 and from 1993 through 1995 (the years most impacted by
construction defect claims). The Company believes that this action appropriately
addresses the adverse loss development trend discussed above. The Company has
also taken various underwriting and pricing actions that it believes addresses
the underlying causes of the adverse development on the non-California liquor
liability and apartment house programs. The foregoing statements are forward
looking statements and involve risks and uncertainties which could cause actual
results to differ materially from these forward looking statements. Factors
which could cause actual results to differ materially include actual versus
estimated claim experience, underwriting actions not being effective, rate
increases for coverage not being sufficient, and changes in the law.
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.
11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS (continued)
- ------------------------
These costs were 30% of net premium earned for the three months and 29% of net
earned premium for the nine months ended September 30, 2001, compared to 34% of
net premium earned for the three months and 32% of net premium earned for the
nine months ended September 30, 2000.
SALARIES AND EMPLOYEE BENEFITS decreased $14,809 (1%) to $1,052,922 for the
three months and increased $35,618 (1%) to $3,283,212 for the nine months ended
September 30, 2001, compared to salary and employee benefits of $1,067,731 for
the three months and $3,247,594 for the nine months ended September 30, 2000.
COMMISSIONS TO AGENTS/BROKERS decreased $26,214 (8%) to $304,355 for the three
months and decreased $43,192 (4%) to $944,172 for the nine months ended
September 30, 2001, compared to the three and nine months ended September 30,
2000.
OTHER OPERATING EXPENSES increased $30,469 (5%) for the three months and $13,643
(1%) for the nine months ended September 30, 2001, compared to the three and
nine months ended September 30, 2000. The increase in the three months was
primarily due an increase in legal fees of $19,353 related to general corporate
matters.
INCOME TAX PROVISION provided a benefit of $1,801,252 (34% of income before
taxes) for the three months and a benefit of $2,503,882 (35% of income before
taxes) for the nine months ended September 30, 2001, compared to income tax
benefit of $29,325 (23% of income before taxes) in the three months and income
tax expense of $360,379 (20% of income before taxes) in the nine months ended
September 30, 2000. This change was primarily due to a pre-tax loss of
$5,309,802 (including tax exempt investment income of $145,319) in the three
months and a pre-tax loss of $7,057,053 (including tax exempt investment income
of $531,413) in the nine months ended September 30, 2001, compared to pre-tax
income of $126,105 (including tax exempt investment income of $246,147) in the
three months and pre-tax income of $1,762,890 (including tax exempt investment
income of $790,726) in the nine months ended September 30, 2000.
The effect of inflation on net income of the Company during the three and nine
months ended September 30, 2001, and the three and nine months ended September
30, 2000, 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:
September 30 December 31 Increase
2001 2000 (Decrease)
---- ---- --------
Fixed maturity bonds (at amortized value) $91,795,438 $94,398,077 $(2,602,639)
Short-term cash investments (at cost) 2,987,946 3,355,354 (367,408)
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 $95,185,784 $98,179,351 $(2,993,567)
========== ========== =========
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.
12
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits: None
(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 there unto authorized.
UNICO AMERICAN CORPORATION
Date: November 12, 2001 By: /s/ Erwin Cheldin
-----------------
Erwin Cheldin
Chairman of the Board, President and Chief
Executive Officer, (Principal Executive Officer)
Date: November 12, 2001 By: /s/ Lester A. Aaron
-------------------
Lester A. Aaron
Treasurer, Chief Financial Officer, (Principal
Accounting and Principal Financial Officer)
13