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 January 1, 2002 to March 31, 2002
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 __
5,489,533
Number of shares of common stock outstanding as of May 10, 2002
1
PART 1 - FINANCIAL INFORMATION
------------------------------
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31 December 31
2002 2001
---- ----
ASSETS
- ------
Investments
Available for sale:
Fixed maturities, at market value
(amortized cost: March 31, 2002
$93,428,688; December 31, 2001
$91,811,859) $95,050,050 $94,628,282
Equity securities at market
(cost: March 31, 2002 $0;
December 31, 2001 $216) - 216
Short-term investments, at cost 1,983,673 2,863,622
---------- ---------
Total Investments 97,033,723 97,492,120
Cash 151,469 45,001
Accrued investment income 1,477,353 1,768,058
Premiums and notes receivable, net 6,511,438 6,248,327
Reinsurance recoverable:
Paid losses and loss adjustment expenses 630,277 732,054
Unpaid losses and loss adjustment expenses 11,212,608 10,748,080
Prepaid reinsurance premiums 41,715 37,683
Deferred policy acquisition costs 5,208,541 5,079,535
Property and equipment
(net of accumulated depreciation) 258,561 267,426
Deferred income taxes 675,245 556,251
Income taxes receivable 5,705,508 5,398,939
Other assets 408,870 449,799
----------- -----------
Total Assets $129,315,308 $128,823,273
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
- -----------
Unpaid losses and loss adjustment expenses $60,648,895 $60,534,295
Unearned premiums 20,005,507 19,328,150
Advance premium and premium deposits 1,427,297 1,083,995
Accrued expenses and other liabilities 7,284,565 7,256,457
Dividends payable 274,227 -
---------- ----------
Total Liabilities $89,640,491 $88,202,897
---------- ----------
STOCKHOLDERS' EQUITY
- ---------------------
Common stock, no par - authorized
10,000,000 shares; issued and
Outstanding shares 5,484,533 at
March 31, 2002, and 5,481,288 at
December 31, 2001 $ 2,682,772 $ 2,671,415
Accumulated other comprehensive income 1,070,098 1,858,839
Retained earnings 35,921,947 36,090,122
---------- ----------
Total Stockholders' Equity $39,674,817 $40,620,376
---------- ----------
Total Liabilities and Stockholders' Equity $129,315,308 $128,823,273
=========== ===========
See notes to unaudited consolidated financial statements.
2
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31
------------------
2002 2001
---- ----
REVENUES
Insurance Company Revenues
Premium earned $9,252,973 $8,309,286
Premium ceded 1,661,230 1,676,823
--------- ---------
Net premium earned 7,591,743 6,632,463
Net investment income 1,389,665 1,409,016
Net realized investment (losses) (216) (23,520)
Other income 2,247 3,020
--------- ---------
Total Insurance Company Revenues 8,983,439 8,020,979
Other Revenues from Insurance Operations
Gross commissions and fees 1,438,987 1,360,767
Investment income 6,571 58,318
Finance charges and late fees earned 218,926 204,793
Other income 4,070 3,011
---------- ---------
Total Revenues 10,651,993 9,647,868
---------- ---------
EXPENSES
Losses and loss adjustment expenses 6,329,563 5,465,895
Policy acquisition costs 2,150,291 2,028,239
Salaries and employee benefits 987,221 1,113,705
Commissions to agents/brokers 302,609 323,007
Other operating expenses 745,871 728,857
---------- ---------
Total Expenses 10,515,555 9,659,703
---------- ---------
Income (Loss) Before Taxes 136,438 (11,835)
Income Tax Provision (Benefit) 30,386 (63,939)
------- ------
Net Income $106,052 $ 52,104
======= ======
PER SHARE DATA
Basic Shares Outstanding 5,482,091 5,648,380
Basic Earnings Per Share $0.02 $0.01
Diluted Shares Outstanding 5,486,622 5,677,436
Diluted Earnings Per Share $0.02 $0.01
See notes to unaudited consolidated financial statements.
3
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended
March 31
------------------
2002 2001
---- ----
Net Income $106,052 $52,104
Other changes in comprehensive income,
net of tax:
Unrealized gains (losses) on securities
classified as available-for-sale arising
during the period (788,884) 992,288
Less: reclassification adjustment for (gains)
and losses included in net income 143 15,523
------- ---------
Comprehensive Income (Loss) $(682,689) $1,059,915
======= =========
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,
2002 2001
---- ----
Cash Flows from Operating Activities:
Net Income $106,052 $52,104
Adjustments to reconcile net income to net cash
from operations
Depreciation 17,959 21,658
Bond amortization, net 94,513 98,127
Net realized loss on sale of securities 216 23,520
Changes in assets and liabilities
Premium, notes and investment income receivable 27,594 390,180
Reinsurance recoverable (362,751) 1,835,883
Prepaid reinsurance premiums (4,032) (10,143)
Deferred policy acquisitions costs (129,006) (115,016)
Other assets 40,928 (293,899)
Reserve for unpaid losses and loss adjustment
expenses 114,600 (3,933,823)
Unearned premium reserve 677,357 566,150
Funds held as security and advanced premiums 343,302 69,551
Accrued expenses and other liabilities 28,108 352,728*
Income taxes current/deferred 287,327 200,302
Federal income tax recoverable (306,569) -
------- -------
Net Cash Provided (Used) from Operations 935,598 (742,678)
------- -------
Investing Activities
Purchase of fixed maturity investments (5,231,342) (2,642,850)
Proceeds from maturity of fixed maturity
investments 3,520,000 4,040,000
Net decrease in short-term investments 879,949 51,213
Additions to property and equipment (9,094) (165,831)
------- ---------
Net Cash Provided (Used) by Investing Activities (840,487) 1,282,532
------- ---------
Financing Activities
Proceeds from issuance of common stocks 11,357 -
Repurchase of common stock - (427,836)*
------ -------
Net Cash Provided (Used) by Financing Activities 11,357 (427,836)
------ -------
Net increase in cash 106,468 112,018
Cash at beginning of period 45,001 54,806
------- -------
Cash at End of Period $151,469 $166,824
======= =======
Supplemental Cash Flow Information Cash paid during
the period for:
Interest - $ 75
Income taxes $479 -
*Does not include $955,351 due on repurchase of common stock settled on April 2,
2001.
See notes to unaudited consolidated financial statements.
5
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
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 months ended March 31, 2002, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. Quarterly financial statements should be read in conjunction with the
financial statements and related notes in the Company's 2001 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 March 31, 2002,
there were 8,170 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
March 31, 2002, 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 three months ended
March 31, 2002, the Company did not repurchase any shares of the Company's
common stock. As of March 31, 2002, 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. The cost of the shares repurchased by the
Company has been allocated $427,024 to capital stock and $5,090,441 to retained
earnings.
6
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
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, 2002 and 2001:
Three Months Ended
March 31
-------------------
2002 2001
---- ----
Basic Earnings Per Share
- ------------------------
Net income numerator $106,052 $52,104
======= ======
Weighted average shares outstanding denominator 5,482,091 5,648,380
========= =========
Basic Earnings Per Share $0.02 $0.01
Diluted Earnings Per Share
- --------------------------
Net income numerator $106,052 $52,104
======= ======
Weighted average shares outstanding 5,482,091 5,648,380
Effect of diluted securities 4,531 29,056
--------- ---------
Diluted shares outstanding denominator 5,486,622 5,677,436
========= =========
Diluted Earnings Per Share $0.02 $0.01
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 months ended March 31, 2002, and 83% of
revenues for the three months ended March 31, 2001. 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
March 31
------------------
2002 2001
---- ----
Revenues
- --------
Insurance company operation $8,983,439 $8,020,979
Other insurance operations 4,637,457 4,277,853
Intersegment elimination (1) (2,968,903) (2,650,964)
--------- ---------
Total other insurance operations 1,668,554 1,626,889
--------- ---------
Total Revenues $10,651,993 $9,647,868
========== =========
Income (Loss) Before Income Taxes
- ---------------------------------
Insurance company operation $(260,388) $(173,296)
Other insurance operations 396,826 161,461
-------- -------
Total Income (Loss) Before Income Taxes $136,438 $(11,835)
======= =======
7
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
NOTE 5 - SEGMENT REPORTING (continued)
- --------------------------------------
As of March 31
--------------
2002 2001
---- ----
Assets
- ------
Insurance company operation $108,470,555 $105,456,436
Intersegment eliminations (2) (2,113,647) (1,312,089)
----------- -----------
Total insurance company operation 106,356,908 104,144,347
Other insurance operations 22,958,400 17,488,158
---------- ----------
Total Assets $129,315,308 $121,632,505
=========== ===========
(1) Intersegment revenue eliminations reflect commission paid by Crusader to
Unifax Insurance Systems, Inc., (Unifax) a wholly owned subsidiary of the
Company.
(2) Intersegment asset eliminations reflect the elimination of Crusader
receivables and Unifax payables.
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- -------------
(a) Liquidity and Capital Resources:
- ------------------------------------
Due to the nature of the Company's business (insurance and insurance services)
and whereas Company growth does not normally require material reinvestments of
profits into property or equipment, the cash flow generated from operations
usually results in improved liquidity for the Company.
Crusader generates a significant amount of cash as a result of its holdings of
unearned premium reserves, reserves for loss payments, and its capital and
surplus. Crusader's loss and loss adjustment expense payments are the most
significant cash flow requirement of the Company. These payments are continually
monitored and projected to ensure that the Company has the liquidity to cover
these payments without the need to liquidate its investments. As of March 31,
2002, the Company had cash and investments of $95,563,830 (at amortized cost) of
which $92,871,213 (97%) were investments of Crusader.
As of the quarter ended March 31, 2002, the Company had invested $93,428,688 (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 $93,428,688 (at
amortized cost) include $7,184,808 (8%) of pre-refunded state and municipal
tax-exempt bonds, $9,532,541 (10%) of U.S. treasury securities, $76,311,339
(82%) of high-quality industrial and miscellaneous bonds, and $400,000 of
certificates of deposit. The tax-exempt interest income earned for the three
months ended March 31, 2002 and 2001, was $96,523 and $233,163, 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.
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). No shares were
repurchased in the three months ended March 31, 2002.
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 $1,663,778, 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.
In 2001, the Company initiated an upgrade and replacement of its printing and
forms generation systems and expects to spend approximately $125,000 in the next
six months to complete this project. There are no other material commitments for
capital expenditures as of the date of this report.
9
(b) Results of Operations:
- --------------------------
All comparisons made in this discussion are comparing the three months ended
March 31, 2002, to the three months ended March 31, 2001, unless otherwise
indicated.
The Company had a net income of $106,052 for the three months ending March 31,
2002, compared to net income of $52,104 for the three months ended March 31,
2001, an increase in net income of $53,948. Total revenues for the three months
ended March 31, 2002, increased $1,004,125 (10%) to $10,651,993, compared to
total revenues of $9,647,868 for the three months ended March 31, 2001.
PREMIUM WRITTEN before reinsurance increased $1,054,895 (12%) to $9,930,330 for
the three months ended March 31, 2002, compared to $8,875,435 for the three
months ended March 31, 2001. The Company primarily writes commercial multiple
peril business package policies. This line of business represents approximately
95% of Crusader's total written premium for the three months ended March 31,
2002.
The growth in written premium in California was primarily the result of the
continued subsidence in priced-based competition in the property casualty
insurance market that has resulted in the Company's products becoming more
competitive. The Company cannot determine how long the existing market
conditions will continue, nor in which direction they might change.
Crusader's written premium by state is as follows:
Three Months Ended March 31 Increase (Decrease)
--------------------------- -------------------
2002 2001 Amount %
---- ---- ------ -
California $8,849,954 $7,490,151 $1,359,803 18
Ohio 283,232 311,151 (27,919) (9)
Arizona 237,580 280,631 (43,051) (15)
Pennsylvania 175,751 243,777 (68,026) (28)
Oregon 140,164 133,036 7,128 5
Montana 122,597 116,275 6,322 5
Washington 91,415 115,474 (24,059) (21)
Texas 13,591 162,656 (149,065) (92)
Nevada 9,244 12,595 (3,351) (27)
Idaho 6,802 9,689 (2,887) (30)
--------- --------- --------- --
Total $9,930,330 $8,875,435 $1,054,895 12
========== ========= ========= ==
In the three months ended March 31, 2002, approximately 89% of Crusader's
premium was written in California. The decrease in written premium outside of
California was primarily attributable to rate increases which made the Company's
products less competitive.
PREMIUM EARNED before reinsurance increased $943,687 (11%) to $9,252,973 for the
three months ended March 31, 2002, compared to $8,309,286 for the three months
ended March 31, 2001. The Company writes annual policies and therefore earns
written premium over the one-year policy term. The increase in earned premium is
a direct result of the related increase in written premium previously discussed.
PREMIUM CEDED decreased $15,593 (1%) to $1,661,230 for the three months ended
March 31, 2002, compared to ceded premium of $1,676,823 in the three months
ended March 31, 2001. Earned premium ceded consists of both premium ceded under
the Company's current reinsurance contracts and premium ceded to the Company's
provisionally rated reinsurance contracts. The change in premium ceded between
the quarters ended March 31, 2002, and March 31, 2001, is as follows:
Increase in ceded premium under current reinsurance contracts $ 571,817
(Decrease) in provisionally rated premium ceded (587,410)
-------
Net (decrease) in ceded premium $(15,593)
======
The increase in ceded premium under current reinsurance contracts is primarily
due to rate increases effective January 1, 2002, and the increase in earned
premium on which these rates are based. Premium ceded under the provisionally
rated contract, which was canceled on a runoff basis effective December 31,
1997, is subject to adjustment based on the amount of losses ceded, limited by a
maximum percentage that can be charged by the reinsurer.
10
NET INVESTMENT INCOME, excluding realized investment gains, decreased $71,098
(5%) to $1,396,236 for the three months ended March 31, 2002, compared to
investment income of $1,467,334 for the three months ended March 31, 2001. 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 in the prior
year 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, 2002, the Company realized a loss
of $216 on one equity security where a decline in market value was considered
other than temporary.
GROSS COMMISSION AND FEE income increased $78,220 (6%) to $1,438,987 for the
three months ended March 31, 2002, compared commission and fee income of
$1,360,767 for the three months ended March 31, 2001. The increase was primarily
due to a contingent commission earned by the daily automobile rental program of
$66,947 in the current quarter compared to contingent commission of $10,145 in
the quarter ending March 31, 2001. Excluding the contingent commission on the
daily auto rental program, commission increased $10,739 compared to the prior
year. The increase in gross commission and fee income for the three months ended
March 31, 2002, compared to the three months ended March 31, 2001, are as
follows:
Service fee income $ 13,121
Health and life insurance program 8,323
Other commission and fee income (7,793)
Workers' compensation program (2,972)
Daily automobile rental insurance program:
Excluding contingent commission 10,739
Contingent commission 56,802
------
Net increase in commission and fee income $78,220
======
LOSSES AND LOSS ADJUSTMENT EXPENSES were 83% of net premium earned for the three
months ended March 31, 2002, compared to 82% of net premium earned for the three
months ended March 31, 2001. This increase was primarily due to an increase in
incurred losses of prior years of approximately $940,000 (adverse development)
in the three months ended March 31, 2002, compared to an increase in incurred
losses of prior years of approximately $885,000 (adverse development) in the
three months ended March 31, 2001.
The Company's incurred losses and loss adjustment expenses for the quarter ended
March 31, 2002, continued to be negatively impacted by claims 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. In 2001,
the Company substantially increased rates or reduced coverages offered on this
business. In the years ended December 31, 2001 and 2000, the Company
significantly increased its estimates of ultimate losses for both reported and
unreported claims. The adverse development of prior year losses in the quarter
ended March 31, 2002, primarily reflects the development of prior year claims in
excess of what the Company had anticipated would develop in during quarter ended
March 31, 2002.
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 reasonable predictable than long-tail liability
claims. The liability for unpaid losses and loss adjustment expenses is based
upon the accumulation of individual case estimates for losses reported prior to
the close of the accounting period plus estimates based on experience and
industry data for development of case estimates and for unreported losses and
loss adjustment expenses. Since the emergence and disposition of claims are
subject to uncertainties, the net amounts that will ultimately be paid to settle
claims may vary significantly from the estimated amounts provided for in the
accompanying consolidated financial statements. Any adjustments to reserves are
reflected in the operating results of the periods in which they are made.
Management believes that the aggregate reserves for losses and loss adjustment
expenses are reasonable and adequate to cover the cost of claims, both reported
and unreported.
11
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 31%
of net earned premium for the three months ended March 31, 2002.
SALARIES AND EMPLOYEE BENEFITS decreased $126,484 (11%) to $987,221 for the
three months ended March 31, 2002, compared to salary and employee benefits of
$1,113,705 for the three months ended March 31, 2001.
COMMISSIONS TO AGENTS BROKERS decreased $20,398 (6%) to $302,609 for the three
months ended March 31, 2002, compared to commission expense of $323,007 for the
three months ended March 31, 2001.
OTHER OPERATING EXPENSES increased $17,014 (2%) to $745,871 for the three months
ended March 31, 2002, compared to $728,857 for the three months ended March 31,
2001.
INCOME TAX PROVISION was an expense of $30,386 (22% of pre-tax income) for the
three months ended March 31, 2002, compared to an income tax benefit of $69,939
in the three months ended March 31, 2001. This change was primarily due to a
pre-tax income of $136,438 (including tax-exempt investment income of $82,044)
in the three months ended March 31, 2002, compared to pre-tax loss of $11,835
(including tax-exempt investment income of $198,188) in the three months ended
March 31, 2001.
The effect of inflation on net income of the Company during the three months
ended March 31, 2002, and the three months ended March 31, 2001, was not
significant.
Forward Looking Statements
- --------------------------
Certain statements contained herein, including the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," that are not historical facts are forward looking. These
statements, which may be identified by forward-looking words or phrases such as
"anticipate," "believe," "expect," "intend," "may," "should," and "would,"
involve risks and uncertainties, many of which are beyond the control of the
Company. Such risks and uncertainties could cause actual results to differ
materially from these forward-looking statements. Factors which could cause
actual results to differ materially include underwriting actions not being
effective, rate increases for coverages not being sufficient, premium rate
adequacy relating to competition or regulation, actual versus estimated claim
experience, regulatory changes or developments, unforeseen calamities, general
market conditions, the Company's ability to introduce new profitable products,
and the Company's ability to expand geographically.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company's consolidated balance sheet includes a substantial amount of
invested assets whose fair values are subject to various market risk exposures
including interest rate risk and equity price risk.
The Company's invested assets consist of the following:
March 31 December 31 Increase
2002 2001 Decrease
---- ---- --------
Fixed maturity bonds (at amortized value) $93,028,688 $91,411,859 $1,616,829
Short-term cash investments (at cost) 1,983,673 2,863,622 (879,949)
Equity securities (at cost) - 216 (216)
Certificates of deposit (over 1 year, at cost) 400,000 400,000 -
---------- ---------- -------
Total invested assets $95,412,361 $94,675,697 $736,664
========== ========== =======
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 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------
(c) During the quarter ended March 31, 2002, the Company issued 3,245 shares of
its common stock upon exercise of employee stock options granted under the Unico
American Corporation Employee Incentive Stock Option Plan. These shares were
issued to one employee of the Company in exchange for $11,357.50 in cash. These
shares were acquired for investment without a view to the public distribution or
resale thereof, and the issuance thereof was exempt from the registration
requirements under the Securities Act of 1933, as amended, under section 4(2)
thereof as transactions not involving a public offering.
ITEM 6 - 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: May 13, 2002 By: \s\ ERWIN CHELDIN
-----------------
Erwin Cheldin
Chairman of the Board, President and Chief
Executive Officer, (Principal Executive Officer)
Date: May 13, 2002 By: \s\ LESTER A. AARON
--------------------
Lester A. Aaron
Treasurer, Chief Financial Officer, (Principal
Accounting and Principal Financial Officer)
13