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, 2002 to September 30, 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 November 12, 2002
1
PART 1 - FINANCIAL INFORMATION
------------------------------
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30 December 31
2002 2001
---- ----
ASSETS
- ------
Investments
Available for sale:
Fixed maturities, at market value
(amortized cost: September 30, 2002
$88,977,796; December 31, 2001
$91,811,859) $93,707,190 $94,628,282
Equity securities at market
(cost: September 30, 2002 $0;
December 31, 2001 $216) - 216
Short-term investments, at cost 9,565,785 2,863,622
----------- ----------
Total Investments 103,272,975 97,492,120
Cash 58,732 45,001
Accrued investment income 1,399,537 1,768,058
Premiums and notes receivable, net 6,901,637 6,248,327
Reinsurance recoverable:
Paid losses and loss adjustment expenses 849,036 732,054
Unpaid losses and loss adjustment expenses 15,929,104 10,748,080
Prepaid reinsurance premiums 40,065 37,683
Deferred policy acquisition costs 5,664,717 5,079,535
Property and equipment
(net of accumulated depreciation) 352,891 267,426
Deferred income taxes - 556,251
Income taxes receivable 1,844,589 5,398,939
Other assets 886,196 449,799
----------- -----------
Total Assets $137,199,479 $128,823,273
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
- -----------
Unpaid losses and loss adjustment expenses $69,023,571 $60,534,295
Unearned premiums 22,911,668 19,328,150
Advance premium and premium deposits 1,612,068 1,083,995
Deferred income taxes 151,040 -
Income taxes payable 25,757 -
Accrued expenses and other liabilities 5,248,532 7,256,457
---------- ----------
Total Liabilities $98,972,636 $88,202,897
---------- ----------
STOCKHOLDERS' EQUITY
- --------------------
Common stock, no par - authorized
10,000,000 shares; issued and
outstanding shares 5,489,533 at
September 30, 2002, and 5,481,288 at
December 31, 2001 $2,700,272 $2,671,415
Accumulated other comprehensive income 3,121,400 1,858,839
Retained earnings 32,405,171 36,090,122
---------- ----------
Total Stockholders' Equity $38,226,843 $40,620,376
---------- ----------
Total Liabilities and Stockholders' Equity $137,199,479 $128,823,273
=========== ===========
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
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES
- --------
Insurance Company Revenues
Premium earned $10,386,227 $9,014,402 $29,427,273 $26,004,015
Premium ceded 1,474,213 1,523,605 4,668,140 4,294,094
--------- --------- --------- ---------
Net premium earned 8,912,014 7,490,797 24,759,133 21,709,921
Net investment income 1,323,731 1,395,287 4,081,809 4,195,465
Net realized investment (loss) - - (216) (23,520)
Other income 19,098 2,572 27,745 17,325
---------- --------- ---------- ----------
Total Insurance Company Revenues 10,254,843 8,888,656 28,868,471 25,899,191
Other Revenues from Insurance Operations
Gross commissions and fees 1,585,100 1,375,654 4,473,100 4,124,453
Investment income 15,132 30,656 42,319 129,277
Net realized investment gains - - - 3,212
Finance charges and late fees earned 220,547 223,722 659,364 644,929
Other income 4,692 5,517 17,508 11,998
---------- ---------- ---------- ----------
Total Revenues 12,080,314 10,524,205 34,060,762 30,813,060
---------- ---------- ---------- ----------
EXPENSES
- --------
Losses and loss adjustment expenses 7,208,018 11,636,974 26,034,238 25,313,741
Policy acquisition costs 2,364,701 2,233,370 6,793,811 6,400,459
Salaries and employee benefits 1,198,074 1,052,922 3,236,751 3,283,212
Commissions to agents/brokers 298,838 304,355 905,057 944,172
Other operating expenses 731,784 606,386 2,212,689 1,928,529
---------- ---------- ---------- ----------
Total Expenses 11,801,415 15,834,007 39,182,546 37,870,113
---------- ---------- ---------- ----------
Income (Loss) Before Taxes 278,899 (5,309,802) (5,121,784) (7,057,053)
Income Tax Provision (Benefit) 132,554 (1,801,252) (1,711,309) (2,503,882)
------- --------- --------- ---------
Net Income (Loss) $146,345 $(3,508,550) $(3,410,475) $(4,553,171)
======= ========= ========= =========
PER SHARE DATA
- --------------
Basic Shares Outstanding 5,489,533 5,453,118 5,486,571 5,518,239
Basic Earnings (Loss) Per Share $0.03 $(0.64) $(0.62) $(0.83)
Diluted Shares Outstanding 5,489,533 5,453,118 5,486,571 5,518,239
Diluted Earnings (Loss) Per Share $0.03 $(0.64) $(0.62) $(0.83)
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
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Net Income (Loss) $146,345 $(3,508,550) $(3,410,475) $(4,553,171)
Other changes in comprehensive income, net of tax:
unrealized gains on securities classified as
as available-for-sale arising during the period 797,952 1,425,058 1,262,418 2,171,938
Less: reclassification adjustment for losses
included in net income (loss) - - 143 13,403
------- --------- --------- ---------
Comprehensive Income (Loss) $944,297 $(2,083,492) $(2,147,914) $(2,367,830)
======= ========= ========= =========
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,
2002 2001
---- ----
Cash Flows from Operating Activities:
Net (Loss) $(3,410,475) $(4,553,171)
Adjustments to reconcile net income to net cash from operations
Depreciation 64,332 52,871
Bond amortization, net 290,656 288,065
Net realized loss on sale of securities 216 20,308
Changes in assets and liabilities
Premium, notes and investment income receivable (284,789) (153,153)
Reinsurance recoverable (5,298,006) 1,141,194
Prepaid reinsurance premiums (2,382) (18,101)
Deferred policy acquisition costs (585,182) (453,526)
Other assets (436,394) (2,327,782)
Reserve for unpaid losses and loss adjustment expenses 8,489,276 5,609,496
Unearned premium reserve 3,583,518 1,884,751
Funds held as security and advanced premiums 528,073 (849,498)
Accrued expenses and other liabilities (2,007,925) (1,318,188)
Income taxes current/deferred 82,638 (117,103)
Federal income tax recoverable 3,554,350 -
--------- -------
Net Cash Provided (Used) from Operations 4,567,906 (793,837)
--------- -------
Investing Activities
Purchase of fixed maturity investments (10,302,696) (10,399,695)
Proceeds from maturity of fixed maturity investments 12,846,100 12,692,180
Net (increase) decrease in short-term investments (6,702,163) 392,710
Additions to property and equipment (149,797) (216,327)
--------- ---------
Net Cash Provided (Used) by Investing Activities (4,308,556) 2,468,868
--------- ---------
Financing Activities
Proceeds from issuance of common stock 28,858 -
Repurchase of common stock - (1,387,398)
Dividends paid to shareholders (274,477) (272,633)
------- ---------
Net Cash (Used) by Financing Activities (245,619) (1,660,031)
------- ---------
Net increase in cash 13,731 15,000
Cash at beginning of period 45,001 54,806
------ ------
Cash at End of Period $58,732 $69,806
====== ======
Supplemental Cash Flow Information Cash paid during the period for:
Interest - $75
Income taxes $75,636 $25,416
See notes to unaudited consolidated financial statements.
5
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 and nine months ended September 30, 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 September 30, 2002,
all options available under this plan have been exercised or terminated. 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, 2002, there were options covering 105,000 shares of common stock
outstanding under this Plan. Options covering 92,500 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, 2002, the Company did not repurchase any shares of the Company's
common stock. As of September 30, 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
SEPTEMBER 30, 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 and nine months ended September 30, 2002 and 2001:
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Basic Income (Loss) Per Share
- -----------------------------
Net income (loss) numerator $146,345 $(3,508,550) $(3,410,475) $(4,553,171)
======= ========== ========= =========
Weighted average shares outstanding denominator 5,489,533 5,453,118 5,486,571 5,518,239
========= ========= ========= =========
Basic Income (Loss) Per Share $0.03 $(0.64) $(0.62) $(0.83)
Diluted Income (Loss) Per Share
- -------------------------------
Net income (loss) numerator $146,345 $(3,508,550) $(3,410,475) $(4,553,171)
======= ========== ========= =========
Weighted average shares outstanding 5,489,533 5,453,118 5,486,571 5,518,239
Effect of diluted securities * - - - -
--------- --------- --------- ---------
Diluted shares outstanding denominator 5,489,533 5,453,118 5,486,571 5,518,239
========= ========= ========= =========
Diluted Income (Loss) Per Share $0.03 $(0.64) $(0.62) $(0.83)
* In loss periods, options are excluded from the calculation of diluted EPS, as
the inclusion of such options would have an antidilutive effect. For the three
months ended September 30, 2002, options to exercise 92,500 shares are
excluded from the calculation of diluted EPS, as the inclusion of such options
would have an antidilutive effect since the average market price during the
period was less than the exercise price of the options.
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 85% of
consolidated revenues for the three months and the nine months ended September
30, 2002, and 84% of revenues for the three and the nine months ended September
30, 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 Nine Months Ended
September 30 September 30
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues
- --------
Insurance company operation $10,254,843 $8,888,656 $28,868,471 $25,899,191
Other insurance operations 5,502,237 4,442,261 14,976,905 13,244,423
Intersegment elimination (1) (3,676,766) (2,806,712) (9,784,614) (8,330,554)
--------- --------- --------- ---------
Total other insurance operations 1,825,471 1,635,549 5,192,291 4,913,869
--------- ----------- --------- ---------
Total Revenues $12,080,314 $10,524,205 $34,060,762 $30,813,060
========== ========== ========== ==========
Income (Loss) Before Income Taxes
- ----------------------------------
Insurance company operation $(583,000) $(5,587,410) $(6,798,880) $(7,895,095)
Other insurance operations 861,899 277,608 1,677,096 838,042
------- --------- --------- ---------
Total Income (Loss) Before Income Taxes $278,899 $(5,309,802) $(5,121,784) $(7,057,053)
======= ========== ========= =========
7
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
NOTE 5 - SEGMENT REPORTING (continued)
- -------------------------------------
As of September 30
------------------
2002 2001
----- ----
Assets
- ------
Insurance company operation $119,108,739 $107,924,575
Intersegment eliminations (2) (1,449,894) (1,605,532)
----------- -----------
Total insurance company operation 117,658,845 106,319,043
Other insurance operations 19,540,634 18,985,714
----------- -----------
Total Assets $137,199,479 $125,304,757
=========== ===========
(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, 2002, the Company had cash and investments of $98,602,313 (at amortized
cost) of which $95,597,204 (97%) were investments of Crusader.
As of the quarter ended September 30, 2002, the Company had invested $88,977,796
(at amortized cost) or 90% of its total invested assets of $98,543,581 (at
amortized cost) 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 $88,977,796 (at
amortized cost) include $3,480,118 (4%) of pre-refunded state and municipal
tax-exempt bonds, $10,525,610 (12%) of U.S. treasury securities, $74,572,068
(84%) of high-quality industrial and miscellaneous bonds, and $400,000 of
certificates of deposit. The tax-exempt interest income earned for the three
months and the nine months ended September 30, 2002, was $52,381 and $243,996,
respectively.
The balance of the Company's investments are in high-quality, short-term
investments that include, bank money market accounts, certificates of deposit,
commercial paper, and a short-term treasury money market fund.
8
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 deposit 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. No shares were repurchased in
the nine months ended September 30, 2002.
Although material capital expenditures may also be funded through borrowings,
the Company believes that its cash and short-term investments at September 30,
2002, net of trust restriction of $699,749, 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.
Unico has a $2,000,000 line of credit with Union Bank of California. As of
September 30, 2002, no amounts were borrowed and the Company does not intend to
utilize its credit line during the remainder of its current term. This credit
line expires on November 4, 2002, at which time it is not expected to be
renewed.
In 2001, the Company initiated an upgrade and replacement of its printing and
forms generation systems. As of the date of this report, the project has been
completed with a total cost of approximately $95,000. There are no material
commitments for capital expenditures as of the date of this report.
State of California Regulatory Proceedings
- ------------------------------------------
On June 27, 2002, Crusader filed a lawsuit against California Insurance
Commissioner Harry Low over a Market Conduct Report that was made public by that
commissioner. The report, which was adopted by the Commissioner on June 17,
2002, was based on an examination conducted by the California Department of
Insurance around May 10, 2001. Crusader brought an action to correct what it
concluded were inaccuracies in the report. The Insurance Commissioner responded
to Crusader's lawsuit with a demurrer that was overruled by the Los Angeles
Superior Court on September 30, 2002. Thereafter, on October 24, 2002, the
Insurance Commissioner ordered Crusader to appear before the Office of
Administrative Hearing on January 28, 2003, to show cause why the Insurance
Commissioner should not issue an order requiring the Company to pay penalties on
the violations alleged in the report. Crusader contends that its conduct was
reasonable and intends to vigorously defend these charges. The Company does not
believe that the outcome of this matter will have a materially adverse effect on
its financial statements. No penalties on the violations alleged in the report
have been accrued in the financial statements.
(b) Results of Operations:
- --------------------------
All comparisons made in this discussion are comparing the three months and nine
months ended September 30, 2002, to the three months and nine months ended
September 30, 2001, unless otherwise indicated.
The Company had net earnings of $146,345 for the three months ending September
30, 2002, compared to a net loss of $3,508,550 for the three months ended
September 30, 2001, an increase from prior year quarter of $3,654,895. For the
nine months ended September 30, 2002, the Company had a net loss of $3,410,475
compared to a net loss of $4,553,171 for the nine months ended September 30,
2001, a decrease in net loss of $1,142,696. Total revenues increased $1,556,109
(15%) to $12,080,314 for the three months and $3,247,702 (11%) to $34,060,762
for the nine months ended September 30, 2002, when compared to total revenues of
$10,524,205 for the three months and $30,813,060 for the nine months ended
September 30, 2001.
PREMIUM WRITTEN, before reinsurance, increased $3,186,839 (34%) to $12,584,755
for the three months and $5,122,028 (18%) to $33,010,793 for the nine months
ended September 30, 2002, compared to written premium of $9,397,916 for the
three months and $27,888,765 for the nine months ended September 30, 2001. The
Company primarily writes commercial multiple peril business package policies.
This line of business represents approximately 96% and 97% of Crusader's total
written premium for the three months and nine months ended September 30, 2002,
respectively.
9
Written premium in California increased $3,311,982 (40%) to $11,612,841 in the
three months and $6,243,705 (26%) to $30,077,792 in the nine months ended
September 30, 2002, compared to the three and nine month periods of the prior
year. Premiums written outside of California decreased $125,143 (11%) to
$971,914 in the three months and $1,121,677 (28%) to $2,933,001 in the nine
months ended September 30, 2002, compared to the three and nine month periods of
the prior year. The increase in written premium in the state of 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 in California will continue, nor in which direction
they might change.
Primarily as a result of losses from liquor and premise liability coverages,
much of the Company's business outside of California has not been profitable. In
August 2002, the Company placed moratoriums on a substantial amount of
non-California business until further studies can be completed regarding
underwriting and pricing. The Company estimates that approximately one-half of
non-California business in force at June 30, 2002, will be cancelled or
non-renewed by June 30, 2003. The decrease in written premium outside of
California was also attributable to rate increases and coverage restrictions
implemented on non-California business in the third quarter of 2001 which made
the Company's products less competitive.
Crusader's written premium by state is as follows:
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
Increase Increase
2002 2001 (Decrease) 2002 2001 (Decrease)
---- ---- -------- ---- ---- --------
California $11,612,841 $8,300,859 $3,311,982 $30,077,792 $23,834,087 $6,243,705
Ohio 258,657 268,826 (10,169) 673,352 965,172 (291,820)
Arizona 166,290 198,166 (31,876) 566,192 831,948 (265,756)
Montana 111,992 125,112 (13,120) 393,872 433,704 (39,832)
Pennsylvania 100,935 122,986 (22,051) 377,437 522,992 (145,555)
Oregon 119,677 77,325 42,352 349,665 319,773 29,892
Washington 119,225 169,494 (50,269) 303,991 464,572 (160,581)
Nevada 84,307 48,722 35,585 205,162 176,525 28,637
Idaho 12,282 4,901 7,381 36,495 20,608 15,887
Texas (1,451) 64,623 (66,074) 26,835 297,638 (270,803)
Kentucky - 16,902 (16,902) - 21,746 (21,746)
---------- --------- --------- ---------- ---------- ---------
Total $12,584,755 $9,397,916 $3,186,839 $33,010,793 $27,888,765 $5,122,028
========== ========= ========= ========== ========== =========
PREMIUM EARNED, before reinsurance, increased $1,371,825 (15%) to $10,386,227
for the three months and $3,423,258 (13%) to $29,427,273 for the nine months
ended September 30, 2002, compared to $9,014,402 for the three months and
$26,004,015 for the nine months ended September 30, 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 $49,392 (3%) to $1,474,213 for the three months and
increased $374,046 (9%) to $4,668,140 for the nine months ended September 30,
2002, compared to premium ceded of $1,523,605 for the three months and
$4,294,094 for the nine months ended September 30, 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 three and nine month periods ended
September 30, 2002, and September 30, 2001, is as follows:
Three Months Ended Nine Months Ended
September 30, 2002 September 30,2002
------------------ -----------------
Increase in premium ceded under
current reinsurance contracts $715,206 $1,906,523
(Decrease) in provisionally rated
premium ceded (764,598) (1,532,477)
------- ---------
Net increase (decrease) in premium ceded $(49,392) $374,046
====== =======
The increase in premium ceded under current reinsurance contracts is primarily
due to rate increases on reinsurance contracts 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 $87,080
(6%) to $1,338,863 for the three months and $200,614 (5%) to $4,124,128 for the
nine months ended September 30, 2002, compared to investment income of
$1,425,943 for the three months and $4,324,742 for the nine months ended
September 30, 2001. The decrease in investment income is primarily due to a
general lowering of yields on new and reinvested assets due to current market
conditions.
GROSS COMMISSION AND FEE INCOME increased $209,446 (15%) to $1,585,100 for the
three months and $348,647 (8%) to $4,473,100 for the nine months ended September
30, 2002, compared to commission and fee income of $1,375,654 for the three
months and $4,124,453 for the nine months ended September 30, 2001. The increase
in commission and fee income in the three and nine months ended September 30,
2002, was primarily due to an increase in policy fees earned on policies written
by Crusader.
The increase in policy fee income was primarily due to an increase in the fee
from $100 to $165 per California policy. This increase was approved by
California regulatory authorities on June 21, 2002, and was implemented for
policies effective on and after the latter part of August 2002. The Company
wrote 13,169 California policies in the nine months ended September 30, 2002,
and 16,723 in the year ended December 31, 2001.
The increase in gross commission and fee income for the three and nine months
ended September 30, 2002, compared to the three and nine months ended September
30, 2001, are as follows:
Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2002
------------------ ------------------
Policy fee income $156,429 $178,532
Health and life insurance program 48,456 84,727
Other commission and fee income (16,843) (31,712)
Workers' compensation program (7,733) (7,342)
Daily automobile rental insurance program 29,137 124,442
------- -------
Net increase in commission and fee income $209,446 $348,647
======= =======
LOSSES AND LOSS ADJUSTMENT EXPENSES were 81% of net premium earned for the three
months and 105% of net premium earned for the nine months ended September 30,
2002, compared to 155% of net premium earned for the three months and 117% of
net premium earned for the nine months ended September 30, 2001. Incurred losses
of prior years increased approximately $804,000 (adverse development) in the
three months and $7,137,000 (adverse development) in the nine months ended
September 30, 2002, compared 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.
In the years ended December 31, 2001 and 2000, the Company significantly
increased its estimates 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). As of December 31,
2001, the Company had instituted various underwriting changes to address the
prior adverse development. However, development in the first and second quarter
of 2002 indicated that the underwriting changes implemented through December 31,
2001, were not sufficient to fully address the development of losses primarily
occurring subsequent to 1999 on the Company's special risk class of business and
on business outside of California. Development of prior years' losses in the
third quarter ended September 30, 2002, indicated that additional reserves were
warranted.
Primarily as a result of losses from liquor and premise liability coverages,
much of the Company's business outside of California continued to develop
adversely and was not profitable for the Company. Although the Company either
significantly increased rates or reduced coverages offered on this business in
the third quarter of 2001, adverse loss development trends and declining sales
on this business caused the Company to conclude that further steps were needed.
Therefore, in August 2002 the Company placed moratoriums on a substantial amount
of that business until further studies could be completed regarding underwriting
and pricing. Direct written premium on non-California business was approximately
$5,263,000 in the year ended December 31, 2001, and approximately $2,933,000 in
the nine months ended September 30, 2002. The Company estimates that
approximately one-half of non-California business in force at June 30, 2002,
will be cancelled or non-renewed by June 30, 2003.
11
The Company is also in the process of increasing its rates on its special risk
class of business. This class of business represents risks written within
current underwriting programs that have a higher degree of exposure and require
special pricing and underwriting. Direct written premium on this business was
approximately $693,000 in the three months and $1,780,000 in the nine months
ended September 30, 2002, compared to $857,000 in the three months and
$2,243,000 in the nine months ended September 30, 2001. Direct written premium
on this business was approximately $2,922,000 in the year ended December 31,
2001, and $2,851,000 in the year ended December 31, 2000. The Company believes
that the decrease in written premium in the three and nine months ended
September 30, 2002, compared to the three and nine months ended September 30,
2001, was primarily due to more selective underwriting. However, based upon the
most recent loss development analysis, the Company believes that premium rate
increases for this business are also necessary. Accordingly, the Company is in
the process of substantially increasing its rates on this business. Such rate
changes are required to be filed with and approved by regulatory authorities,
and there is no assurance that these filings will be approved or how long they
will take to implement. The Company cannot determine the effect any rate
increases will have on sales; however, it believes that maintaining an adequate
rate is more important than maintaining market share.
As disclosed in the Company's December 31, 2001 Annual Report on Form 10K, the
Company has experienced adverse development on its apartment house business due
to the effect of settlements on habitability claims. Those settlements were
substantially influenced by California law that provides for the payment of
plaintiff attorney fees without regard to policy limits and by the "Montrose
Chemical Corp. v. Admiral Insurance Company" decision of 1995 that expands
coverage through multiple policy periods for continuing and progressive damages.
In 2000, the Company modified its underwriting criteria to address this adverse
development; and on June 24, 2002, the Company received approval from regulatory
authorities to modify its policy form to limit the statutory attorney fee
exposure. This modified policy form applies to policies effective on and after
September 7, 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 reasonably predictable than long-tail liability
claims. The liability for unpaid losses and loss adjustment expenses is based
upon the accumulation of individual case estimates for losses reported prior to
the close of the accounting period plus estimates based on experience and
industry data for development of case estimates and for unreported losses and
loss adjustment expenses. Since the emergence and disposition of claims are
subject to uncertainties, the net amounts that will ultimately be paid to settle
claims may vary significantly from the estimated amounts provided for in the
accompanying consolidated financial statements. Any adjustments to reserves are
reflected in the operating results of the periods in which they are made.
Management believes that the aggregate reserves for losses and loss adjustment
expenses are reasonable and adequate to cover the cost of claims, both reported
and unreported.
Primarily as a result of the underwriting losses in 2001 and 2000, the A.M. Best
Company lowered Crusader's rating from A (Excellent) to A- (Excellent) effective
March 26, 2002, based on financial information as of December 31, 2001. At the
time the rating was lowered, A.M. Best remained concerned with the potential for
further adverse loss reserve development and the negative impact it would have
on the Company's operating performance and overall capitalization, and viewed
that rating outlook as negative. Due to the continued adverse development in the
six months ended June 30, 2002, on October 3, 2002, A.M. Best Company lowered
Crusader's rating to B+ (Very Good) and continues to view its rating outlook as
negative.
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 27% of net premium earned for the three months and nine
months ended September 30, 2002, and 30% of net earned premium for the three
months and 29% of net earned premium for the nine months ended September 30,
2001.
12
SALARIES AND EMPLOYEE BENEFITS increased $145,152 (14%) to $1,198,074 for the
three months and decreased $46,461 (1%) to $3,236,751 for the nine months ended
September 30, 2002, compared to salary and employee benefits of $1,052,922 for
the three months and $3,283,212 for the nine months ended September 30, 2001.
The increase in the three months ended September 30, 2002 was primarily due to a
decrease in salaries and employee benefits being allocated to policy acquisition
costs.
COMMISSIONS TO AGENTS/BROKERS decreased $5,517 (2%) to $298,838 for the three
months and $39,115 (4%) to $905,057 for the nine months ended September 30,
2002, compared to commission expense of $304,355 for the three months and
$944,172 for the nine months ended September 30, 2001.
OTHER OPERATING EXPENSES increased $125,398 (21%) to $731,784 for the three
months and $284,160 (15%) to $2,212,689 for the nine months ended September 30,
2002, compared to operating expenses of $606,386 for the three months and
$1,928,529 for the nine months ended September 30, 2001. The increase in the
three and nine months ended September 30, 2002, was primarily due to an increase
in legal fees and regulatory examination fees.
INCOME TAX PROVISION was $132,554 (48% of pre-tax income) for the three months
and an income tax benefit of $1,711,309 (33% of pre-tax loss) for the nine
months ended September 30, 2002, compared to an income tax benefit of $1,801,252
(34% of pre-tax loss) in the three months and an income tax benefit of
$2,503,882 (35% of pre-tax loss) in the nine months ended September 30, 2001.
This decrease in tax benefit was primarily due the pre-tax income of $278,899 in
the three months and pre-tax loss of $5,121,784 in the nine months ended
September 30, 2002, compared to the pre-tax loss of $5,309,802 in the three
months and $7,057,053 in the nine months ended September 30, 2001. The income
tax benefit for the nine months ended September 30, 2002, arose primarily from
the Company's ability to recover prior income taxes paid due to the carryback of
current period net operating losses.
The effect of inflation on net income of the Company during the three and nine
months ended September 30, 2002, and the three and nine months ended September
30, 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 approved or sufficient, premium rate adequacy not being
competitive, 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 effect of the Company's
decision not to expand geographically.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company's consolidated balance sheets include 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
2002 2001 (Decrease)
---- ---- --------
Fixed maturity bonds (at amortized value) $88,577,796 $91,411,859 $(2,834,063)
Short-term cash investments (at cost) 9,565,785 2,863,622 6,702,163
Equity securities (at cost) - 216 (216)
Certificates of deposit (over 1 year, at cost) 400,000 400,000 -
---------- ---------- ---------
Total invested assets $98,543,581 $94,675,697 $3,867,884
========== ========== =========
There have been no material changes in the composition of the Company's invested
assets or market risk exposures since the end of the preceding fiscal year end.
13
ITEM 4 - CONTROLS AND PROCEDURES
- --------------------------------
Within the 90-day period prior to the filing of this report, an evaluation was
carried out by the Company's management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-14(c)
under the Securities Exchange Act of 1934). Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the design
and operation of these disclosure controls and procedures were effective. No
significant changes were made in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
PART II - OTHER INFORMATION
- ---------------------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
99.1 Certification of Chief Executive Officer under Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K: None.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned there unto authorized.
UNICO AMERICAN CORPORATION
Date: November 12, 2002 By: /s/ ERWIN CHELDIN
---------------------
Erwin Cheldin
Chairman of the Board, President and Chief
Executive Officer, (Principal Executive Officer)
Date: November 12, 2002 By: /s/ LESTER A. AARON
-----------------------
Lester A. Aaron
Treasurer, Chief Financial Officer, (Principal
Accounting and Principal Financial Officer)
14
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Erwin Cheldin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Unico American
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002.
/s/ Erwin Cheldin
- ------------------
Erwin Cheldin
Chairman of the Board, President and Chief Executive Officer
15
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Lester A. Aaron, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Unico American
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002.
/s/ Lester A. Aaron
- --------------------
Lester A. Aaron
Treasurer, Chief Financial Officer
16
EXHIBIT INDEX
Exhibit No. Description
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)