M
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report under Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 2005 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-3978
UNICO AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 95-2583928
(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification No.)
23251 Mulholland Drive, Woodland Hills, California 91364
(Address of Principal Executive Offices) (Zip Code)
(818) 591-9800
(Registrant's telephone number, Including Area Code)
No Change
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
5,496,315
Number of shares of common stock outstanding as of November 11, 2005
1
PART 1 - FINANCIAL INFORMATION
------------------------------
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30 December 31
2005 2004
---- ----
ASSETS
- ------
Investments
Available for sale:
Fixed maturities, at market value (amortized cost: September 30,
2005 $134,756,370; December 31, 2004 $128,989,658) $134,251,448 $129,559,615
Short-term investments, at cost 4,145,744 3,118,118
----------- -----------
Total Investments 138,397,192 132,677,733
Cash 43,921 15,016
Accrued investment income 959,770 1,047,278
Premiums and notes receivable, net 6,996,211 7,770,560
Reinsurance recoverable:
Paid losses and loss adjustment expenses 501,469 18,512
Unpaid losses and loss adjustment expenses 22,408,107 20,119,011
Deferred policy acquisition costs 7,495,873 8,203,238
Property and equipment (net of accumulated depreciation) 730,986 278,404
Deferred income taxes 1,914,738 1,667,195
Other assets 798,449 773,329
----------- -----------
Total Assets $180,246,716 $172,570,276
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
- -----------
Unpaid losses and loss adjustment expenses $96,475,531 $87,469,000
Unearned premiums 31,864,327 35,656,393
Advance premium and premium deposits 951,635 1,067,224
Income taxes payable 68,081 227,551
Notes payable-related parties - 500,000
Accrued expenses and other liabilities 4,298,847 5,224,783
----------- -----------
Total Liabilities $133,658,421 $130,144,951
----------- -----------
STOCKHOLDERS' EQUITY
- --------------------
Common stock, no par - authorized 10,000,000 shares; issued and outstanding
shares 5,496,315 at September 30, 2005, and 5,492,315 at
December 31, 2004 $2,720,487 $2,708,047
Accumulated other comprehensive income (loss) (333,249) 376,172
Retained earnings 44,201,057 39,341,106
---------- ----------
Total Stockholders' Equity $46,588,295 $42,425,325
---------- ----------
Total Liabilities and Stockholders' Equity $180,246,716 $172,570,276
=========== ===========
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
------------ ------------
2005 2004 2005 2004
---- ---- ---- ----
REVENUES
- --------
Insurance Company Revenues
Premium earned $16,046,897 $17,298,120 $49,256,455 $50,612,113
Premium ceded 3,508,114 4,797,341 10,900,956 13,197,468
---------- ---------- ---------- ----------
Net premium earned 12,538,783 12,500,779 38,355,499 37,414,645
Investment income 1,047,537 1,053,114 3,137,272 3,167,781
Other income 31,081 23,564 75,739 72,752
---------- ---------- ---------- ----------
Total Insurance Company Revenues 13,617,401 13,577,457 41,568,510 40,655,178
Other Revenues from Insurance Operations
Gross commissions and fees 1,377,801 1,656,143 4,142,472 4,995,893
Investment income 15,544 9,260 43,919 27,663
Finance charges and fees 187,889 231,799 579,813 713,537
Other income 5,800 3,295 13,158 9,288
---------- ---------- ---------- ----------
Total Revenues 15,204,435 15,477,954 46,347,872 46,401,559
---------- ---------- ---------- ----------
EXPENSES
- --------
Losses and loss adjustment expenses 7,900,404 8,719,947 24,456,233 26,328,735
Policy acquisition costs 2,619,682 2,616,107 7,947,104 7,739,279
Salaries and employee benefits 1,309,777 1,256,240 3,868,772 3,569,704
Commissions to agents/brokers 160,598 226,191 517,901 728,487
Other operating expenses 628,957 540,097 1,972,527 2,002,126
---------- ---------- ---------- ----------
Total Expenses 12,619,418 13,358,582 38,762,537 40,368,331
---------- ---------- ---------- ----------
Income Before Taxes 2,585,017 2,119,372 7,585,335 6,033,228
Income tax provision 923,559 693,159 2,725,384 2,115,628
--------- --------- --------- ---------
Net Income $1,661,458 $1,426,213 $4,859,951 $3,917,600
========= ========= ========= =========
PER SHARE DATA
- --------------
Basic Shares Outstanding 5,496,315 5,489,815 5,495,826 5,489,815
Basic Earnings Per Share $0.30 $0.26 $0.88 $0.71
Diluted Shares Outstanding 5,610,753 5,581,440 5,613,210 5,577,357
Diluted Earnings Per Share $0.30 $0.26 $0.87 $0.70
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
------------ ------------
2005 2004 2005 2004
---- ---- ---- ----
Net Income $1,661,458 $1,426,213 $4,859,951 $3,917,600
Other changes in comprehensive income, net of tax:
Unrealized gains (losses) on securities classified
as available-for-sale arising during the period (292,199) 164,025 (709,421) (1,188,406)
--------- --------- --------- ---------
Comprehensive Income $1,369,259 $1,590,238 $4,150,530 $2,729,194
========= ========= ========= =========
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
2005 2004
---- ----
Cash Flows from Operating Activities:
Net Income $4,859,951 $3,917,600
Adjustments to reconcile net income to net cash from operations
Depreciation 112,771 70,982
Bond amortization, net 90,269 197,825
Changes in assets and liabilities
Premium, notes and investment income receivable 861,857 317,059
Reinsurance recoverable (2,772,053) (1,588,876)
Prepaid reinsurance premiums - 1,073
Deferred policy acquisition costs 707,365 (171,381)
Other assets (25,120) 539,398
Reserve for unpaid losses and loss adjustment expenses 9,006,531 6,115,088
Unearned premium reserve (3,792,066) 939,460
Funds held as security and advanced premiums (115,589) 23,436
Accrued expenses and other liabilities (925,936) (1,598,617)
Income taxes current/deferred (41,555) (359,478)
Income taxes recoverable - (177,057)
--------- ---------
Net Cash Provided from Operations 7,966,425 8,226,512
--------- ---------
Investing Activities
Purchase of fixed maturity investments (35,553,071) (42,462,593)
Proceeds from maturity of fixed maturity investments 29,696,090 30,530,817
Net (increase) decrease in short-term investments (1,027,626) 4,249,534
Additions to property and equipment (565,353) (48,447)
--------- ---------
Net Cash (Used) by Investing Activities (7,449,960) (7,730,689)
--------- ---------
Financing Activities
Proceeds from issuance of common stock 12,440 -
Repayment of notes payable - related parties (500,000) (500,000)
------- -------
Net Cash (Used) by Financing Activities (487,560) (500,000)
------- -------
Net increase (decrease) in cash 28,905 (4,177)
Cash at beginning of period 15,016 37,988
------ ------
Cash at End of Period $43,921 $33,811
====== ======
Supplemental Cash Flow Information
Cash paid during the period for:
Interest $6,250 $2,603
Income taxes $2,765,872 $2,371,239
See notes to unaudited consolidated financial statements.
5
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Nature of Business
- ------------------
Unico American Corporation is an insurance holding company that underwrites
property and casualty insurance through its insurance company subsidiary;
provides property, casualty, health and life insurance through its agency
subsidiaries; and provides insurance premium financing and membership
association services through its other subsidiaries. Unico American Corporation
is referred to herein as the "Company" or "Unico" and such references include
both the corporation and its subsidiaries, all of which are wholly owned, unless
otherwise indicated. Unico was incorporated under the laws of Nevada in 1969.
Principles of Consolidation
- ---------------------------
The accompanying unaudited consolidated financial statements include the
accounts of Unico American Corporation and its subsidiaries. All significant
inter-company accounts and transactions have been eliminated in consolidation.
Basis of Presentation
- ---------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with U.S. 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, 2005, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005. Quarterly financial statements should be read in conjunction
with the consolidated financial statements and related notes in the Company's
2004 Annual Report on Form 10-K as filed with the Securities and Exchange
Commission.
Use of Estimates in the Preparation of the Financial Statements
- ---------------------------------------------------------------
The preparation of financial statements in conformity with GAAP requires the
Company to make estimates and assumptions that affect its reported amounts of
assets and liabilities and its disclosure of any contingent assets and
liabilities at the date of its financial statements, as well as its reported
amounts of revenues and expenses during the reporting period. Actual results
could differ materially from those estimates.
NOTE 2 - OMNIBUS STOCK PLAN
- ---------------------------
The Company's 1999 Omnibus Stock Plan that covers 500,000 shares of the
Company's common stock (subject to adjustment in the case of stock splits,
reverse stock splits, stock dividends, etc.) was approved by shareholders June
4, 1999. On August 26, 1999, the Company granted 135,000 incentive stock options
of which 40,000 were terminated and 95,000 were outstanding and exercisable as
of September 30, 2005. These options expire 10 years from the date of the grant.
On December 18, 2002, the Company granted an additional 182,000 incentive stock
options under the Company's 1999 Omnibus Stock Plan of which 6,500 options were
exercised, 2,500 options were terminated and 173,000 were outstanding as of
September 30, 2005. These options expire 10 years from the date of the grant.
These options become exercisable as follows:
Currently Exercisable 105,500
January 1, 2006 37,500
January 1, 2007 30,000
-------
Total 173,000
=======
6
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE 2 - OMNIBUS STOCK PLAN (continued)
- --------------------------------------
The Company applies the intrinsic-value based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations including FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB Opinion No. 25, to account for its fixed-plan stock
options. Under this method, compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. FASB Statement No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation," and FASB Statement No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure," an amendment of SFAS 123, established
accounting and disclosure requirements using a fair-value based method of
accounting for stock-based employee compensation plans. As permitted by existing
accounting standards, the Company has elected to continue to apply the
intrinsic-value based method of accounting described above and has adopted only
the disclosure requirements of SFAS 123, as amended. In December 2004, FASB
Statement No. 123R (SFAS 123R) which revised SFAS 123 was issued and will be
applicable for the Company in 2006 (see Note 5).
Had compensation cost for the Company's stock-based compensation plan been
reflected in the accompanying consolidated financial statements based on the
fair value at the grant dates for option awards consistent with the method of
SFAS 123, the Company's net income would have been reduced to the pro forma
amounts indicated below:
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2005 2004 2005 2004
---- ---- ---- ----
Net Income
As reported $1,661,458 $1,426,213 $4,859,951 $3,917,600
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 12,376 18,975 37,126 56,925
--------- --------- --------- ---------
Pro forma $1,649,082 $1,407,238 $4,822,825 $3,860,675
========= ========= ========= =========
Income Per Share
As reported $0.30 $0.26 $0.88 $0.71
Pro forma $0.30 $0.26 $0.88 $0.70
Income Per Share - Assuming Dilution:
As reported $0.30 $0.26 $0.87 $0.70
Pro forma $0.29 $0.25 $0.86 $0.69
Calculations of the fair value under the method prescribed by SFAS No. 123 were
made using the Black-Scholes Option-Price Model with the following weighted
average assumptions used for the 1999 and 2002 grants:
2002 1999
Grant Grant
----- -----
Dividend yield 1.40% 2.46%
Expected volatility 34% 43%
Expected lives 10 Years 10 Years
Risk-free interest rates 4.05% 6.09%
Fair value of options granted $1.32 $4.30
7
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE 3 - REPURCHASE OF COMMON STOCK - EFFECTS 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, 2005, the Company did not repurchase any shares of the Company's
common stock. As of September 30, 2005, the Company had purchased and retired
under the Board of Directors' authorization an aggregate of 868,958 shares of
its common stock at a cost of $5,517,465.
NOTE 4 - EARNINGS PER SHARE
- ---------------------------
The following table represents the reconciliation of the numerators and
denominators of the Company's basic earnings per share and diluted earnings per
share computations reported on the Consolidated Statements of Operations for the
three and nine months ended September 30, 2005 and 2004:
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2005 2004 2005 2004
---- ---- ---- ----
Basic Earnings Per Share
- ------------------------
Net income numerator $1,661,458 $1,426,213 $4,859,951 $3,917,600
========= ========= ========= =========
Weighted average shares outstanding denominator 5,496,315 5,489,815 5,495,826 5,489,815
========= ========= ========= =========
Basic Earnings Per Share $0.30 $0.26 $0.88 $0.71
Diluted Earnings Per Share
- --------------------------
Net income numerator $1,661,458 $1,426,213 $4,859,951 $3,917,600
========= ========= ========= =========
Weighted average shares outstanding 5,496,315 5,489,815 5,495,826 5,489,815
Effect of diluted securities 114,438 91,625 117,384 87,542
--------- --------- --------- ---------
Diluted shares outstanding denominator 5,610,753 5,581,440 5,613,210 5,577,357
========= ========= ========= =========
Diluted Earnings Per Share $0.30 $0.26 $0.87 $0.70
NOTE 5 - RECENTLY ISSUED ACCOUNTING STANDARDS
- ---------------------------------------------
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 123R "Share-Based Payment" (SFAS I23R), which revises FASB
Statement No. 123 (SFAS 123) and supersedes APB 25. SFAS 123R eliminates an
entity's ability to account for share-based payments using APB 25 and requires
that all such transactions be accounted for using a fair value based method. In
April 2005, the SEC deferred the effective date of SFAS 123R from the first
interim or annual period beginning after June 15, 2005, to the next fiscal year
beginning after June 15, 2005. SFAS 123R is not expected to have a material
impact on the Company's results of operations or financial position.
NOTE 6 - 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 approximately
90% of consolidated revenues for the three and nine months ended September 30,
2005, and approximately 88% of revenues for the three and nine months ended
September 30, 2004. The Company's remaining operations constitute a variety of
specialty insurance services, each with unique characteristics and individually
insignificant to consolidated revenues.
8
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE 6 - SEGMENT REPORTING (continued)
- -------------------------------------
Revenues, income before income taxes, and assets by segment are as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2005 2004 2005 2004
---- ---- ---- ----
Revenues
- --------
Insurance company operation $13,617,401 $13,577,457 $41,568,510 $40,655,178
Other insurance operations 5,728,516 6,830,397 17,246,282 19,897,100
Intersegment elimination (1) (4,141,482) (4,929,900) (12,466,920) (14,150,719)
--------- --------- ---------- ----------
Total other insurance operations 1,587,034 1,900,497 4,779,362 5,746,381
--------- --------- --------- ---------
Total Revenues $15,204,435 $15,477,954 $46,347,872 $46,401,559
========== ========== ========== ==========
Income Before Income Taxes
- --------------------------
Insurance company operation $2,311,592 $1,006,067 $6,909,667 $3,355,695
Other insurance operations 273,425 1,113,305 675,668 2,677,533
--------- --------- --------- ---------
Total Income Before Income Taxes $2,585,017 $2,119,372 $7,585,335 $6,033,228
========= ========= ========= =========
As of September 30
------------------
2005 2004
---- ----
Assets
- ------
Insurance company operation $160,576,857 $148,047,128
Intersegment eliminations (2) (2,047,200) (2,488,063)
----------- -----------
Total insurance company operation 158,529,657 145,559,065
Other insurance operations 21,717,059 23,028,529
---------- ----------
Total Assets $180,246,716 $168,587,594
=========== ===========
(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.
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
OVERVIEW
- --------
General
- -------
Unico American Corporation is an insurance holding company that underwrites
property and casualty insurance through its insurance company subsidiary;
provides property, casualty, health and life insurance through its agency
subsidiaries; and through its other subsidiaries provides insurance premium
financing and membership association services.
The Company had a net income of $1,661,458 for the three months ended September
30, 2005, compared to net income of $1,426,213 for the three months ended
September 30, 2004, an increase in net income of $235,245 (16%). For the nine
months ended September 30, 2005, the Company had a net income of $4,859,951
compared to a net income of $3,917,600 for the nine months ended September 30,
2004, an increase in net income of $942,351 (24%).
This overview discusses some of the relevant factors that management considers
in evaluating the Company's performance, prospects and risks. It is not
all-inclusive and is meant to be read in conjunction with the entirety of the
management discussion and analysis, the Company's financial statements and notes
thereto, and all other items contained within the report on this Form 10-Q.
Revenue and Income Generation
- -----------------------------
The Company receives its revenue primarily from earned premium derived from the
insurance company operations, commission and fee income generated from the
insurance agency operations, finance charges and fee income from the premium
finance operations, and investment income from cash generated primarily from the
insurance operation. The insurance company operation generates approximately 90%
of the Company's total revenue. The Company's remaining operations constitute a
variety of specialty insurance services, each with unique characteristics and
individually not material to consolidated revenues.
Insurance Company Operation
- ---------------------------
The property and casualty insurance industry is highly competitive and includes
many insurers, ranging from large companies offering a wide variety of products
worldwide to smaller, specialized companies in a single state or region offering
only a single product. Many of the Company's existing or potential competitors
have considerably greater financial and other resources, have a higher rating
assigned by independent rating organizations such as A.M. Best Company, have
greater experience in the insurance industry, and offer a broader line of
insurance products than the Company. Currently, Crusader is writing primarily
Commercial Multiple Peril business only in the state of California. Crusader's
current rating (effective October 21, 2005) by A.M. Best Company is B+ (Very
Good) with a rating outlook of stable.
A primary challenge of the property and casualty insurance company operation is
contending with the fact that the Company sells its products before the ultimate
costs are actually known. When pricing its products, the Company projects the
ultimate loss and loss adjustment expense that it anticipates will be incurred
after the policy is sold. In addition, factors such as changes in, among other
things, regulations, the legal environment, and inflation can all impact the
ultimate cost.
The Company's future writings growth is dependent on market conditions,
competition, and the Company's ability to introduce new and profitable products.
The Company believes that the "hard market" condition experienced by the Company
in the last few years no longer exists. The Company also believes that rate
adequacy is more important than premium growth and that underwriting profit is
the Company's primary goal. Management's assessment of trends and underwriting
results is a primary factor in its decisions to expand or contract its business.
The Company has no plan to expand into additional states. Instead, the Company
intends to allocate its resources toward marketing and improving its California
business rates, rules, and forms.
10
Crusader's underwriting results are as follows:
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
Increase Increase
2005 2004 (Decrease) 2005 2004 (Decrease)
---- ---- --------- ---- ---- --------
Net premium earned $12,538,783 $12,500,779 $38,004 $38,355,499 $37,414,645 $940,854
Less:
Losses and loss adjustment expenses 7,900,404 8,719,947 (819,543) 24,456,233 26,328,735 (1,872,502)
Policy acquisition costs 2,619,682 2,616,107 3,575 7,947,104 7,739,279 207,825
---------- ---------- ------- ---------- ---------- ---------
Total 10,520,086 11,336,054 (815,968) 32,403,337 34,068,014 (1,664,677)
---------- ---------- ------- ---------- ---------- ---------
Underwriting Profit
(Before Income Taxes) $2,018,697 $1,164,725 $853,972 $5,952,162 $3,346,631 $2,605,531
========= ========= ======= ========= ========= =========
The improved underwriting results for the three and nine months ended September
30, 2005, as shown in the above table, is primarily the result of a decrease in
losses and loss adjustment expenses. As a result of underwriting losses in 2000
through 2002, management analyzed and acted upon various components of its
underwriting activity. The Company believes that the implementation of those
actions contributed to the improved underwriting results. Losses and loss
adjustment expenses of all prior accident years were approximately $771,000
(favorable development) in the three months and $2,385,000 (favorable
development) in the nine months ended September 30, 2005, compared to losses and
loss adjustment expenses of all prior accident years of approximately $170,000
(adverse development) in the three months and $4,000 (favorable development) in
the nine months ended September 30, 2004.
Premium written before reinsurance decreased $2,854,216 (16%) to $15,106,164 for
the three months ended September 30, 2005, compared to $17,960,380 for the three
months ended September 30, 2004. For the nine months ended September 30, 2005,
premium written before reinsurance decreased $6,087,204 (12%) to $45,464,369,
compared to $51,551,573 for the nine months ended September 30, 2004. Policies
issued decreased 906 (17%) to 4,574 for the three months ended September 30,
2005, compared to 5,480 for the three months ended September 30, 2004. For the
nine months ended September 30, 2005, policies issued decreased 2,087 (13%) to
13,908, compared to 15,995 for the nine months ended September 30, 2004. The
decrease in written premium before reinsurance for the three and nine months
ended September 30, 2005, is primarily a result of the decrease in the number of
policies issued during these periods. Despite the increased competition in the
property and casualty marketplace, the Company believes that rate adequacy is
more important than premium growth and underwriting profit is the Company's
primary goal. The Company's average gross written premium per policy issued
remained comparable to the prior year period. Average written premium per policy
as of September 30, 2005, was $3,269 compared with $3,223 as of September 30,
2004.
Other Operations
- ----------------
The Company's other operations generate commissions, fees, and finance charges
from various insurance products. The items that have the most significant
economic impact on other operations are as follows:
Unifax primarily sells and services insurance policies for Crusader. The
commissions paid by Crusader to Unifax are eliminated as intercompany
transactions and are not reflected as income in the financial statements. Unifax
also receives policy fee income that is directly related to the Crusader
policies it sells. As a result of the decrease in Crusader policies sold by
Unifax, policy fee income decreased $91,737 (10%) to $791,296 for the three
months and $309,019 (12%) to $2,280,095 for the nine months ended September 30,
2005, compared to $883,033 for the three months and $2,589,114 for the nine
months ended September 30, 2004.
American Insurance Brokers, Inc. (AIB), a wholly owned subsidiary of the
Company, sells and services health insurance policies for individual/family and
small business groups and receives commission and fee income based on the
premiums that it writes. Commission income in this program decreased $128,853
(24%) to $399,397 for the three months and $464,094 (27%) to $1,225,418 for the
nine months ended September 30, 2005, compared to $528,250 and $1,689,512 for
the three and nine months ended September 30, 2004, respectively. The decrease
is primarily a result of CIGNA HealthCare's (CIGNA) decision to discontinue its
individual/family health insurance program over the period from November 1,
2003, through October 1, 2004. AIB had been assisting former CIGNA policyholders
to find health coverage with other insurance carriers that AIB represents.
11
Investments and Liquidity
- -------------------------
The Company generates revenue from its fixed maturity and short-term
investments. These investments totaled approximately $138.9 million (at
amortized cost) at September 30, 2005, compared to $132.1 million (at amortized
cost) at December 31, 2004. Investment income for the three and nine months
ended September 30, 2005, were $1,063,081 and $3,181,191 respectively, compared
with $1,062,374 and $3,195,444 for the three and nine months ended September 30,
2004, respectively.
LIQUIDITY AND CAPTIAL 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, 2005, the Company had cash and investments of $138,946,035 (at amortized
cost) of which $136,405,542 (98%) were investments of Crusader.
As of September 30, 2005, the Company had invested $134,756,370 (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 $134,756,370 (at
amortized cost) include $943,561 (0.7%) of pre-refunded state and municipal
tax-exempt bonds, $98,372,099 (73.0%) of U.S. treasury securities, $11,999,897
(8.9%) of U.S. government sponsored enterprise securities, $22,940,813 (17.0%)
of industrial and miscellaneous securities, and $500,000 (0.4%) of long-term
certificates of deposit. The tax-exempt interest income earned for the three and
nine months ended September 30, 2005, was $3,529 and $10,745, respectively.
The balance of the Company's investments is in short-term investments that
include bank money market accounts, certificates of deposit, commercial paper,
and a short-term treasury money market fund.
The Company's investment guidelines on equity securities limit investments in
equity securities to an aggregate maximum of $2,000,000. The Company's
investment guidelines on fixed maturities limit those investments to high-grade
obligations with a maximum term of eight years. The maximum investment
authorized in any one issuer is $2,000,000 and the maximum in any one U.S.
government agency or U.S. government sponsored enterprise is $3,000,000. This
dollar limitation excludes bond premiums paid in excess of par value and U.S.
government or U.S. government guaranteed issues. Investments in municipal
securities are primarily pre-refunded and secured by U.S. treasury securities.
The short-term investments are either U.S. government obligations, FDIC insured,
or are in an institution with a Moody's rating of P2 and/or a Standard & Poor's
rating of A1. All of the Company's fixed maturity investment securities are
rated and readily marketable and could be liquidated without any materially
adverse financial impact.
On September 29, 2003, the Company borrowed $1,000,000 from Erwin Cheldin, a
director and the Company's principal shareholder, president and chief executive
officer. As of April 29, 2005, the note was paid in full.
The Company is continuing with its conversion to a "paperless office" and
improving its computer network, hardware, switching, and other related computer
infrastructure. The "paperless office" conversion of the insurance company
underwriting operations was completed in October 2005. The Company estimates
that the remaining planned conversion and improvements may take up to one year.
As of September 30, 2005, the Company incurred approximately $500,000 of capital
expenditures and anticipates incurring an additional $250,000 to complete the
above projects. Upon full implementation of these projects, the Company
anticipates its potential payback on these capital expenditures in approximately
two to three years due to productivity improvements, improved customer service,
and lower operating costs.
The Company has previously announced that its Board of Directors had authorized
the repurchase in the open market from time to time of up to an aggregate of
945,000 shares of the common stock of the Company (see Note 3). No shares were
repurchased in the nine months ended September 30, 2005.
12
Although material capital expenditures may also be funded through borrowings,
the Company believes that its cash and short-term investments as of the date of
this report, net of trust restriction of $168,775, statutory deposits of
$700,000, cash of $200,000 deposited with superior courts in lieu of bonds, and
the dividend restriction between Crusader and Unico, plus the cash to be
generated from operations, should be sufficient to meet its operating
requirements during the next twelve months without the necessity of borrowing
funds.
RESULTS OF OPERATIONS:
- ---------------------
All comparisons made in this discussion are comparing the three months and nine
months ended September 30, 2005, to the three months and nine months ended
September 30, 2004, unless otherwise indicated.
The Company had a net income of $1,661,458 for the three months ended September
30, 2005, compared to a net income of $1,426,213 for the three months ended
September 30, 2004, an increase of $235,245 (16%). For the nine months ended
September 30, 2005, the Company had a net income of $4,859,951 compared to a net
income of $3,917,600 for the nine months ended September 30, 2004, an increase
of $942,351 (24%). Total revenues decreased $273,519 (2%) to $15,204,435 for the
three months and $53,687 (0.1%) to $46,347,872 for the nine months ended
September 30, 2005, compared to total revenues of $15,477,954 for the three
months and $46,401,559 for the nine months ended September 30, 2004.
PREMIUM WRITTEN before reinsurance decreased $2,854,216 (16%) to $15,106,164 for
the three months ended September 30, 2005, compared to $17,960,380 for the three
months ended September 30, 2004. For the nine months ended September 30, 2005,
premium written before reinsurance decreased $6,087,204 (12%) to $45,464,369,
compared to $51,551,573 for the nine months ended September 30, 2004. The
Company primarily writes commercial multiple peril business package policies in
California. This line of business represents approximately 98% of Crusader's
total written premium for the three and nine months ended September 30, 2005.
The decrease in written premium in the three and nine months ended September 30,
2005, compared to the three and nine months ended September 30, 2004, was
primarily the result of increased competition. The Company believes that the
hard market" that existed in California in the past few years has transitioned
to a "soft market." The Company cannot determine how long the existing market
conditions will continue, nor in which direction they might change. The
Company's future writings and growth are dependent on market conditions,
competition, and the Company's ability to introduce new and profitable products.
The Company's average gross written premium per policy issued is as follows:
Nine Months Gross
Ended Written Policies Average Gross
September 30 Premium Issued Written Premium
------------ ------- ------ ---------------
2005 $45,464,369 13,908 $3,269
2004 $51,551,573 15,995 $3,223
Beginning July 1, 2003, the Company had placed moratoriums on all non-California
business, primarily due to the fact that much of the Company's business outside
of California had not been profitable. The Company has no current plan to expand
into additional states. Instead, the Company intends to allocate its resources
toward marketing and improving its California business rates, rules, and forms.
PREMIUM EARNED before reinsurance decreased $1,251,223 (7%) to $16,046,897 for
the three months and $1,355,658 (3%) to $49,256,455 for the nine months ended
September 30, 2005, compared to $17,298,120 for the three months and $50,612,113
for the nine months ended September 30, 2004. The Company writes annual policies
and, therefore, earns written premium over the one-year policy term. The
decrease in earned premium is a direct result of the related decrease in written
premium previously discussed.
Premium ceded decreased $1,289,227 (27%) to $3,508,114 for the three months and
$2,296,512 (17%) to $10,900,956 for the nine months ended September 30, 2005,
compared to ceded premium of $4,797,341 in the three months and $13,197,468 for
the nine months ended September 30, 2004. Earned premium ceded consists of both
premium ceded under the Company's current reinsurance contracts and premium
ceded to the Company's provisionally rated reinsurance contracts. Prior to
January 1, 1998, the Company's reinsurer charged a provisional rate on exposures
up to $500,000 that was subject to adjustment and was based on the amount of
losses ceded, limited by a maximum percentage that could be charged. That
provisionally rated treaty was cancelled on a runoff basis in 1997.
13
Direct earned premium, earned ceded premium, and ceding commission are as
follows:
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
Increase Increase
2005 2004 (Decrease) 2005 2004 (Decrease)
---- ---- -------- ---- ---- --------
Direct earned premium $16,046,897 $17,298,120 ($1,251,223) $49,256,455 $50,612,113 $(1,355,658)
Earned ceded premium:
Excluding provisionally rated
ceded premium 3,505,643 4,575,340 (1,069,697) 10,773,915 13,260,169 (2,486,254)
Provisionally rated ceded premium 2,471 222,001 (219,530) 127,041 (62,701) 189,742
--------- --------- --------- ---------- ---------- ---------
Total Earned Ceded Premium 3,508,114 4,797,341 (1,289,227) 10,900,956 13,197,468 (2,296,512)
Ceding commission (1,153,640) (1,537,599) 383,959 (3,540,346) (4,497,515) 957,169
--------- --------- ------- --------- --------- ---------
Total Earned Ceded Premium
Net of Ceding Commission $2,354,474 $3,259,742 $(905,268) $7,360,610 $8,699,953 $(1,339,343)
========= ========= ======= ========= ========= =========
The decrease in earned ceded premium (excluding provisionally rated ceded
premium) for the three and nine months ended September 30, 2005, is primarily
related to a decrease in the reinsurance rate charged by the Company's
reinsurers. This rate decrease was primarily due to the following:
1. Favorable ceded loss experience in 2004 and 2003.
2. In 2005 and 2004 Crusader retained a participation in its excess of
loss reinsurance treaties of 10% in its 1st layer ($750,000 in excess
of $250,000 for 2004, and $700,000 in excess of $300,000 for 2005), 10%
in its 2nd layer ($1,000,000 in excess of $1,000,000), and 30% in its
property clash treaty.
3. Beginning January 1, 2005, Crusader increased its retention from
$250,000 to $300,000 per risk. There has been no change in the annual
aggregate deductible or participation rates compared to 2004. The 2005
1st layer primary excess of loss treaty does not provide for a
contingent commission.
4. Crusader's 2004 and 2003 1st layer primary excess of loss treaty
provides for a contingent commission equal to 45% of the net profit, if
any, accruing to the reinsurer. Based on losses and loss adjustment
expenses ceded (including incurred but not reported losses) as of
September 30, 2005, no contingent commission has been accrued.
INVESTMENT INCOME, excluding realized investment gains, increased $707 (0.1%) to
$1,063,081 for the three months and decreased $14,253 (0.4%) to $3,181,191 for
the nine months ended September 30, 2005, compared to investment income of
$1,062,374 for the three months and $3,195,444 for the nine months ended
September 30, 2004.
The average yield on the Company's investments is as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2005 2004 2005 2004
---- ---- ---- ----
Average Invested Assets $137,839,419 $125,086,976 $135,504,945 $122,297,117
Total Investment Income $1,063,081 $1,062,374 $3,181,191 $3,195,444
Annualized Yield on Average Invested Assets 3.08% 3.40% 3.13% 3.48%
14
The par value, amortized cost, estimated market value and weighted average yield
of fixed maturity investments at September 30, 2005, by contractual maturity are
as follows. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
penalties.
Weighted
Maturities by Par Amortized Market Average
Calendar Year Value Cost Value Yield
- ------------- ----- ---- ----- ----
December 31, 2005 $22,500,000 $22,497,419 $22,439,135 2.16%
December 31, 2006 62,672,000 62,733,924 62,197,246 2.79%
December 31, 2007 39,875,000 39,904,640 39,774,404 4.00%
December 31, 2008 2,410,000 2,474,030 2,512,223 5.45%
December 31, 2009 7,000,000 7,146,357 7,328,440 5.27%
----------- ----------- -----------
Total $134,457,000 $134,756,370 $134,251,448 3.22%
=========== =========== ===========
The weighted average maturity of the Company's fixed maturity investments was
1.1 years as of September 30, 2005, compared to 1.6 years as of September 30,
2004. Due to the current interest rate environment, management believes it is
prudent to purchase fixed maturity investments with approximately two-year
maturities and with minimal credit risk.
At September 30, 2005, the Company held fixed maturity investments with
unrealized appreciation of $399,642 and fixed maturity investments with
unrealized depreciation of $904,564. The Company monitors its investments
closely. If an unrealized loss is determined to be other than temporary, it is
written off as a realized loss through the Consolidated Statements of
Operations. The Company's methodology of assessing other-than-temporary
impairments is based on security-specific analysis as of the balance sheet date
and considers various factors including the length of time to maturity and the
extent to which the fair value has been less than the cost, the financial
condition and the near term prospects of the issuer, whether the debtor is
current on its contractually obligated interest and principal payments, and the
Company's intent to hold the investment for a period of time sufficient to allow
the Company to recover its costs. The Company has concluded that the gross
unrealized losses of $904,564 at September 30, 2005, were temporary in nature.
However, facts and circumstances may change which could result in a decline in
market value considered to be other than temporary. The following table
summarizes, for all fixed maturities in an unrealized loss position at September
30, 2005, the aggregate fair value and gross unrealized loss by length of time
those fixed maturities have been continuously in an unrealized loss position:
Market Gross
Value Unrealized Loss
----- ---------------
0-6 months $28,592,597 $202,173
7-12 months 26,518,645 304,626
Over 12 months 50,534,594 397,765
----------- -------
Total $105,645,836 $904,564
=========== =======
As of September 30, 2005, the fixed maturity investments with a gross unrealized
loss for a continuous period of 0 to 6 months consisted of U.S. treasury
securities and investment grade industrial securities. The fixed maturity
investments with a gross unrealized loss position for a continuous period of 7
to 12 months consisted of U.S. treasury securities and investment grade
industrial securities. The fixed maturity investments with a gross unrealized
loss position for a continuous period over 12 months consisted of U.S. treasury
securities, U.S. government sponsored enterprise securities, and pre-refunded
municipal bonds.
GROSS COMMISSIONS AND FEES decreased $278,342 (17%) to $1,377,801 for the three
months and $853,421 (17%) to $4,142,472 for the nine months ended September 30,
2005, compared to commissions and fees of $1,656,143 for the three months and
$4,995,893 for the nine months ended September 30, 2004.
15
The decrease in gross commissions and fee income for the three and nine months
ended September 30, 2005, compared to the three and nine months ended September
30, 2004, are as follows:
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
Increase Increase
2005 2004 (Decrease) 2005 2004 (Decrease)
---- ---- -------- ---- ---- --------
Policy fee income $791,296 $883,032 $(91,736) $2,280,095 $2,589,114 $(309,019)
Health and life insurance program
commission and fee income 479,006 613,296 (134,290) 1,467,880 1,940,452 (472,572)
Other commission and fee income 9,106 12,143 (3,037) 36,756 38,660 (1,904)
Daily automobile rental insurance program:
Commission income (excluding
contingent commission) 98,393 147,672 (49,279) 327,865 418,179 (90,314)
Contingent commission - - - 29,876 9,488 20,388
--------- --------- ------- --------- --------- -------
Total $1,377,801 $1,656,143 $(278,342) $4,142,472 $4,995,893 $(853,421)
========= ========= ======= ========= ========= =======
The decrease in policy fee income is a result of a decrease in the number of
policies issued during the three and nine months ended September 30, 2005, as
compared to the three and nine months ended September 30, 2004. The Company has
increased its policy fee approximately 8% for policies effective on or after
September 26, 2005. The effect of this increase should be recognized beginning
in the quarter ending December 31, 2005.
Commission and fee income in the health and life program decreased in the three
and nine months ended September 30, 2005, compared to the three and nine months
ended September 30, 2004. The decrease was primarily due to CIGNA's decision to
discontinue its individual/family health insurance program over the period from
November 1, 2003, through October 1, 2004. The decrease is also due to severe
competition from CIGNA's competitors and the fact that the Company is only
contracted to market brokered small group business with CIGNA. The Company is
currently exploring contracting opportunities with other group carriers.
LOSSES AND LOSS ADJUSTMENT EXPENSES for all accident years were 63% of net
premium earned for the three months and 64% of net premium earned for the nine
months ended September 30, 2005, compared to 70% of net premium earned for the
three and nine months ended September 30, 2004. Losses and loss adjustment
expenses for the 2005 accident year were 70% of net premium earned for the three
and nine months ended September 30, 2005. Losses and loss adjustment expenses
for the 2004 accident year were 71% of net premium earned for the three and nine
months ended September 30, 2004. Development of losses and loss adjustment
expenses for all prior accident years were approximately $771,000 (favorable
development) in the three months and $2,385,000 (favorable development) in the
nine months ended September 30, 2005, compared to $170,000 (adverse development)
in the three months and $4,000 (favorable development) in the nine months ended
September 30, 2004.
As a result of Crusader underwriting losses that began in the year ended
December 31, 2000, Crusader's management has been analyzing and acting upon
various components of its underwriting activity. These components include the
following:
1. Business Outside of California
2. Habitability Exposure
3. Construction Defect Exposure
4. Special Risk Class of Business
5. Increased Cost of Settling Claims, Indemnity and Expense
6. Increased Cost of Reinsurance
7. Mold Exposure
8. Terrorism Exposure
The favorable development of prior years during 2005 was primarily due to lower
than previously anticipated losses and loss adjustment expenses being incurred.
Accordingly, the Company reduced the estimate of its ultimate losses and loss
adjustment expenses for those accident years. The Company believes that
implementation of management's actions on the underwriting components discussed
above have contributed to the improved operating results.
16
The Company`s consolidated financial statements include estimated reserves for
unpaid losses and related claim settlement or loss adjustment expenses of the
insurance company operation. Crusader sets loss and loss adjustment expense
reserves at each balance sheet date as management's best estimate of the
ultimate payments that it anticipates will be made to settle all losses incurred
and related expenses incurred as of that date for both reported and unreported
losses. Estimating loss reserves is a difficult process as there are many
factors that can ultimately affect the final settlement of a claim and,
therefore, the reserve that is needed. Changes in the regulatory and legal
environment, results of litigation, medical costs, the cost of repair materials
and labor rates can all impact ultimate claim costs. In addition, time can be a
critical part of reserving determinations since the longer the span between the
incidence of a loss and the payment or settlement of the claim, the more
variable the ultimate settlement amount can be. Accordingly, short-tail claims,
such as property damage claims, tend to be more reasonably predictable than
long-tail liability claims. The liability for unpaid losses and loss adjustment
expenses is based upon the accumulation of individual case estimates for losses
reported prior to the close of the accounting period plus estimates based on
experience and industry data for development of case estimates and for
unreported losses and loss adjustment expenses. Since the emergence and
disposition of claims are subject to uncertainties, the net amounts that will
ultimately be paid to settle claims may vary significantly from the estimated
amounts provided for in the accompanying consolidated financial statements. Any
adjustments to reserves are reflected in the operating results of the periods in
which they are made. The Company believes that the aggregate reserves for losses
and loss adjustment expenses are reasonable and adequate to cover the cost of
claims, both reported and unreported.
POLICY ACQUISITION COSTS consist of commissions, premium taxes, inspection fees,
and certain other underwriting costs, which are related to the production of
Crusader insurance policies. These costs include both Crusader expenses and
allocated expenses of other Unico subsidiaries. Crusader's reinsurers pay
Crusader a ceding commission, which is primarily a reimbursement of the
acquisition cost related to the ceded premium. Policy acquisition costs, net of
ceding commission, are deferred and amortized as the related premiums are
earned. These costs were 21% of net premium earned for the three and nine months
ended September 30, 2005, and 21% of net earned premium for the three and nine
months ended September 30, 2004.
SALARIES AND EMPLOYEE BENEFITS increased $53,537 (4%) to $1,309,777 for the
three months and $299,068 (8%) to $3,868,772 for the nine months ended September
30, 2005, compared to salary and employee benefits of $1,256,240 for the three
months and $3,569,704 for the nine months ended September 30, 2004.
COMMISSIONS TO AGENTS/BROKERS decreased $65,593 (29%) to $160,598 for the three
months and decreased $210,586 (29%) to $517,901 for the nine months ended
September 30, 2005, compared to commission expense of $226,191 for the three
months and $728,487 for the nine months ended September 30, 2004. The decrease
is primarily the result of a decrease in premiums written in the health and life
insurance program and is related to the decrease in health and life insurance
program commission income.
OTHER OPERATING EXPENSES increased $88,860 (16%) to $628,957 for the three
months and decreased $29,599 (1%) to $1,972,527 for the nine months ended
September 30, 2005, compared to $540,097 for the three months and $2,002,126 for
the nine months ended September 30, 2004.
INCOME TAX PROVISION was an expense of $923,559 (36% of pre-tax income) for the
three months and $2,725,384 (36% of pre-tax income) for the nine months ended
September 30, 2005, compared to $693,559 (33% of pre-tax income) in the three
months and $2,115,628 (35% of pre-tax income) for the nine months ended
September 30, 2004. This change was primarily due to a pre-tax income of
$2,585,017 (including tax-exempt investment income of $3,529) in the three
months and $7,585,335 (including tax-exempt investment income of $10,745) in the
nine months ended September 30, 2005, compared to $2,119,372 (including
tax-exempt investment income of $3,530) in the three months and $6,033,228
(including tax-exempt investment income of $33,047) in the nine months ended
September 30, 2004.
The effect of inflation on net income of the Company during the three and nine
months ended September 30, 2005, and the three and nine months ended September
30, 2004, was not significant.
17
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
2005 2004 (Decrease)
---- ---- --------
Fixed maturity bonds (at amortized value) $134,256,370 $128,489,658 $5,766,712
Short-term cash investments (at cost) 4,145,744 3,118,118 1,027,626
Certificates of deposit (over 1 year, at cost) 500,000 500,000 -
----------- ----------- ---------
Total Invested Assets $138,902,114 $132,107,776 $6,794,338
=========== =========== =========
There have been no material changes in the composition of the Company's invested
assets or market risk exposures since the end of the preceding fiscal year end.
ITEM 4 - CONTROLS AND PROCEDURES
- --------------------------------
An evaluation was carried out by the Company's management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
September 30, 2005 (as defined in Rule 13a-15(e) or 15d-15(e) under the
Securities Exchange Act of 1934). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the design and
operation of these disclosure controls and procedures were effective.
During the period covered by this report, there have been no changes in the
Company's internal control over financial reporting that have materially
affected or are reasonably likely to materially affect the Company's internal
control over financial reporting.
PART II - OTHER INFORMATION
- ---------------------------
ITEM 6 - EXHIBITS
- -----------------
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
18
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNICO AMERICAN CORPORATION
--------------------------
Date: November 11, 2005 By:/s/ ERWIN CHELDIN
--------------------
Erwin Cheldin
Chairman of the Board, President and Chief
Executive Officer, (Principal Executive Officer)
Date: November 11, 2005 By: /s/ LESTER A. AARON
-----------------------
Lester A. Aaron
Treasurer, Chief Financial Officer, (Principal
Accounting and Principal Financial Officer)
19
EXHIBIT INDEX
- -------------
Exhibit No. Description
- ---------- -----------
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)