SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2005 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. Employer
incorporation or organization) Identification No.)
23251 Mulholland Drive, Woodland Hills, California 91364
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (818) 591-9800
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)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act). Yes__ No X
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes__ No X
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-X is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy of information statements
incorporated by reference as Part III of this Form 10-K or any amendment to this
Form 10-K. X
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer __ Accelerated filer __ Non-accelerated filer 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
The aggregate market value of Registrant's voting and non-voting common equity
held by non-affiliates as of June 30, 2005, the last business day of
Registrant's most recently completed second fiscal quarter was $24,308,404.
5,522,065
Number of shares of common stock outstanding as of March 23, 2006
Portions of the definitive proxy statement that Registrant intends to file
pursuant to Regulation 14(A) by a date no later than 120 days after December 31,
2005, to be used in connection with the annual meeting of shareholders, are
incorporated herein by reference into Part III hereof. If such definitive proxy
statement is not filed in the 120-day period, the information called for by Part
III will be filed as an amendment to this Form 10-K not later than the end of
the 120 day period.
1
PART I
------
Item 1. 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 through its other subsidiaries provides insurance premium
financing and membership association services. 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.
Descriptions of the Company's operations in the following paragraphs are
categorized between the Company's major segment, its insurance company
operation, and all other revenues from insurance operations. The insurance
company operation is conducted through Crusader Insurance Company (Crusader),
Unico's property and casualty insurance company. Insurance company revenues and
other revenues from insurance operations for the years ended December 31, 2005,
December 31, 2004 and December 31, 2003 are as follows:
Year ended December 31
----------------------
2005 2004 2003
------------------- ------------------- -------------------
Percent Percent Percent
of Total of Total of Total
Total Company Total Company Total Company
Revenues Revenues Revenues Revenues Revenues Revenues
-------- -------- -------- -------- -------- --------
Insurance company revenues $54,833,512 89.6% $54,414,947 87.9% $42,005,474 82.2%
Other revenues from insurance operations
- ----------------------------------------
Gross commissions and fees:
Health and life insurance program commission income 1,628,061 2.7% 2,156,924 3.5% 3,312,715 6.5%
Policy fee income 3,001,966 4.9% 3,394,783 5.5% 3,458,559 6.7%
Daily automobile rental insurance program:
Commission 441,066 0.7% 565,452 0.9% 574,197 1.1%
Claim administration fees 70,000 0.1% - - 241,428 0.5%
Association operations membership and fee income 318,349 0.5% 333,470 0.5% 481,366 0.9%
Other commission and fee income 48,589 0.1% 53,251 0.1% 41,127 0.1%
--------- --- --------- --- --------- ----
Total gross commission and fee income 5,508,031 9.0% 6,503,880 10.5% 8,109,392 15.8%
Investment income 68,828 0.1% 38,250 0.1% 47,010 0.1%
Finance charges and fees earned 758,325 1.3% 933,529 1.5% 952,543 1.9%
Other income 13,826 - 12,704 - 16,020 -
--------- ---- ------ ---- --------- ----
Total other revenues from insurance operations 6,349,010 10.4% 7,488,363 12.1% 9,124,965 17.8%
--------- ---- --------- ---- --------- ----
Total Revenues $61,182,522 100.0% $61,903,310 100.0% $51,130,439 100.0%
========== ===== ========== ===== ========== =====
INSURANCE COMPANY OPERATION
---------------------------
General
- -------
The insurance company operation is conducted through Crusader, which as of
December 31, 2005, was licensed as an admitted insurance carrier in the states
of Arizona, California, Montana, Nevada, Oregon and Washington. In 2002 the
Company began to substantially reduce the offering of insurance outside of
California primarily due to the unprofitability of that business. In 2004 all
business outside of California had ceased. See Item 7 - "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Results of
Operations - Insurance Company Operation." Crusader is a multiple line property
and casualty insurance company that began transacting business on January 1,
1985. During the year ended December 31, 2005, 97% of Crusader's business was
commercial multiple peril policies. Commercial multiple peril policies provide a
combination of property and liability coverage for businesses. Commercial
property coverages insure against loss or damage to buildings, inventory and
equipment from natural disasters, including hurricanes, windstorms, hail, water,
2
explosions, severe winter weather, and other events such as theft and vandalism,
fires, storms, and financial loss due to business interruption resulting from
covered property damage. Commercial liability coverages insure against third
party liability from accidents occurring on the insured's premises or arising
out of its operations, such as injuries sustained from products sold. In
addition to commercial multiple peril policies, Crusader also writes separate
policies to insure commercial property and commercial liability risks on a
mono-line basis.
All of Crusader's business is produced by Unifax Insurance Systems, Inc.,
(Unifax) its sister corporation. Unifax has substantial experience with these
classes of business. The commissions paid by Crusader to Unifax are eliminated
as intercompany transactions and are not reflected in the previous table.
Crusader is licensed in property and casualty and disability lines of insurance
by the California Department of Insurance.
Reinsurance
- -----------
A reinsurance transaction occurs when an insurance company transfers (cedes) a
portion of its exposure on policies written by it to a reinsurer that assumes
that risk for a premium (ceded premium). Reinsurance does not legally discharge
the Company from primary liability under its policies. If the reinsurer fails to
meet its obligations, the Company must nonetheless pay its policy obligations.
Crusader's primary excess of loss reinsurance agreements are as follows:
Loss Annual Aggregate
Year Reinsurer Company(s) Rating Retention Deductible
- ---- ----------------------------------------- ------ --------- ----------
2005 Platinum Underwriters Reinsurance, Inc. & A
Hannover Ruckversicherungs AG A $300,000 $500,000
- ---- ----------------------------------------- ------ ------- -------
2004 Platinum Underwriters Reinsurance, Inc. & A
Hannover Ruckversicherungs AG A $250,000 $500,000
- ---- ----------------------------------------- ------ ------- -------
2003 Platinum Underwriters Reinsurance, Inc. & A
Hannover Ruckversicherungs AG & A
QBE Reinsurance Corporation A $250,000 $500,000
- ---- ----------------------------------------- ------ ------- -------
2002 Partner Reinsurance Company of the U.S. A+ $250,000 $675,000
- ---- ----------------------------------------- ------ ------- -------
2001 Partner Reinsurance Company of the U.S. A+ $250,000 $500,000
- ---- ----------------------------------------- ------ ------- -------
2000 Partner Reinsurance Company of the U.S. A+ $250,000 $500,000
- ---- ---------------------------------------- ------ ------- -------
1999 General Reinsurance Corporation A++ $250,000 $750,000
- ---- ----------------------------------------- ------ ------- -------
1998 General Reinsurance Corporation A++ $250,000 $750,000
- ---- ----------------------------------------- ------ ------- -------
Prior to January 1, 1998, National Reinsurance Corporation (acquired by General
Reinsurance Corporation in 1996) 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 and replaced by a flat rated treaty
on January 1, 1998.
In 2005 Crusader retained a participation in its excess of loss reinsurance
treaties of 10% in its 1st layer ($700,000 in excess of $300,000), 10% in its
2nd layer ($1,000,000 in excess of $1,000,000), and 30% in its property and
casualty clash treaties. In 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), 10% in its 2nd layer ($1,000,000 in excess of $1,000,000), and 30% in
its property and casualty clash treaties. In 2003 Crusader retained a
participation in its excess of loss reinsurance treaties of 5% in its 1st layer
($750,000 in excess of $250,000), 10% in its 2nd layer ($1,000,000 in excess of
$1,000,000), and 30% in its property and casualty clash treaties.
Crusader's 2004 and 2003 1st layer primary excess of loss treaty provides for a
contingent commission to the Company equal to 45% of the net profit, if any,
accruing to the reinsurer. The first accounting period for the contingent
commission covers the period from January 1, 2003, through December 31, 2005.
The Company will calculate and report to the reinsurer its net profit, if any,
within 90 days after 36 months following the end of the first accounting period,
and within 90 days after the end of each 12 month period thereafter until all
losses subject to the agreement have been finally settled. Based on losses and
loss adjustment expenses ceded (including incurred but not reported losses) as
of December 31, 2005, no contingent commission has been accrued. The 2005 1st
layer primary excess of loss treaty does not provide for a contingent
commission.
Crusader also has catastrophe reinsurance from various highly rated California
authorized reinsurance companies. These reinsurance agreements help protect
Crusader against liabilities in excess of certain retentions, including
3
major or catastrophic losses that may occur from any one or more of the property
and/or casualty risks which Crusader insures. The Company has no reinsurance
recoverable balances in dispute.
The aggregate amount of earned premium ceded to the reinsurers was $14,234,844
for the year ended December 31, 2005, $17,784,240 for the year ended December
31, 2004, and $16,648,020 for the year ended December 31, 2003.
On most of the premium that Crusader cedes to the reinsurer, the reinsurer pays
a commission to Crusader that includes a reimbursement of the cost of acquiring
the portion of the premium that is ceded. Crusader does not currently assume any
reinsurance. The Company intends to continue obtaining reinsurance although the
availability and cost may vary from time to time. The unpaid losses ceded to the
reinsurer are recorded as an asset on the balance sheet.
Unpaid Losses and Loss Adjustment Expenses
- ------------------------------------------
Crusader maintains reserves for losses and loss adjustment expenses with respect
to both reported and unreported losses. When a claim for loss is reported to the
Company, a reserve is established for the expected cost to settle the claim,
including estimates of any related legal expense and other costs associated with
resolving the claim. These reserves are called "case based" reserves. In
addition, the Company also sets up reserves at the end of each reporting period
for losses that have occurred but have not yet been reported to the Company.
These incurred but not reported losses are referred to as "IBNR" reserves.
Crusader establishes reserves for reported losses based on historical
experience, upon case-by-case evaluation of facts surrounding each known loss,
and the related policy provisions. The amount of reserves for unreported losses
is estimated by analysis of historical and statistical information. The ultimate
liability of Crusader may be greater or less than estimated reserves. Reserves
are monitored and adjusted when appropriate and are reflected in the statement
of operations in the period of adjustment. Reserves for losses and loss
adjustment expenses are estimated to cover the future amounts needed to pay
claims and related expenses with respect to insured events that have occurred.
The process of establishing loss and loss adjustment expense reserves involves
significant judgment. The following table shows the development of the unpaid
losses and loss adjustment expenses for fiscal years 1996 through 2005. The top
line of the table shows the estimated liability for unpaid losses and loss
adjustment expenses recorded at the balance sheet date for each of the indicated
years. This liability represents the estimated amount of losses and loss
adjustment expenses for losses arising in the current and prior years that are
unpaid at the balance sheet date. The table shows the reestimated amount of the
previously recorded liability based on experience as of the end of each
succeeding year. The estimate is increased or decreased, as more information
becomes known.
The table reflects redundancies and deficiencies in Crusader's net loss and loss
adjustment expense reserves. As of December 31, 2005, all periods stated in the
table prior to 2003 reflected a cumulative deficiency. The 2003 and 2004 periods
reflects a cumulative redundancy. See discussion of losses and loss adjustment
expenses in Item 7- "Management's Discussion and Analysis - Results of
Operations - Insurance Company Operation."
Crusader is a relatively small insurance company. Crusader is constantly
changing its product mix and exposures, including the types of businesses
insured within its business package program. Considering the uncertainties from
this changing environment, the Company recognizes the difficulties in developing
its own unique reserving statistics; therefore, it incorporates industry
standards and averages into its estimates. The Company believes that its loss
and loss adjustment expense reserves are properly stated. When subsequent loss
and loss adjustment expense development justifies changes in reserving
practices, the Company acts accordingly.
When evaluating the information in the following table, it should be noted that
each amount includes the effects of all changes in amounts of prior periods;
therefore, the cumulative redundancy or deficiency represents the aggregate
change in the estimates over all prior years. Conditions and trends that have
affected development of liability in the past may not necessarily occur in the
future. Accordingly, it may not be appropriate to extrapolate future
deficiencies or redundancies based on this table.
4
CRUSADER INSURANCE COMPANY
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
Fiscal Year
Ended March
31 Fiscal Year Ended December 31
-------------- --------------------------------------------------------------------------
1996 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
(Nine Months)
Reserve for Unpaid Losses and
Loss Adjustment Expenses $32,682,153 $32,682,153 $40,591,248 $40,374,232 $37,628,165 $34,546,026
Paid Cumulative as of
1 Year Later 7,019,174 10,996,896 12,677,646 15,393,167 18,745,224 20,841,417
2 Years Later 15,292,415 19,488,853 23,740,181 28,570,117 34,905,359 37,976,277
3 Years Later 20,898,580 25,552,756 30,217,031 38,923,545 46,072,688 49,053,708
4 Years Later 24,932,922 29,730,976 35,620,705 45,425,709 53,153,491 52,821,183
5 Years Later 27,726,438 33,893,473 40,639,328 50,526,164 56,021,297 54,919,573
6 Years Later 31,701,748 38,075,656 45,028,598 52,588,830 57,247,843
7 Years Later 35,482,343 41,650,221 46,921,020 53,482,116
8 Years Later 38,974,010 43,129,105 47,807,308
9 Years Later 40,429,262 43,885,258
10 Years Later 41,109,352
Reserves Reestimated as of
1 Year Later 31,232,388 32,838,369 35,730,603 39,132,945 41,898,796 53,872,376
2 Years Later 28,636,286 31,086,210 36,032,215 43,164,627 56,423,375 59,746,880
3 Years Later 28,074,691 32,347,788 38,844,953 52,349,735 59,486,543 62,172,320
4 Years Later 29,774,762 35,513,862 45,907,785 54,291,547 61,791,428 62,369,460
5 Years Later 32,382,991 43,335,778 47,940,955 56,619,057 62,174,813 61,894,587
6 Years Later 40,773,954 44,588,020 50,374,721 57,151,258 61,983,908
7 Years Later 41,690,986 46,146,262 50,993,874 56,935,245
8 Years Later 43,243,124 46,740,535 50,819,391
9 Years Later 43,779,781 46,520,046
10 Years Later 43,574,297
Cumulative Redundancy (Deficiency) $(10,892,144) $(9,408,200) $(10,288,143) $(16,561,013) $(24,355,743) $(27,348,561)
========== ========= ========== ========== ========== ==========
Gross Liability for Unpaid Losses
and Loss Adjustment Expenses $37,006,458 $39,740,865 $42,004,851 $41,513,945 $41,592,489 $45,217,369
Ceded Liability for Unpaid Losses
and Loss Adjustment Expenses (4,324,305) (2,629,019) (1,413,603) (1,139,713) (3,964,324) (10,671,343)
--------- --------- --------- --------- --------- ----------
Net Liability for Unpaid Losses
and Loss Adjustment Expenses $32,682,153 $37,111,846 $40,591,248 $40,374,232 $37,628,165 $34,546,026
========== ========== ========== ========== ========== ==========
Gross Liability Reestimated $68,691,523 $75,103,207 $74,427,392 $82,678,340 $90,727,748 $94,815,588
Ceded Liability Reestimated (25,117,226) (28,583,161) (23,608,001) (25,743,095) (28,743,840) (32,921,001)
---------- ---------- ---------- ----------- ----------- ----------
Net Liability Reestimated $43,574,297 $46,520,046 $50,819,391 $56,935,245 $61,983,908 $61,894,587
========== ========== ========== ========== ========== ==========
Gross Reserve Redundancy (Deficiency) $(31,685,065) $(35,362,342) $(32,422,541) $(41,164,395) $(49,135,259) $(49,598,219)
========== ========== ========== ========== ========== ==========
5
CRUSADER INSURANCE COMPANY
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
Fiscal Year Ended December 31
-------------------------------------------------------------------------
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
Reserve for Unpaid Losses and
Loss Adjustment Expenses $49,786,215 $53,596,945 $58,883,861 $67,349,989 $76,235,467
Paid Cumulative as of
1 Year Later 23,010,615 21,326,688 18,546,279 14,626,446
2 Years Later 39,463,106 35,883,729 28,289,327
3 Years Later 46,256,431 40,808,763
4 Years Later 49,157,040
5 Years Later
6 Years Later
7 Years Later
8 Years Later
9 Years Later
10 Years Later
Reserves Reestimated as of
1 Year Later 57,577,066 56,348,531 58,048,427 63,525,526
2 Years Later 60,629,814 57,237,770 54,623,000
3 Years Later 60,974,567 55,430,550
4 Years Later 59,745,610
5 Years Later
6 Years Later
7 Years Later
8 Years Later
9 Years Later
10 Years Later
Cumulative Redundancy
(Deficiency) $(9,959,395) $(1,833,605) $4,260,861 $3,824,463
========= ========= ========= =========
Gross Liability for Unpaid Losses
and Loss Adjustment Expenses $60,534,295 $74,905,284 $78,139,090 $87,469,000 $101,914,548
Ceded Liability for Unpaid Losses
and Loss Adjustment Expenses (10,748,080) (21,308,339) (19,255,229) (20,119,011) (25,679,081)
---------- ---------- ---------- ---------- ----------
Net Liability for Unpaid Losses
and Loss Adjustment Expenses $49,786,215 $53,596,945 $58,883,861 $67,349,989 $76,235,467
========== ========== ========== ========== ==========
Gross Liability Reestimated $92,237,536 $80,703,792 $76,521,708 $86,878,994
Ceded Liability Reestimated (32,491,926) (25,273,242) (21,898,708) (23,353,468)
---------- ---------- ---------- ----------
Net Liability Reestimated $59,745,610 $55,430,550 $54,623,000 $63,525,526
========== ========== ========== ==========
Gross Reserve Redundancy (Deficiency) $(31,703,241) $(5,798,508) $1,617,382 $590,006
========== ========= ========= =======
5
Net Premium Written to Policyholders' Surplus Ratio
- ---------------------------------------------------
The following table shows, for the periods indicated, Crusader's statutory
ratios of net premiums written to statutory policyholders' surplus. Since each
property and casualty insurance company has different capital needs, an
"acceptable" ratio of net premium written to policyholders' surplus for one
company may be inapplicable to another. While there is no statutory requirement
applicable to Crusader that establishes a permissible net premium to surplus
ratio, guidelines established by the National Association of Insurance
Commissioners (NAIC) provide that such ratio should generally be no greater than
3 to 1.
Twelve months ended December 31
--------------------------------------------------------------------------------
Statutory: 2005 2004 2003 2002 2001
- ---------- ---- ---- ---- ---- ----
Net premiums written $46,030,707 $51,089,573 $47,420,157 $38,363,201 $32,106,175
Policyholders' surplus $36,586,441 $29,436,343 $26,103,440 $26,258,452 $27,519,538
Ratio 1.3 to 1 1.7 to 1 1.8 to 1 1.5 to 1 1.2 to 1
Crusader results are reported in accordance with U.S. generally accepted
accounting principles (GAAP). These results differ from its financial results
reported in accordance with Statutory Accounting Principles (SAP) as prescribed
or permitted by insurance regulatory authorities. Crusader is required to file
financial statements with insurance regulatory authorities prepared on a SAP
basis.
SAP differs in certain respects from GAAP. The more significant of these
differences that apply to Crusader are:
o Under GAAP, policy acquisition costs such as commissions, premium taxes
and other variable costs incurred in connection with writing new and
renewal business are capitalized and amortized on a pro rata basis over
the period in which the related premiums are earned, rather than
expensed as incurred as required by SAP.
o Certain assets included in balance sheets under GAAP are designated as
"non-admitted assets" and are charged directly against statutory
surplus under SAP. Non-admitted assets include primarily premium
receivables that are outstanding over 90 days, federal deferred tax
assets in excess of statutory limitations, furniture, equipment,
leasehold improvements, and prepaid expenses.
o Under GAAP, amounts related to ceded reinsurance are shown gross as
prepaid reinsurance premiums and reinsurance recoverable, rather than
netted against unearned premium reserves and loss and loss adjustment
expense reserves, respectively, as required by SAP.
o Under GAAP, fixed maturity securities, which are classified as
available-for-sale, are reported at estimated fair values, rather than
at amortized cost, or the lower of amortized cost or market, depending
on the specific type of security as required by SAP.
o The differing treatment of income and expense items results in a
corresponding difference in federal income tax expense. Under GAAP
reporting, changes in deferred income taxes are reflected as an item of
income tax benefit or expense. As required by SAP, federal income taxes
are recorded when payable and deferred taxes, subject to limitations,
are recognized but only to the extent that they do not exceed 10% of
statutory surplus. Changes in deferred taxes are recorded directly to
statutory surplus.
Regulation
- ----------
The insurance company operation is subject to regulation by the California
Department of Insurance (the insurance department) and by the department of
insurance of other states in which Crusader is licensed. The insurance
department has broad regulatory, supervisory, and administrative powers. These
powers relate primarily to the standards of solvency which must be met and
maintained; the licensing of insurers and their agents; the nature and
limitation of insurers' investments; the prior approval of rates, rules and
forms; the issuance of securities by insurers; periodic financial and market
conduct examinations of the affairs of insurers; the annual and other reports
required to be filed on the financial condition and results of operations of
such insurers or for other purposes; and the establishment of reserves required
to be maintained for unearned premiums, losses, and other purposes. The
regulations and supervision by the insurance department are designed principally
for the benefit of policyholders and not for the insurance company shareholders.
The insurance department's Market Conduct Division is responsible for conducting
periodic examinations of companies to ensure compliance with California
Insurance Code and California Code of Regulations with respect to rating,
underwriting and claims handling practices. The most recent examination of
Crusader covered underwriting and rating practices for the period January 1,
2000, through June 18, 2001. The report on the results of that examination was
issued on September 10, 2002. The insurance department also conducts periodic
financial examinations of Crusader. The
6
insurance department has completed its financial examination of Crusader's
December 31, 2004, statutory financial statements. No significant issues were
reported in the preliminary report.
In December 1993, the NAIC adopted a Risk-Based Capital (RBC) Model Law for
property and casualty companies. The RBC Model Law is intended to provide
standards for calculating a variable regulatory capital requirement related to a
company's current operations and its risk exposures (asset risk, underwriting
risk, credit risk and off-balance sheet risk). These standards are intended to
serve as a diagnostic solvency tool for regulators that establishes uniform
capital levels and specific authority levels for regulatory intervention when an
insurer falls below minimum capital levels. The RBC Model Law specifies four
distinct action levels at which a regulator can intervene with increasing
degrees of authority over a domestic insurer if its RBC is equal to or less than
200% of its computed authorized control level RBC. A company's RBC is required
to be disclosed in its statutory annual statement. The RBC is not intended to be
used as a rating or ranking tool nor is it to be used in premium rate making or
approval. Crusader's adjusted capital at December 31, 2005, was 400% of
authorized control level risk-based capital.
The following table sets forth the different levels of risk-based capital that
may trigger regulatory involvement and the corresponding actions that may
result.
- ----------------------------- ----------------------------------- ----------------------------------------------------------
LEVEL TRIGGER CORRECTIVE ACTION
- ----------------------------- ----------------------------------- ----------------------------------------------------------
- ----------------------------- ----------------------------------- ----------------------------------------------------------
Company Action Level Adjusted Capital less than 200% The insurer must submit a comprehensive plan to the
of Authorized Control Level insurance commissioner
- ----------------------------- ----------------------------------- ----------------------------------------------------------
- ----------------------------- ----------------------------------- ----------------------------------------------------------
Regulatory Action Level Adjusted Capital less than 150% In addition to above, insurer is subject to examination,
of Authorized Control Level analysis and specific corrective action.
- ----------------------------- ----------------------------------- ----------------------------------------------------------
- ----------------------------- ----------------------------------- ----------------------------------------------------------
Authorized Control Level Adjusted Capital less than 100% In addition to both of the above, insurance commissioner
of Authorized Control Level may place insurer under regulatory control.
- ----------------------------- ----------------------------------- ----------------------------------------------------------
- ----------------------------- ----------------------------------- ----------------------------------------------------------
Mandatory Control Level Adjusted Capital less than 70% Insurer must be placed under regulatory control.
of Authorized Control Level
- ----------------------------- ----------------------------------- ----------------------------------------------------------
Insurance Regulatory Information System (IRIS) was developed by a committee of
state insurance regulators primarily to assist state insurance departments in
executing their statutory mandate to oversee the financial condition of
insurance companies. IRIS helps those companies that merit highest priority in
the allocation of the regulators' resources on the basis of 12 financial ratios
that are calculated annually. The analytical phase is a review of annual
statements and the financial ratios. The ratios and trends are valuable in
pointing to companies likely to experience financial difficulties, but are not
themselves indicative of adverse financial condition. The ratio and benchmark
comparisons are mechanically produced and are not intended to replace the state
insurance departments' own in-depth financial analysis or on-site examinations.
An unusual range of ratio results has been established from studies of the
ratios of companies that have become insolvent or have experienced financial
difficulties. In the analytical phase, companies that receive four or more
financial ratio values outside the usual range are analyzed in order to identify
those companies that appear to require immediate regulatory action.
Subsequently, a more comprehensive review of the ratio results and an insurer's
annual statement is performed to confirm that an insurer's situation calls for
increased or close regulatory attention. In 2005, the Company was not outside
the usual values on any of the twelve IRIS ratio tests.
California Insurance Guarantee Association
- ------------------------------------------
The California Insurance Guarantee Association (CIGA) was created to provide for
payment of claims for which insolvent insurers of most casualty lines are liable
but which cannot be paid out of such insurers' assets. The Company is subject to
assessment by CIGA for its pro-rata share of such claims based on premiums
written in the particular line in the year preceding the assessment by insurers
writing that line of insurance in California. Such assessments are based upon
estimates of losses to be incurred in liquidating an insolvent insurer. In a
particular year, the Company cannot be assessed an amount greater than 2% of its
premiums written in the preceding year. Assessments are recouped through a
mandated surcharge to policyholders the year after the assessment. No assessment
was made by CIGA for the 2004 or the 2005 calendar year.
Holding Company Act
- -------------------
Crusader is subject to regulation by the insurance department pursuant to the
provisions of the California Insurance Holding Company System Regulatory Act
(the "Holding Company Act"). Pursuant to the Holding Company Act, the insurance
department may examine the affairs of Crusader at any time. Certain transactions
defined to be of an "extraordinary" type may not be effected without the prior
approval of the insurance
7
department. Such transactions include, but are not limited to, sales, purchases,
exchanges, loans and extensions of credit, and investments made within the
immediately preceding 12 months involving the lesser of 3% of admitted assets or
25% of policyholders' surplus, as of the preceding December 31. An extraordinary
transaction also includes a dividend which, together with other dividends or
distributions made within the preceding twelve months, exceeds the greater of
10% of the insurance company's policyholders' surplus as of the preceding
December 31 or the insurance company's net income for the preceding calendar
year. An insurance company is also required to notify the insurance department
of any dividend after declaration, but prior to payment.
The Holding Company Act also provides that the acquisition or change of
"control" of a California domiciled insurance company or of any person who
controls such an insurance company cannot be consummated without the prior
approval of the Insurance Commissioner. In general, a presumption of "control"
arises from the ownership of voting securities and securities that are
convertible into voting securities, which in the aggregate constitute 10% or
more of the voting securities of a California insurance company or a person who
controls a California insurance company, such as Crusader. A person seeking to
acquire "control," directly or indirectly, of the Company must generally file
with the Insurance Commissioner an application for change of control containing
certain information required by statute and published regulations and provide a
copy of the application to the Company. The Holding Company Act also effectively
restricts the Company from consummating certain reorganization or mergers
without prior regulatory approval. The Company is in compliance with the Holding
Company Act.
Rating
- ------
Insurance companies are rated to provide both industry participants and
insurance consumers with meaningful information on specific insurance companies.
Higher ratings generally indicate financial stability and a strong ability to
pay claims. These ratings are based upon factors relevant to policyholders and
are not directed toward protection of investors. Such ratings are neither a
rating of securities nor a recommendation to buy, hold or sell any security and
may be revised or withdrawn at any time. Ratings focus primarily on the
following factors: capital resources, financial strength, demonstrated
management expertise in the insurance business, credit analysis, systems
development, market segment position and growth opportunities, marketing, sales
conduct practices, investment operations, minimum policyholders' surplus
requirements and capital sufficiency to meet projected growth, as well as access
to such traditional capital as may be necessary to continue to meet standards
for capital adequacy.
The claims-paying abilities of insurers are rated to provide both insurance
consumers and industry participants with comparative information on specific
insurance companies. Claims-paying ratings are important for the marketing of
certain insurance products. A higher rating generally indicates greater
financial strength and a stronger ability to pay claims.
Crusader's current rating (effective October 21, 2005) by A.M. Best Company is
B+ (Very Good) with a rating outlook of stable.
Terrorism Risk Insurance Act of 2002
- ------------------------------------
On November 26, 2002, the Terrorism Risk Insurance Act of 2002 (The Act) was
signed by President Bush. On December 22, 2005, the United States' government
extended the Terrorism Act, which was set to expire on December 31, 2005, for
two more years. The Act establishes a program within the Department of the
Treasury in which the Federal Government will share the risk of loss from acts
of terrorism with the insurance industry. Federal participation will be
triggered when the Secretary of the Treasury, in concurrence with the Secretary
of State and the Attorney General of the United States, certifies an act to be
an act of terrorism committed by an individual(s) acting on behalf of any
foreign interest, provided the terrorist act results in aggregate losses in
excess of $5 million.
Under The Act, the federal government will pay 90% of covered terrorism losses
exceeding the statutorily established deductible. All property and casualty
insurance companies are required to participate in the program to the extent
that they must make available property and casualty insurance coverage for
terrorism that does not differ materially from the terms, amounts, and other
coverage limitations applicable to losses arising from events other than acts of
terrorism.
The Company does not write policies on properties considered to be a target of
terrorist activities such as airports, hotels, large office structures,
amusement parks, landmark defined structures, or other public facilities. In
addition, there is not a high concentration of policies in any one area where
increased exposure to terrorist threats
8
exist. Consequently, the Company believes its exposure relating to acts of
terrorism is low. In 2005 Crusader received $478,073 in terrorism coverage
premium from approximately 32% of its policyholders. Crusader's 2005 terrorism
deductible was $10,183,621. Crusader's 2006 terrorism deductible is $11,324,734.
OTHER INSURANCE OPERATIONS
--------------------------
General Agency Operations
- -------------------------
Unifax primarily sells and services commercial multiple peril business insurance
policies for Crusader in California. In addition, it sells and services
commercial earthquake insurance policies in California for a non-affiliated
insurer. Unifax also sold and serviced policies for Crusader in Arizona, Idaho,
Ohio, Kentucky, Montana, Nevada, Oregon, Pennsylvania, Texas, and Washington.
However, in 2002 the Company began placing moratoriums on non-California
business on a state-by-state basis. By July 2003, the Company had placed
moratoriums on all non-California business.
Bedford Insurance Services, Inc., (Bedford) sells and services daily automobile
rental policies in most states for a non-affiliated insurer.
As general agents, these subsidiaries market, rate, underwrite, inspect and
issue policies, bill and collect insurance premiums, and maintain accounting and
statistical data. Unifax is the exclusive general agent for Crusader. Unifax and
Bedford are non-exclusive general agents for non-affiliated insurance companies.
The Company's marketing is conducted through advertising to independent
insurance agents and brokers. For its services, the general agent receives a
commission (based on the premium written) from the insurance company and, in
some cases, a policy fee from the customer. These subsidiaries all hold licenses
issued by the California Department of Insurance and other states where
applicable.
Insurance Claim Administration Operation
- ----------------------------------------
The Company's subsidiary U.S. Risk Managers, Inc., (U.S. Risk) previously
provided insurance claim administration services to the non-affiliated property
and casualty insurance company that Bedford represents as a general agent. As of
December 31, 2003, a non-affiliated insurance company assumed the claim
administration responsibility for all outstanding and IBNR claims. U.S. Risk
Managers, Inc. is currently inactive.
All claim adjusting services for Crusader policies are administered by Crusader.
Crusader engages independent field examiners for all work performed outside the
Company's office.
Insurance Premium Finance Operation
- -----------------------------------
American Acceptance Corporation (AAC) is a licensed insurance premium finance
company that provides insurance purchasers with the ability to pay their
insurance premiums on an installment basis. The premium finance company pays the
insurance premium to the insurance company in return for a premium finance note
from the insured. These notes are paid off by the insured in nine monthly
installments and are secured by the unearned premiums held by the insurance
company. AAC provides premium financing for Crusader policies that are produced
by Unifax in California.
Association Operation
- ---------------------
The Company's subsidiary Insurance Club, Inc., DBA The American Association for
Quality Health Care (AAQHC), is a membership association that provides various
consumer benefits to its members, including participation in group health care
and life insurance policies that AAQHC negotiates for the association. For these
services, AAQHC receives membership and fee income from its members.
Health and Life Insurance Operations
- ------------------------------------
The Company's subsidiary American Insurance Brokers, Inc., (AIB) markets health
and life insurance in California through non-affiliated insurance companies for
individuals and groups. The services provided consist of marketing, billing and
collection, accounting, and customer service. For these services, AIB receives
commissions from insurance companies. Most of the business is produced through
independent insurance agents and brokers who receive a commission from AIB. AIB
hold licenses issued by the California Department of Insurance.
9
INVESTMENTS
-----------
The investments of the Company are made by the Company's Chief Financial Officer
under the supervision of an investment committee appointed by the Company's
Board of Directors. 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 material
adverse financial impact.
COMPETITION
-----------
General
- -------
The property and casualty insurance industry is highly competitive in the areas
of price and service. It is highly cyclical, characterized by periods of high
premium rates and shortages of underwriting capacity followed by periods of
severe price competition and excess capacity.
The profitability of insurers is affected by many factors including rate
competition, the frequency of claims and their average cost, natural disasters,
state regulations, interest rates, crime rates, general business conditions, and
court decisions redefining and expanding the extent of coverage and granting
higher compensation awards. One of the challenging and unique features of the
property and casualty business is the fact that, since premiums are collected
before losses are paid, its products are normally priced before its costs are
known.
Insurance Company and General Agency Operations (Property and Casualty)
- ----------------------------------------------------------------------
The Company's property and casualty insurance business continues to experience a
competitive marketplace. There are many substantial competitors who have larger
resources, operate in more states, and insure coverages in more lines and in
higher limits than the Company. In addition, Crusader competes not only with
other insurance companies but also with the general agents. Many of these
general agents offer more products than the Company. The principal method of
competition among competitors is price. While the Company attempts to meet this
competition with competitive prices, its emphasis is on service, promotion, and
distribution. Additional information regarding competition in the insurance
marketplace is discussed in the Item 7 - "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Results of Operations."
Insurance Premium Financing Operation
- -------------------------------------
The insurance premium financing operation currently finances policies written
only through its sister company, Unifax. Consequently, AAC's growth is primarily
dependent on the growth of Crusader and Unifax business. In addition, the
competitive pricing, the quality of its service, and the ease and convenience of
financing with AAC have made its profitability possible.
Health and Life Insurance Operations
- ------------------------------------
Competition in the health and life insurance business is intense. In 2005 and
2004 approximately 72% and 78%, respectively, of the Company's health and life
insurance business was from the CIGNA HealthCare medical and dental plan
programs. These plans consist of both individual and family health insurance and
small group markets. Due to CIGNA's discontinuance of its individual and family
health insurance programs to new policyholders in the state of California in
April 2003 and the termination of existing policyholders beginning November 1,
2003, through October 1, 2004, the percentage of business derived from CIGNA
decreased. CIGNA's termination of its California individual and family health
insurance did not affect CIGNA's individual and family dental plans or its group
medical and dental plans. AIB has secured commission relationships with other
carriers and is continuing its efforts to diversify and to offer a wider variety
of products to its customers.
EMPLOYEES
---------
On March 10, 2006, the Company employed 124 persons at its facility located in
Woodland Hills, California. The Company has no collective bargaining agreements
and believes its relations with its employees are excellent.
10
Item 1A. Risk Factors.
- ----------------------
The Company is subject to numerous risks and uncertainties, the outcome of which
may impact future results of operations and financial condition. These risks are
as follows:
Losses and loss adjustment expense reserves are based on estimates and may not
- ------------------------------------------------------------------------------
be sufficient to cover future losses.
- ------------------------------------
Losses and loss adjustment expense reserves represent an estimate of amounts
needed to pay and administer claims with respect to insured events that have
occurred, including events that have been incurred which have not yet been
reported to the Company. There is a high level of uncertainty inherent in the
evaluation of the required losses and loss adjustment expense reserves for the
Company. The long-tailed nature of liability claims and the volatility of jury
awards exacerbate that uncertainty. The Company sets losses and loss adjustment
expense reserves at each balance sheet date at management's best estimate of the
ultimate payments that it anticipates will be made to settle all losses incurred
and related loss adjustment expenses incurred as of that date for both reported
and unreported losses. The ultimate cost of claims is dependent upon future
events, the outcomes of which are affected by many factors. Company claim
reserving procedures and settlement philosophy, current and perceived social and
economic inflation, current and future court rulings and jury attitudes,
improvements in medical technology, and many other economic, scientific, legal,
political, and social factors all can have significant effects on the ultimate
costs of claims. Changes in Company operations and management philosophy also
may cause actual developments to vary from the past. 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's success depends on its ability to accurately underwrite risks and
- -------------------------------------------------------------------------------
to charge adequate premiums to policyholders.
- --------------------------------------------
The Company's financial condition, liquidity and results of operations depend in
large part on the Company's ability to underwrite and set premiums accurately
for the risks it faces. Premium rate adequacy is necessary to generate
sufficient premium to offset losses, loss adjustment expenses and underwriting
expenses and to earn a profit. In order to price its products accurately, the
Company must collect and properly analyze a substantial volume of data; develop,
test and apply appropriate rating formulae; closely monitor and timely recognize
changes in trends; and project both severity and frequency of losses with
reasonable accuracy. The Company's ability to undertake these efforts
successfully is subject to a number of risks and uncertainties, including,
without limitation:
o Availability of sufficient reliable data.
o Incorrect or incomplete analysis of available data.
o Uncertainties inherent in estimates and assumptions.
o Selection and application of appropriate rating formulae or other
pricing methodologies.
o Adoption of successful pricing strategies.
o Prediction of policyholder retention (e.g., policy life expectancy).
o Unanticipated court decisions, legislation or regulatory action.
o Ongoing changes in the Company's claim settlement practices.
o Unexpected inflation.
o Social changes, particularly such as those effecting litigious
inclinations.
Such risks may result in the Company's pricing being based on outdated,
inadequate or inaccurate data or inappropriate analyses, assumptions or
methodologies, and may cause the Company to estimate incorrectly future changes
in the frequency or severity of claims. As a result, the Company could
underprice risks, which would negatively affect the Company's margins, or it
could overprice risks, which could reduce the Company's volume and
competitiveness. In either event, the Company's operating results, financial
condition and cash flow could be materially adversely affected.
Inability to obtain reinsurance or to collect on ceded reinsurance could
- ------------------------------------------------------------------------
adversely affect the Company's ability to write new policies.
- ------------------------------------------------------------
The availability, amount and cost of reinsurance depend on market conditions and
may vary significantly. Any decrease in the amount of the Company's reinsurance
will increase the risk of loss and could materially adversely affect its
business and financial condition. Ceded reinsurance does not discharge the
Company's direct obligations under the policies it writes. The Company remains
liable to its policyholders, even if the Company is
11
unable to make recoveries that it believes its entitled to under the reinsurance
contracts. Losses may not be recovered from the reinsurers until claims are
paid.
The insurance business is subject to extensive regulation and legislative
- -------------------------------------------------------------------------
changes, which may impact the manner in which the company operates its business.
- -------------------------------------------------------------------------------
The insurance business is subject to extensive regulation by the California
Department of Insurance. The California Department of Insurance has broad
regulatory powers implemented to protect policyholders, not stockholders or
other investors. These powers include, among other things, the ability to:
o Place limitations on the Company's investments and dividends.
o Place limitations on the Company's ability to transact business with its
affiliates.
o Establish standards of solvency including minimum reserves and capital
surplus requirements.
o Prescribe the form and content of, and to examine, the Company's
financial statements.
Federal legislation typically does not directly impact the property and casualty
business, but the business can be indirectly affected by changes in federal
regulations.
This extensive regulation may affect the cost or demand for the Company's
products and may limit the ability to obtain rate increases or to take other
actions that the Company might desire to do in order to increase its
profitability.
A downgrade in the financial strength rating of the insurance company could
- ---------------------------------------------------------------------------
reduce the amount of business it may be able to write.
- -----------------------------------------------------
Rating agencies rate insurance companies based on financial strength as an
indication of an ability to pay claims. Crusader currently has a financial
strength rating of B+ (Very Good) from A.M. Best. The financial strength rating
of A.M. Best is subject to periodic review using, among other things,
proprietary capital adequacy models, and is subject to revision or withdrawal at
any time. Insurance financial strength ratings are directed toward the concerns
of policyholders and insurance agents and are not intended for the protection of
investors. Any downgrade in the Company's A.M. Best rating could cause a
reduction in the number of policies it writes and could have a material adverse
effect on its results of operations and financial position.
Intense competition could adversely affect the ability to sell policies at
- --------------------------------------------------------------------------
premium rates the Company deem adequate.
- ---------------------------------------
The Company faces significant competition which, at times, is intense. If the
Company is unable to compete effectively its business and financial condition
could be materially adversely affected. Competition in the property and casualty
marketplace is based on many factors including premiums charged, services
provided, financial strength ratings assigned by independent rating agencies,
speed of claims payments, reputation, perceived financial strength and general
experience. The Company competes with regional and national insurance companies.
Some competitors have greater financial, marketing and management resources than
the Company. Intense competitive pressure on prices can result from the actions
of even a single large competitor. The Company uses its own premium rates to
determine the price for its property and casualty policies.
The Company's earnings may be affected by changes in interest rates.
- -------------------------------------------------------------------
Investment income is an important component of the Company's revenues and net
income. The ability to achieve investment objectives is affected by factors that
are beyond the Company's control. Interest rates are highly sensitive to many
factors, including governmental monetary policies and domestic and international
economic and political conditions. Any significant decline in investment income
as a result of falling interest rates or general market conditions would have an
adverse effect on net income and, as a result, on the Company's stockholders'
equity and policyholders' surplus.
The outlook of the Company's investment income is dependent on the future
direction of interest rates and the amount of cash flows from operations that
are available for investment. The fair values of fixed maturity investments that
are "available-for-sale" fluctuate with changes in interest rates and cause
fluctuations in the stockholders' equity.
The Company's geographic concentration ties its performance to the business,
- ---------------------------------------------------------------------------
economic and regulatory conditions in California.
- ------------------------------------------------
The Company's insurance business is concentrated in California (100% of 2005
and 2004 net written premiums). Accordingly, unfavorable business, economic or
regulatory conditions in the state of California could negatively
12
impact the business. In addition, California is exposed to severe natural
perils, such as earthquakes and fires, along with the possibility of terrorist
acts. Accordingly, the Company could suffer losses as a result of catastrophic
events. Because the Company's business is concentrated in this manner, it may be
exposed to economic and regulatory risks or risks from natural perils that are
greater than the risks associated with greater geographic diversification.
The Company relies on independent insurance agents and brokers.
- --------------------------------------------------------------
The failure or inability of independent insurance agencies and brokers to market
the Company's insurance programs successfully could have a material adverse
effect on its business, financial condition and results of operations. Agents
and brokers are not obligated to promote the Company's insurance programs and
may sell competitors' insurance programs. As a result, the Company's business
depends in part on the marketing efforts of agents and brokers and on the
Company's ability to offer insurance programs and services that meet the
requirements of the their customers.
Litigation may have an adverse effect on the Company's business.
- ---------------------------------------------------------------
The insurance industry is the target of an increasing number of class action
lawsuits and other types of litigation, some of which involve claims for
substantial and/or indeterminate amounts and the outcomes of which are
unpredictable. This litigation is based on a variety of issues including
insurance and claim settlement practices. Although the Company has not been the
target of any specific class action lawsuits it is possible that a suit of this
type could have a negative impact on the Company's business.
The Company relies on its information technology systems to manage many aspects
- -------------------------------------------------------------------------------
of its business, and any failure of these systems to function properly or any
- -----------------------------------------------------------------------------
interruption in their operation could result in a material adverse effect on the
- --------------------------------------------------------------------------------
Company's business, financial condition and results of operations.
- -----------------------------------------------------------------
The Company depends on the accuracy, reliability and proper functioning of its
information technology systems. The Company relies on these information
technology systems to effectively manage many aspects of its business, including
underwriting, policy acquisition, claims processing and handling, accounting,
reserving and actuarial processes and policies, and to maintain its policyholder
data. The failure of hardware or software that supports the Company's
information technology systems, the loss of data contained in the systems could
disrupt its business and could result in decreased premiums, increased overhead
costs and inaccurate reporting, all of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, despite system redundancy, the implementation of security measures
and the existence of a disaster recovery plan for the Company's information
technology systems, these systems are vulnerable to damage or interruption from
events such as:
o Earthquake, fire, flood and other natural disasters.
o Terrorist attacks and attacks by computer viruses or hackers.
o Power loss.
o Unauthorized access.
o Computer systems or data network failure
It is possible that a system failure, accident or security breach could result
in a material disruption to the Company's business. In addition, substantial
costs may be incurred to remedy the damages caused by these disruptions. To the
extent that a critical system fails or is not properly implemented and the
failure cannot be corrected in a timely manner, the Company may experience
disruptions to the business that could have a material adverse effect on the
Company's results of operations.
The Company's disclosure controls and procedures may not prevent or detect all
- ------------------------------------------------------------------------------
acts of fraud.
- -------------
The Company's disclosure controls and procedures are designed to reasonably
ensure that information required to be disclosed in reports filed or submitted
under the Securities Exchange Act is accumulated and communicated to management
and is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. The Company's management believes that
any disclosure controls and procedures or internal controls and procedures, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Because
of the inherent limitations in all control systems, they cannot provide absolute
assurance that all control issues and instances of fraud, if any, within the
Company have been prevented or detected. These inherent limitations include the
realities that judgments in decision-making can be faulty and that breakdowns
can occur because of a simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
13
people, or by an unauthorized override of the controls. The design of any system
of controls also is based in part upon certain assumptions about the likelihood
of future events, and the Company cannot ensure that any design will succeed in
achieving its stated goals under all potential future conditions. Accordingly,
because of the inherent limitations in a cost effective control system,
misstatements due to error or fraud may occur and not be detected.
The ability of the Company to attract, develop and retain talented employees,
- -----------------------------------------------------------------------------
managers and executives, and to maintain appropriate staffing levels, is
- ------------------------------------------------------------------------
critical to the Company's success.
- ---------------------------------
The Company must hire and train new employees, and retain current employees to
handle its operations. The failure of the Company to successfully hire and
retain a sufficient number of skilled employees could result in the Company
having to slow the growth of its business. In addition, the failure to
adequately staff its claims department could result in decreased quality of the
Company's claims operations. The Company's success also depends heavily upon the
continued contributions of its executive officers, both individually and as a
group. The Company's future performance will be substantially dependent on its
ability to retain and motivate its management team. The loss of the services of
any of the Company's executive officers could prevent the Company from
successfully implementing its business strategy, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Item 1B. Unresolved Staff Comments.
- -----------------------------------
Not applicable
Item 2. Properties
- -------------------
The Company presently occupies a 46,000 square foot building located at 23251
Mulholland Drive, Woodland Hills, California, under a master lease expiring
March 31, 2007. The lease provides for an annual gross rent of $1,025,952. Erwin
Cheldin, the Company's president, chairman and principal stockholder, is the
owner of the building. On February 22, 1995, the Company signed an extension to
the lease with no increase in rent to March 31, 2007. The Company believes that
the terms of the lease at inception and at the time the lease extension was
signed were at least as favorable to the Company as could have been obtained
from non-affiliated third parties.
The Company utilizes for its own operations approximately 100% of the space it
leases.
Item 3. Legal Proceedings
- --------------------------
The Company, by virtue of the nature of the business conducted by it, becomes
involved in numerous legal proceedings in which it may be named as either
plaintiff or defendant. Incidental actions are sometimes brought by customers or
others that relate to disputes concerning the issuance or non-issuance of
individual insurance policies or other matters. In addition, the Company resorts
to legal proceedings from time to time in order to enforce collection of
premiums, commissions, or fees for the services rendered to customers or to
their agents. These routine items of litigation do not materially affect the
Company's operations and are handled on a routine basis through its counsel.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None
14
PART II
-------
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
- --------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
-------------------------------------
The Company's common stock is traded on the NASDAQ National Market System under
the symbol "UNAM." The high and low sales prices (by quarter) during the last
two comparable twelve-month periods are as follows:
High Low
Quarter Ended Price Price
------------- ----- -----
March 31, 2004 $6.52 $5.22
June 30, 2004 $6.45 $5.78
September 30, 2004 $6.69 $5.78
December 31, 2004 $9.59 $7.20
March 31, 2005 $11.50 $8.76
June 30, 2005 $9.15 $8.00
September 30, 2005 $9.58 $8.41
December 31, 2005 $9.38 $8.45
As of December 31, 2005, the approximate number of shareholders of record of the
Company's common stock was 425. In addition, the Company estimates beneficial
owners of the Company's common stock held in the name of nominees to be
approximately 850.
The Company last declared a cash dividend on its common stock in 2002.
Declaration of future annual cash dividends will be subject to the Company's
profitability and its cash requirements. Because the Company is a holding
company and operates through its subsidiaries, its cash flow and, consequently,
its ability to pay dividends are dependent upon the earnings of its subsidiaries
and the distribution of those earnings to the Company. Also, the ability of
Crusader to pay dividends to the Company is subject to certain regulatory
restrictions under the Holding Company Act (see Item 1 - "Business - Insurance
Company Operation - Holding Company Act"). Based on Crusader's statutory surplus
as regards policyholders as of December 31, 2005, the maximum dividend that can
be made by Crusader to Unico without prior regulatory approval in 2005 is
$3,658,644.
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 17 of "Notes to
Consolidated Financial Statements"). No shares were repurchased during the year
ended December 31, 2005. As of December 31, 2005, the Company has 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.
Item 6. Selected Financial Data
- --------------------------------
Year ended December 31
---------------------------------------------------------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Total revenues $61,182,522 $61,903,310 $51,130,439 $46,028,642 $42,116,906
Total costs and expenses 50,716,092 53,230,852 48,981,068 50,842,701 58,840,015
---------- ---------- ---------- ---------- -----------
Income (loss) before taxes $10,466,430 $8,672,458 $2,149,371 $(4,814,059) $(16,723,109)
Net income (loss) $6,715,004 $5,681,500 $1,068,650 $(3,224,689) $(10,870,018)
Basic earnings (loss) per share $1.22 $1.03 $0.19 $(0.59) $(1.97)
Diluted earnings (loss) per share $1.20 $1.02 $0.19 $(0.59) $(1.97)
Cash dividends per share - - - $0.05 $0.05
Total assets $186,297,179 $172,570,276 $161,493,695 $148,686,605 $128,823,273
Stockholders' equity $48,394,373 $42,425,325 $38,470,857 $38,408,990 $40,620,376
15
Item 7. 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 provided claim administration
services (through December 31, 2003), insurance premium financing, and
membership association services.
The Company's net income was $6,715,004 in 2005, $5,681,500 in 2004, and
$1,068,650 in 2003.
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 Annual Report
on Form 10-K.
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 company 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 and is rated
B+ (Very Good) with a rating outlook of stable by A.M. Best Company.
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 claim and loss adjustment cost that it anticipates will be incurred
after the policy is sold. In addition, other factors such as changes in
regulations and legal environment, among other things, can all impact the
ultimate cost.
The property and casualty insurance industry is characterized by periods of soft
market conditions, in which premium rates are stable or falling and insurance is
readily available, and by periods of hard market conditions, where rates rise,
coverage may be more difficult to find and insurers' profits increase. 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. Despite the increased competition in the property and casualty
marketplace, the Company believes that rate adequacy is more important than
premium growth, and that underwriting profit is the Company's primary goal. For
the year ended December 31, 2005, gross written premium was $60,268,784, a
decrease of $8,603,237 (12%) compared to 2004.
For the twelve months ended December 31, 2005, losses and loss adjustment
expenses for insured events of the current year were $35,338,196, offset by
$3,824,464 favorable development for events of prior years. For the twelve
months ended December 31, 2004, losses and loss adjustment expenses for insured
events of the current year were $35,286,172, offset by $835,434 favorable
development for events of prior years. The favorable developments resulted from
settling or re-estimating claims for lesser amounts than they were initially
reserved.
16
Other Operations
- ----------------
The Company's other operations generate commissions, fees, and finance charges
from various insurance products. The events 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. As a
result of the decrease in the number of policies sold by Unifax during 2005 as
compared to 2004, policy fee income for the 12 months ended December 31, 2005,
decreased 12% as compared to the prior year period.
AIB sells and services health insurance policies for individual/family and small
business groups and receives commissions based on the premiums that it writes.
Commissions decreased 25% in the year ended December 31, 2005, compared to 2004.
The decrease is 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. AIB had been assisting former CIGNA policyholders
to find health coverage with other insurance carriers that AIB represents.
AAQHC provides various consumer benefits to its members, including participation
in group health care and life insurance policies. For these services, AAQHC
receives membership and fee income from its members. Membership and fee income
decreased 5% in the year ended December 31, 2005, compared to 2004. The decrease
is a result of the 9% decrease in the number of members.
AAC provides premium financing for Crusader policies that are produced by Unifax
in California. Finance charges and fees earned by AAC during 2005 decreased 19%
as compared to 2004. The decrease is primarily a result of a 19% decrease in the
number of loans issued in 2005 compared to 2004. Average premium financed
decreased 2% from $2,606 in 2004 to $2,557 in 2005.
Investments and Liquidity
- -------------------------
The Company generates revenue from its investment portfolio, which consisted of
approximately $140.6 million (at amortized cost) at December 31, 2005, compared
to $132.1 million (at amortized cost) at December 31, 2004. Although the
investment portfolio increased approximately 8.5 million (at amortized cost) or
6% in 2005 compared to 2004, investment income for the twelve months ended
December 31, 2005 and 2004 remained relatively unchanged.
Due primarily to the maturity of higher yielding investments and reinvestments
in shorter maturities, the annualized yield on the average invested assets
decreased from 3.39% in 2004 to 3.17% in 2005. Due to the interest rate
environment in the past few years, management believed it was prudent to
purchase fixed maturity investments with shorter maturities with minimal credit
risk. As of December 31, 2005, the weighted average maturity of the Company's
fixed maturity investments was 1.2 years compared to 1.4 years and 1.9 years as
of December 31, 2004 and December 31, 2003, respectively.
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. Because the Company is a
holding company and operates through its subsidiaries, its cash flow is
dependent upon the earnings of its subsidiaries and the distributions of those
earnings to the Company.
The cash flow provided by operations in the year ended December 31, 2005, was
$9,798,342, a decrease in cash flow of $5,025,495 compared to the cash flow for
the year ending December 31, 2004. Cash flow provided by operations for the year
ended December 31, 2004, was $14,823,837, a decrease of $701,549 in cash
provided compared to the year ended December 31, 2003. The Company has utilized
the cash provided from operating activities and from the maturity of its fixed
maturity investments primarily to purchase $59.4 million of fixed maturity
securities.
The most significant liquidity risk faced by the Company would be adverse
development of the insurance company claims, both reported and unreported. The
Company has taken measures to address the underlying causes of prior adverse
development; however, no assurance can be given that the measures taken will be
successful or that the Company's estimate of ultimate losses and loss adjustment
expenses will be sufficient. Based on the
17
Company's current loss and loss expense reserves and expected current and future
payments, the Company believes that there are no current liquidity issues.
Crusader generates a significant amount of cash as a result of its holdings of
unearned premium reserves, its 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. Cash and
investments (excluding net unrealized gains or losses) at December 31, 2005,
were $140,617,062 compared to $132,122,792 at December 31, 2004, a 6% increase.
Crusader's cash and investments at December 31, 2005, was $137,990,174 or 98% of
the total held by the Company, compared to $129,887,431 or 98% of the total held
by the Company at December 31, 2004.
The Company's investments are as follows:
December 31, 2005 December 31, 2004 December 31, 2003
----------------- ----------------- -----------------
Amount % Amount % Amount %
------ - ------ - ------ -
Fixed maturities (at amortized cost)
Certificates of deposit $500,000 - $500,000 - $500,000 -
U.S. treasury securities 107,290,653 79 77,765,616 60 38,305,041 34
U.S. government sponsored
enterprise securities 6,000,000 4 11,998,772 10 11,997,264 11
Industrial and miscellaneous (taxable) 21,403,239 16 37,754,927 29 58,493,396 53
State and municipal (tax exempt) 934,536 1 970,343 1 2,029,891 2
----------- --- ----------- --- ----------- ---
Total fixed maturity investments 136,128,428 100 128,989,658 100 111,325,592 100
----------- === ----------- === ----------- ===
Short-term cash investments (at cost)
Certificates of deposit 100,000 2 400,000 13 425,000 6
Cash deposit in lieu of bond* 200,000 5 752,659 24 752,659 10
Commercial paper 1,830,000 41 1,005,000 32 2,000,000 28
Bank money market accounts 182,673 4 803,949 26 902,517 13
U.S. gov't obligation money market fund 2,150,671 48 144,925 5 147,666 2
Short-term U.S. treasury - - - - 2,998,850 41
Bank savings accounts 11,818 - 11,585 - 2,623 -
--------- --- --------- --- --------- ---
Total short-term cash investments 4,475,162 100 3,118,118 100 7,229,315 100
--------- === --------- === --------- ===
Total investments $140,603,590 $132,107,776 $118,554,907
=========== =========== ===========
* Deposits with superior courts to stay execution of judgment pending appeal of
Crusader claims.
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 investment 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 and the Company may
sell investment securities from time to time in response to economic and market
conditions, its investment guidelines place primary emphasis on buying and
holding high-quality investments to maturity.
The tax-exempt interest income earned (net of bond premium and discount
amortization) during the year ended December 31, 2005, was $14,416 compared to
$36,719 in the year ended December 31, 2004. In the year ended December 31,
2003, tax-exempt interest income earned totaled $117,892.
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. As of December 31, 2005, all of the Company's fixed maturity
investments were investment grade and readily marketable and could be liquidated
without any materially adverse financial impact.
18
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.
During 2005 the Company began its conversion to a "paperless office" including
improvements to 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 December 31, 2005, the Company had incurred approximately
$650,000 of capital expenditures and anticipates incurring an additional
$100,000 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.
Crusader's statutory capital and surplus as of December 31, 2005, was
$36,586,441, an increase of $7,150,098 (24.3%) from December 31, 2004.
Crusader's statutory capital and surplus as of December 31, 2004, was
$29,436,343, an increase of $3,332,903 (12.8%) from December 31, 2003.
No dividends were declared or paid by Crusader to Unico in 2005, 2004 or 2003.
Based on Crusader's statutory surplus as regards policyholders as of December
31, 2005, the maximum dividend that can be made by Crusader to Unico without
prior regulatory approval in 2006 is $3,658,644.
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 17 of "Notes to
Consolidated Financial Statements"). During the year ended December 31, 2005,
the Company did not repurchase any shares of the Company's common stock. As of
December 31, 2005, the Company has 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.
Although material capital expenditures may also be funded through borrowings,
the Company believes that its cash and short-term investments at year end, net
of trust restriction of $265,668, statutory deposits of $700,000, cash deposited
(with superior courts) in lieu of bond of $200,000 and California insurance
company statutory dividend restrictions applicable to Crusader 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.
As a California insurance company, Crusader is obligated to pay a premium tax on
gross premiums written in all states that Crusader is admitted. Premium taxes
are deferred and amortized as the related premiums are earned. The premium tax
is in lieu of state franchise taxes and is not included in the provision for
state taxes.
The Company has certain obligations to make future payments under contracts and
credit-related financial instruments and commitments. At December 31, 2005,
certain long-term aggregate contractual obligations and credit-related
commitments are summarized as follows:
Within 1-3 3-5 After
Contractual Obligations Total 1 Year Years Years 5 years
- ----------------------- ----- ------ ----- ----- -------
Building lease $1,282,440 $1,025,952 $256,488 - -
Losses and loss adjustment expense reserves* 101,914,548 33,682,548 35,807,000 $15,745,000 $16,680,000
----------- ---------- ---------- ---------- ----------
Total $103,196,988 $34,708,500 $36,063,488 $15,745,000 $16,680,000
=========== ========== ========== ========== ==========
* Unlike many other forms of contractual obligations, loss and loss adjustment
expense reserves do not have definitive due dates and the ultimate payment
dates are subject to a number of variables and uncertainties. As a result,
the total loss and loss adjustment expense reserve payments to be made by
period, as shown above, are estimates.
19
Results of Operations
---------------------
General
- -------
The Company had net income of $6,715,004 for the year ended December 31, 2005,
compared to net income of $5,681,500 for the year ended December 31, 2004, and
net income of $1,068,650 for the year ended December 31, 2003. Total revenue for
the year ended December 31, 2005, was $61,182,522 compared to $61,903,310 for
the year ended December 31, 2004, and $51,130,439 for the year ended December
31, 2003.
For the year ended December 31, 2005, the Company had income before taxes of
$10,466,430 compared to income before taxes of $8,672,458 in the year ended
December 31, 2004, an increase in income before taxes of $1,793,972. The
increase in pre-tax income was primarily due to an increase of $3,114,856 in the
underwriting profit (net earned premium less losses and loss adjustment expenses
and policy acquisition costs) from Crusader offset by $995,849 decrease in gross
commissions and fees income.
For the year ended December 31, 2004, the Company had income before taxes of
$8,672,458 compared to income before taxes of $2,149,371 in the year ended
December 31, 2003, an increase in income before taxes of $6,523,087. The
increase in pre-tax income was primarily due to an increase of $7,892,277 in the
underwriting profit (net earned premium less losses and loss adjustment expenses
and policy acquisition costs) from Crusader offset by $1,605,512 decrease in
gross commissions and fees income.
The effect of inflation on the net income of the Company during the years ended
December 31, 2005, 2004, and 2003 was not significant.
The Company derives revenue from various sources as discussed below.
Insurance Company Operation
- ---------------------------
Premium and loss information of Crusader are as follows:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Gross written premium $60,268,784 $68,872,021 $64,047,717
Net written premium (net of reinsurance ceded) $46,030,707 $51,089,573 $47,420,157
Earned premium before reinsurance ceded $64,712,764 $67,890,808 $53,754,119
Earned premium (net of reinsurance ceded) $50,477,920 $50,106,568 $37,106,099
Losses and loss adjustment expenses $31,513,732 $34,450,738 $31,720,533
Gross unpaid losses and loss adjustment expenses $101,914,548 $87,469,000 $78,139,090
Net unpaid losses and loss adjustment expenses $76,235,467 $67,349,989 $58,883,861
Crusader's primary line of business is commercial multiple peril policies. This
line of business represented approximately 97% of Crusader's total written
premium for the year ended December 31, 2005, 98% for the year ended December
31, 2004, and 97% for the year ended December 31, 2003.
As of December 31, 2005, Crusader was licensed as an admitted insurance company
in the states of Arizona, California, Montana, Nevada, Oregon, and Washington
and is approved as a non-admitted surplus lines writer in other states.
For the year ended December 31, 2005, gross written premium decreased by
$8,603,237 (12%) over 2004. Gross written premium for the year ended December
31, 2004, increased by $4,824,304 (8%) over 2003. The decrease in written
premium in 2005 and the increase in written premium in 2004 are primarily the
result of the fluctuations in written premium in the Company's apartment
program, a program within the Company's commercial multiple peril line of
business. Written premium in the apartment program was $25,265,294 for the
twelve months ended December 31, 2005, a decrease of $6,622,191 (21%) from
$31,887,485 for the twelve months ended December 31, 2004. Written premium in
the apartment program increased $4,582,381 (17%) from $27,305,104 for the twelve
months ended December 31, 2003, to $31,887,485 for the twelve months ended
December 31, 2004. The decrease in written premium in the Company's apartment
program in 2005 was primarily due to increased competition in that market. 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.
20
The Company's average premium per policy issued is as follows:
Year Ended Direct Written Policies Average
December 31 Premium Issued Premium
----------- ------- ------ -------
2005 $60,268,784 17,927 $3,362
2004 $68,872,021 20,885 $3,298
2003 $64,047,717 21,425 $2,989
As indicated in the above table, the number of policies issued during the 12
months ended December 31, 2005, decreased by 2,958 (14%) as compared to the
prior year. The average premium per policy in 2005 increased by $64 (2%) as
compared to the 12 months ended December 31, 2004. As previously discussed, the
decrease in the number of policies issued in 2005 compared to 2004 is primarily
a result of the increased competition. The Company believes that rate adequacy
is more important than premium growth and that underwriting profit is the
Company's primary goal. Thus, the average premium per policy issued remained
relatively comparable to the prior year. Management's assessment of trends and
underwriting results is a primary factor in its decisions to expand or contract
its business. The Company continues to believe that it can compete effectively
and profitably by offering better service and by marketing its policies through
independent agents and brokers.
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 has not been profitable. The Company has no short-term plan to
expand into additional states or to expand its marketing channels. Instead, the
Company intends to allocate its resources toward improving its California
business rates, rules, and forms.
The Company writes annual policies and, therefore, earns written premium daily
over the one-year policy term. Premium earned before reinsurance decreased
$3,178,044 (5%) in the year ended December 31, 2005, compared to the year ended
December 31, 2004, and increased $14,136,689 (26%) in the year ended December
31, 2004, compared to the year ended December 31, 2003. The decrease in earned
premium before reinsurance in 2005 is a direct result of the decrease in written
premium in 2005. The increase in earned premium before reinsurance in 2004 is a
direct result of the increase in written premium during 2004 and 2003.
Earned ceded premium for the 12 months ended December 31, 2005, decreased
$3,594,396 (20%) to $14,234,844 compared to $17,784,240 for the 12 months ended
December 31, 2004. Earned ceded premiums as a percentage of direct earned
premiums were 22% and 26% for 2005 and 2004, respectively. Although direct
earned premiums in 2005 decreased 5% as compared to 2004, earned ceded premiums
decreased 20% primarily as a result of a rate decrease by the Company's
reinsurers effective January 1, 2005. Earned ceded premiums for the 12 months
ended December 31, 2004, increased $1,136,220 (7%) to $17,784,240 compared to
$16,648,020 for the 12 months ended December 31, 2003. Earned ceded premiums as
a percentage of direct earned premiums were 26% and 31% for 2004 and 2003,
respectively. The 2005 and 2004 earned ceded premium to direct earned premium
ratio decreased primarily as a result of rate decrease by the Company's
reinsurers. The rates decreased primarily due to the Company's improving ceded
loss experience.
Ceding commissions on the Company's excess of loss treaties is 35% and is a
component of policy acquisition costs. Primarily due to favorable loss
experience in 2004 and 2003, reinsurance premium on the Company's 1st layer
primary excess of loss treaty ($700,000 in excess of $300,000) decreased in 2005
by 24% compared to 2004. In 2005, Crusader retained a participation in its
excess of loss reinsurance treaties of 10% in its 1st layer ($700,000 in excess
of $300,000), 10% in its 2nd layer ($1,000,000 in excess of $1,000,000), and 30%
in its property and casualty clash treaties. In 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), 10% in its 2nd layer ($1,000,000 in excess of
$1,000,000), and 30% in its property and casualty clash treaties. In 2003
Crusader retained a participation in its excess of loss reinsurance treaties of
5% in its 1st layer ($750,000 in excess of $250,000), 10% in its 2nd layer
($1,000,000 in excess of $1,000,000), and 30% in its property and casualty clash
treaties. 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.
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. The first accounting period for the contingent commission covers the
period from January 1, 2003, through December 31, 2005. The Company will
calculate and report to the reinsurer its net profit, if any, within 90 days
after 36 months following the end of the first accounting period,
21
and within 90 days after the end of each 12 month period thereafter until all
losses subject the to agreement have been finally settled. Based on losses and
loss adjustment expenses ceded (including incurred but not reported losses) as
of December 31, 2005, no contingent commission has been accrued. The 2005 1st
layer primary excess of loss treaty does not provide for a contingent
commission.
Crusader's direct earned premium, earned ceded premium, and ceding commission
are as follows:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Direct earned premium $64,712,764 $67,890,808 $53,754,119
Earned ceded premium
Excluding provisionally rated ceded premium 14,281,810 17,843,805 16,414,611
Provisionally rated ceded premium (46,966) (59,565) 233,409
---------- ---------- -----------
Total earned ceded premium 14,234,844 17,784,240 16,648,020
Ceding commission 4,647,748 6,031,987 5,429,330
--------- ---------- ----------
Earned ceded premium, net of ceding commission $9,587,096 $11,752,253 $11,218,690
========= ========== ==========
Ratios to direct earned premium
Direct ceded premium 22% 26% 31%
Earned ceded premium, net of ceding commission 15% 17% 21%
The combined ratio is the sum of (1) the net ratio of losses and loss adjustment
expenses incurred (including a provision for incurred-but-not-reported losses
"IBNR") to net premiums earned (loss ratio) and (2) the ratio of policy
acquisition costs to net premiums earned (expense ratio). The following table
shows the loss ratios, expense ratios, and combined ratios of Crusader as
derived from data prepared in accordance with GAAP.
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Loss ratio 62.4% 68.8% 85.5%
Expense ratio 20.8% 20.6% 21.4%
---- ---- -----
Combined ratio 83.2% 89.4% 106.9%
==== ==== =====
As indicated in the above table, the loss ratio for the year ended December 31,
2005, decreased to 62.4% from 68.8% in 2004 and 85.5% in 2003. The continuous
decrease in the loss ratio was primarily due to improvements in the provision
for prior years' incurred losses. Generally, if the combined ratio is below
100%, an insurance company has an underwriting profit; if it is above 100%, a
company has an underwriting loss.
Reserves for losses and loss adjustment expenses before reinsurance increased
$14,445,548 (17%) from $87,469,000 as of December 31, 2004, to $101,914,548 as
of December 31, 2005. The increase in loss and loss adjustment expense reserves
in 2005 is primarily a result of an $11,030,000 increase to direct IBNR
reserves, from $67,770,000 as of December 31, 2004 to $78,800,000 as of December
31, 2005.
Reserves for losses and loss adjustment expenses before reinsurance increased
$9,329,910 (12%) from $78,139,090 as of December 31, 2003, to $87,469,000 as of
December 31, 2004. The increase in loss and loss adjustment expense reserves in
2004 is primarily a result of a $14,330,000 increase to direct IBNR reserves,
from $53,440,000 as of December 31, 2003 to $67,770,000 as of December 31, 2004.
Reserves for losses and loss adjustment expenses before reinsurance for each of
Crusader's lines of business were as follows:
Year ended December 31
----------------------
Line of Business 2005 2004 2003
- ---------------- ------------------ ----------------- -----------------
CMP $98,758,298 96.9% $83,677,560 95.7% $73,708,553 94.3%
Other Liability 2,967,804 2.9% 3,592,719 4.1% 4,279,021 5.5%
Other 188,446 0.2% 198,721 0.2% 151,516 0.2%
----------- ----- ---------- ----- ---------- -----
Total $101,914,548 100.0% $87,469,000 100.0% $78,139,090 100.0%
=========== ===== ========== ===== ========== =====
22
The Company`s consolidated financial statements include estimated reserves for
unpaid losses and related loss adjustment expenses of the insurance company
operation. Crusader sets loss and loss adjustment expense reserves at each
balance sheet date at management's best estimate of the ultimate payments that
it anticipates will be made to settle all losses incurred and related loss
adjustment 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. 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.
Losses and loss adjustment expenses
- -----------------------------------
Losses and loss adjustment expenses were $31,513,732 or 62% of net premium
earned for the year ended December 31, 2005, compared to $34,450,738 or 69% of
net premium earned for the year ended December 31, 2004, and compared to
$31,720,533 or 85% of net premium earned for the year ended December 31, 2003.
The Company incurred favorable development of prior years' losses of $3,824,464
for the year ended December 31, 2005, compared to favorable development of prior
years' losses of $835,434 for the year ended December 31, 2004. The Company
incurred adverse development of prior years' losses of $2,751,585 for the year
ended December 31, 2003.
Analysis of the roll forward of losses and loss adjustment expenses
- -------------------------------------------------------------------
The following table provides an analysis of the roll forward of Crusader's
losses and loss adjustment expenses, including a reconciliation of the ending
balance sheet liability for the periods indicated:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Reserve for unpaid losses and loss adjustment expenses
at beginning of year - net of reinsurance $67,349,989 $58,883,861 $53,596,945
---------- ---------- ----------
Incurred losses and loss adjustment expenses
Provision for insured events of current year 35,338,196 35,286,172 28,968,948
Increase (decrease) in provision for events of prior years (3,824,464) (835,434) 2,751,585
---------- ---------- ----------
Total losses and loss adjustment expenses 31,513,732 34,450,738 31,720,533
---------- ---------- ----------
Payments
Losses and loss adjustment expenses attributable to
insured events of the current year 8,001,808 7,438,331 5,106,929
Losses and loss adjustment expenses attributable to
insured events of prior years 14,626,446 18,546,279 21,326,688
---------- ---------- ----------
Total payments 22,628,254 25,984,610 26,433,617
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses
at end of year - net of reinsurance 76,235,467 67,349,989 58,883,861
Reinsurance recoverable on unpaid losses and loss
adjustment expenses at end of year 25,679,081 20,119,011 19,255,229
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses at
end of year per balance sheet, gross of reinsurance * $101,914,548 $87,469,000 $78,139,090
=========== ========== ==========
* In accordance with Financial Accounting Standards Board Statement No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts," reinsurance recoverable on unpaid losses and loss adjustment
expenses are reported for GAAP as assets rather than netted against the
corresponding liability for such items on the balance sheet.
23
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 which it believed was primarily
attributable to those losses. The Company believes that implementation of
management's actions on these underwriting components has contributed to
improved operating results. The development of prior years' losses and loss
adjustment expenses in 2005 and 2004 was lower than previously anticipated.
Accordingly, the Company reduced the estimate of its ultimate losses and loss
adjustment expenses for those prior accident years.
Other Insurance Operations
- --------------------------
Association Operation
---------------------
Membership and fee income from the association program of AAQHC is as follows:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Membership and fee income $318,349 $333,470 $481,366
Membership and fee income for the year ended December 31, 2005, decreased
$15,121 (5%), compared to the year ended December 31, 2004. Membership and fee
income for the year ended December 31, 2004, decreased $147,896 (31%), compared
to the year ended December 31, 2003. Beginning in April 2003, CIGNA discontinued
its individual and family health insurance program to new policyholders in the
State of California and on November 1, 2003, CIGNA began terminating
approximately 2,200 individual and family policyholders on a runoff basis. The
termination of policyholders continued through October 1, 2004. The
discontinuance of CIGNA's individual and family health insurance program did not
affect the CIGNA small group program. Primarily due to the discontinuance of
CIGNA's individual and family health insurance program, membership and fee
income decreased as these terminated members were no longer members of the
association.
Health and Life Insurance Program
---------------------------------
Commission income from the health and life insurance sales is as follows:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Commission income $1,628,061 $2,156,924 $3,312,715
AIB markets health and life insurance in California through non-affiliated
insurance companies for individuals and groups. For these services, AIB receives
commission based on the premiums that it writes. Commission income decreased
$528,863 (25%) in the year ended December 31, 2005, compared to 2004. Commission
income decreased $1,155,791 (35%) in the year ended December 31, 2004, compared
to 2003. The decrease in commission in 2005 and 2004 was primarily due to the
discontinuance of CIGNA's individual and family health insurance program in the
state of California as discussed under the results from the association
operation above.
Commissions from other carriers for the year ended December 31, 2005, remained
relatively comparable to 2004. Commissions from other carriers for the year
ended December 31, 2004, increased 96% over 2003 as AIB was able secure other
insurance for approximately half of the 2,200 Cigna members that were terminated
by CIGNA. AIB could not obtain insurance for the remaining CIGNA individuals and
family members primarily due to their pre-existing health conditions or that
they were able to secure other insurance.
Policy Fee Income
-----------------
Unifax sells and services insurance policies for Crusader. The policy fee
charged to the policyholder by Unifax is recognized as income in the
consolidated financial statements. Policy fee income of Unifax is as follows:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Policy fee income $3,001,966 $3,394,783 $3,458,559
Policies issued 17,927 20,885 21,425
Policy fee income for the year ended December 31, 2005, decreased $392,817 (12%)
as compared to the year ended December 31, 2004. The 12% decrease in policy fee
income is primarily a result of a 2,958 (14%)
24
decrease in the number of policies issued during 2005 as compared to 2004 offset
by the increase in policy fee from $165 per policy to $178 effective on and
after August 2005.
Policy fee income for the year ended December 31, 2004, decreased $63,776 (2%)
as compared to the year ended December 31, 2003. The slight decrease in policy
fee income is a result of a 540 (3%) decrease in the number of policies issued
during 2004 as compared to 2003.
Daily Automobile Rental Insurance Program
-----------------------------------------
The daily automobile rental insurance program is produced by Bedford. Bedford
receives a commission from a non-affiliated insurance company based on premium
written. Prior to December 31, 2003, Bedford also received a claim
administration fee from the non-affiliated insurance company.
Commission and fee income from the daily automobile rental insurance program are
as follows:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Rental program commission $411,189 $555,964 $574,197
Claim administration fee 70,000 - 241,428
Contingent commission 29,877 9,488 -
------- ------- -------
Total commission and fee income $511,066 $565,452 $815,625
======= ======= =======
Commission and fee income during the year ended December 31, 2005, were
$511,066, a decrease of $54,386 (10%) as compared to the year ended December 31,
2004. Commission and fee income during the year ended December 31, 2004, were
$565,452, a decrease of $250,173 (31%) as compared to the year ended December
31, 2003.
The daily automobile rental insurance program commission income (excluding
contingent commission) decreased $144,775 (26%) in 2005 compared to 2004. The
daily automobile rental insurance program commission income (excluding
contingent commission) decreased $18,233 (3%) in 2004 compared to 2003. Premium
written in 2005 decreased 24% compared to premium written in 2004, and premium
written in 2004 decreased 6% compared to premium written in 2003. The decrease
in written premium in 2005 and 2004 is primarily due to the continued intense
price competition in the daily automobile rental insurance program, which is
causing these reductions in the Company's written premium and related commission
income. To avoid underwriting losses for the non-affiliated insurance Company
that it represents, Bedford continues to produce business only at rates that it
believes to be adequate. The Company cannot determine how long the existing
market conditions will continue, nor in which direction they might change.
The Company's subsidiary U.S. Risk Managers, Inc., (U.S. Risk) ceased providing
insurance claim administration services to the non-affiliated daily automobile
insurer as of December 31, 2003; and it is currently inactive. As of December
31, 2003, the non-affiliated insurer assumed the claim administration
responsibility for all outstanding and IBNR claims. During 2003, the Company
recognized $200,000 of claim administration fees that were unearned as of
December 31, 2002. Although U.S. Risk is inactive, the Company is still
responsible for all claim administration cost arising from losses covered by
premiums for which it received a claim administration fee. During 2004 and 2005,
the Company did not receive any claim administration fees and did not incur any
future internal claim administration costs. During 2005, the Company recognized
an additional amount of $70,000 of the $100,000 claim administration fees that
were unearned as of December 31, 2004. Thus, the unearned claim administration
reserve as of December 31, 2005, is $30,000 and it reflects the estimated costs
to complete the claim administration by the non-affiliated insurer. As of
December 31, 2005, the non-affiliated insurer had not yet billed the Company for
these costs.
25
Other Commission and Fee Income
-------------------------------
Other commission and fee income are as follows:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Earthquake program commission income $48,519 $53,140 $40,015
Miscellaneous commission and fee income 70 111 1,112
------ ------ ------
Total other commission and fee income $48,589 $53,251 $41,127
====== ====== ======
Unifax began producing commercial earthquake insurance policies in California
for non-affiliated insurance companies in 1999. Unifax receives a commission
from these insurance companies based on premium written. Commission income on
the earthquake program for the year ended December 31, 2005, decreased $4,621
(9%) compared to 2004. Commission income on the earthquake program for the year
ended December 31, 2004, increased $13,125 (33%) compared to 2003.
The commissions paid by Crusader to Unifax are eliminated as intercompany
transactions and are not reflected in commission income or commission expense.
Premium Finance Program
-----------------------
Premium finance charges and late fees earned from financing policies are as
follows:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Premium finance charges and fees earned $758,325 $933,529 $952,543
New loans 4,200 5,156 6,216
AAC provides premium financing for Crusader policies produced by Unifax in
California. The growth of this program is dependent and directly related to the
growth of Crusader's written premium and AAC's ability to market its competitive
rates and service. Premium finance charges and fees earned decreased $175,204
(19%) in the year ended December 31, 2005, compared to 2004 due primarily to the
fact that there were 956 (19%) fewer loans financed in the current year. Premium
finance charges and fees earned decreased $19,014 (2%) in the year ended
December 31, 2004, compared to 2003 due to the fact that there were 1,060 (17%)
fewer loans financed in the current year offset by the 13% increase in the
average premium financed as compared to 2003. During 2005, 32% of all Unifax
policies were financed and 75% of those policies were financed by AAC. During
2004, 33% of all Unifax policies were financed and 74% of those policies were
financed by AAC.
Investment Income and Net Realized Gains
- ----------------------------------------
Investment income and net realized gains are as follows:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Average Invested Assets $136,355,683 $125,331,342 $110,614,379
Interest income
Insurance company operations $4,248,399 $4,204,573 $4,801,133
Other operations 68,828 38,250 47,010
--------- --------- ---------
Total investment income
and realized gains $4,317,227 $4,242,823 $4,848,143
========= ========= =========
Yield on Average Invested Assets 3.17% 3.39% 4.38%
In the year ended December 31, 2005, while the Company's average invested assets
(at amortized value) increased $11,024,341 (9%) compared to the year ended
December 31, 2004, investment income earned increased $74,404 (2%) compared to
the year ended December 31, 2004. The yield on average invested assets decreased
to 3.17% in 2005 from 3.39% in 2004. The decrease in the yield on average
invested assets is primarily the result of a decline in the average return on
reinvested assets in the Company's investment portfolio. Also contributing to
the decline in the yield on average invested assets is a shorter weighted
average maturity of new and reinvested assets. Due to the current interest rate
environment, management believes it prudent to
26
purchase fixed maturity investments with shorter maturities, and therefore, the
weighted average maturity of the Company's fixed maturity investments has
decreased to 1.2 years as of December 31, 2005, from 1.4 years as of December
31, 2004. The Company's average invested assets increased in the year ending
December 31, 2005, primarily as a result of increased cash flows from
operations. The mix of taxable and tax-exempt securities in the portfolio
affects the investment income return percentage. Tax-exempt securities generally
carry a lower yield than taxable securities. These securities (at amortized
value) decreased to $934,536 (1% of total investments) at December 31, 2005,
compared to $970,343 (1% of total investments) at December 31, 2004.
In the year ended December 31, 2004, while the Company's average invested assets
(at amortized value) increased $14,716,855 (13%) compared to the year ended
December 31, 2003, investment income earned (excluding net realized gains)
decreased $605,320 (12%) compared to the year ended December 31, 2003. The
decrease in investment income is primarily the result of a decline in the
average return on new and reinvested assets in the Company's investment
portfolio. Also contributing to the decline in average return is a shorter
weighted average maturity of new and reinvested assets. Due to the 2004 interest
rate environment, management believed it was prudent to purchase fixed maturity
investments with shorter maturities, and therefore, the weighted average
maturity of the Company's fixed maturity investments has decreased to 1.4 years
as of December 31, 2004, from 1.9 years as of December 31, 2003. In the year
ended December 31, 2004, the Company's average yield on invested assets (at
amortized value) was 3.39% compared to 4.38% at the year ended December 31,
2003. The Company's average invested assets increased in the year ending
December 31, 2004, primarily as a result of increased cash flows from
operations. The mix of taxable and tax-exempt securities in the portfolio
affects the investment income return percentage. Tax-exempt securities generally
carry a lower yield than taxable securities. These securities (at amortized
value) decreased to $970,343 (1% of total investments) at December 31, 2004,
compared to $2,029,891 (2% of total investments) at December 31, 2003.
The par value, amortized cost, estimated market value and weighted average yield
of fixed maturity investments at December 31, 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 Calendar Year Par Value Amortized Cost Market Value Average Yield
- --------------------------- --------- -------------- ------------ -------------
December 31, 2006 $62,672,000 $62,721,805 $62,292,261 2.79%
December 31, 2007 63,875,000 63,801,855 63,520,607 4.13%
December 31, 2008 2,410,000 2,467,891 2,489,677 5.45%
December 31, 2009 7,000,000 7,136,877 7,246,755 5.27%
----------- ----------- -----------
Total $135,957,000 $136,128,428 $135,549,300 3.59%
=========== =========== ===========
The following table sets forth the composition of the investment portfolio of
the Company at the dates indicated:
(Amounts in Thousands)
As of December 31
-----------------
2005 2004 2003
---- ---- ----
Amortized Market Amortized Market Amortized Market
Type of Security Cost Value Cost Value Cost Value
- ---------------- ---- ----- ---- ----- ---- -----
Certificates of deposit $500 $500 $500 $500 $500 $500
U.S. treasury securities 107,291 106,563 77,766 77,299 38,305 38,550
U.S. government sponsored enterprise securities 6,000 5,933 11,999 11,853 11,997 11,987
Industrial and miscellaneous taxable bonds 21,403 21,631 37,755 38,950 58,494 61,447
State and municipal tax-exempt bonds 934 922 970 958 2,030 2,040
------- ------- ------- ------- ------- -------
Total fixed maturity investments 136,128 135,549 128,990 129,560 111,326 114,524
Short-term cash investments 4,475 4,475 3,118 3,118 7,229 7,229
------- ------- ------- ------- ------- -------
Total investments $140,603 $140,024 $132,108 $132,678 $118,555 $121,753
======= ======= ======= ======= ======= =======
27
The following table summarizes, for all fixed maturities in an unrealized loss
position at December 31, 2005, the aggregate fair value and gross unrealized
loss by length of time those fixed maturities have been continuously in an
unrealized loss. No securities were sold at a loss during 2005, 2004 or 2003.
Amortized Gross
Cost Fair Value Unrealized Loss
---- ---------- ---------------
0-6 months $46,834,903 $46,585,392 $249,511
7-12 months 14,327,095 14,166,247 160,848
Over 12 months 50,421,376 49,989,695 431,681
----------- ----------- -------
Total $111,583,374 $110,741,334 $842,040
=========== =========== =======
At December 31, 2005, the fixed maturity investments with a gross unrealized
loss for a continuous periods of 0 to 6 months and 7 to 12 months, both
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. The unrealized loss is primarily due to rising interest rates.
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 $842,040 at December 31, 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 Company did not sell any fixed maturity investment in the years ended
December 31, 2005 and 2004.
Operating Expenses
------------------
POLICY ACQUISITION COSTS are as follows:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Policy acquisition costs $10,512,688 $10,319,186 $7,941,199
Ratio to net earned premium (GAAP ratio) 21% 21% 21%
Policy acquisition costs consist of commissions, premium taxes, inspection fees,
and certain other underwriting costs that are directly related to and vary with
the production of Crusader insurance policies. These costs include both Crusader
expenses and allocated expenses of other Unico subsidiaries. On certain
reinsurance treaties, Crusader receives a ceding commission from its reinsurer
that represents a reimbursement of the acquisition costs related to the premium
ceded. No ceding commission is received on facultative, catastrophe, or
provisionally rated ceded premium. Policy acquisition costs, net of ceding
commission, are deferred and amortized as the related premiums are earned. The
ratio of policy acquisition cost to net earned premium in 2005, 2004 and 2003
were comparable at 21%.
SALARIES AND EMPLOYEE BENEFITS are as follows:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Total salaries and employee benefits incurred $9,401,757 $9,126,929 $8,777,582
Less: charged to losses and loss adjustment expenses (1,387,198) (1,335,778) (1,137,090)
Less: capitalized to policy acquisition costs (2,873,586) (2,921,985) (2,679,726)
--------- --------- ---------
Net amount charged to operating expenses $5,140,973 $4,869,166 $4,960,766
========= ========= =========
Total salaries and employee benefits incurred for the year ended December 31,
2005, increased $274,828 (3%) compared to the year ended December 31, 2004.
Factors that affected the 3% were general salary increases (less than 6%) and
increases in employee benefits costs, offset by reduction in the number of
employees.
28
Total salaries and employee benefits incurred for the year ended December 31,
2004, increased $349,347 (4%) compared to the year ended December 31, 2003.
COMMISSIONS TO AGENTS/BROKERS are as follows:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Commission to agents/brokers $674,674 $934,452 $1,460,684
Commissions to agents/brokers (not including commissions on Crusader policies
that are reflected in policy acquisition costs) are generally related to gross
commission income from the health and life insurance program, the daily
automobile rental insurance program, and the earthquake program. Commissions to
agents and brokers decreased $259,778 (28%) for the year ended December 31,
2005, as compared to the year ended December 31, 2004. Commissions to agents and
brokers decreased $526,232 (36%) for the year ended December 31, 2004, as
compared to the year ended December 31, 2003. The decreases in both years are
primarily the result of a decrease in premiums written and the related decrease
in the commission expense in the health and life insurance program.
OTHER OPERATING EXPENSES are as follows:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Other operating expenses $2,874,025 $2,657,310 $2,897,886
Other Operating Expenses generally do not change significantly with changes in
production. This is true for both increases and decreases in production.
Operating expenses increased $216,715 (8%) for the year ended December 31, 2005,
compared to the year ended December 31, 2004. Operating expenses decreased
$240,576 (8%) for the year ended December 31, 2004, compared to the year ended
December 31, 2003.
Income Taxes
------------
Income tax expense for the year ended December 31, 2005, was $3,751,426 compared
to an income tax expense of $2,990,958 for the year ended December 31, 2004. The
effective combined income tax rates for 2005 and 2004 were 36% and 34%,
respectively. The pre-tax income increased $1,793,972 for the year ended
December 31, 2005, compared to the year ended December 31, 2004, which resulted
in an increased income tax expense in 2005. The income tax expense for the year
ended December 31, 2004, was $2,990,958 compared to an income tax expense of
$1,080,721 for the year ended December 31, 2003. The effective combined income
tax rates for 2004 and 2003 were 34% and 50%, respectively.
In the year ended December 31, 2003, the Company recognized an income tax
expense of $287,000 resulting from an assessment for the years 1999 and 2000
from the California Franchise Tax Board. The assessment resulted from a court
ruling in Ceridian vs. Franchise Tax Board that held that the California statute
permitting the tax deductibility of dividends received from a wholly owned
insurance subsidiary was unconstitutional because it discriminated against
out-of-state holding companies and thus was in violation of the interstate
commerce clause of the United States Constitution. The ruling concluded that the
discriminatory sections of the statute are not severable and the entire statute
was invalid and unenforceable. California law provides that the proper remedy in
such circumstances is to disallow the deduction to those taxpayers that
benefited from the deduction. As a result of the court ruling, in February 2003,
the Franchise Tax Board (FTB) notified the Company that it would issue a Notice
of Proposed Assessment (NPA) for tax years 1999 and 2000 of approximately
$287,000 representing California state franchise taxes plus related interest of
approximately $80,000. In September 2004, California enacted legislation (AB
263) that addresses many aspects of the tax treatment of insurance company
owners, including holding companies such as Unico. The legislation provides for
an election, applicable if made to all tax years ending after December 1, 1997,
and before January 1, 2005, under which a dividend-received deduction of up to
80% of dividends paid by an insurer to a non-insurer parent is allowed. The
Company made the election authorized by AB 263 and, therefore, has reversed 80%
of the $287,000 income tax expense and 80% of the interest accrued thereon. In
addition, as a result of AB 263, the Company is obligated to establish a state
deferred tax liability which represents the Company's future state tax liability
for all undistributed earnings of Crusader since January 1, 1993, in accordance
with FASB 109.
29
Recently Issued Accounting Standards
- ------------------------------------
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R") that will require compensation costs related to
share-based payment transactions to be recognized in the financial statements.
With limited exceptions, the amount of compensation cost will be measured based
on the grant-date fair value of the equity instrument issued. Compensation cost
will be recognized over the period that an employee provides service in exchange
for the award. SFAS No. 123R replaces Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and its related
implementation guidance; the principles that the Company currently employs to
account and report its employee stock option awards. On April 14, 2005, the
Securities and Exchange Commission issued a Final Rule amending Regulation S-X
to revise the date for compliance with SFAS No. 123R so that each registrant
that is not a small business issuer will be required to prepare financial
statements in accordance with SFAS No. 123R beginning with the first interim
reporting period of the registrant's first fiscal year beginning on or after
June 15, 2005. The Company will adopt the provisions of SFAS No. 123R in January
2006. The Company does not believe that the adoption of SFAS No. 123R will have
a material impact on its consolidated financial statements.
In May 2005, the FASB issued Statement of Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections" ("SFAS No. 154"). SFAS No. 154
establishes, unless impracticable, retrospective application as the required
method for reporting a change in accounting principle in the absence of explicit
transition requirements specific to a newly adopted accounting principle. The
statement will be effective for the Company for all accounting changes and any
error corrections occurring after January 1, 2006.
FASB Staff Position (FSP) No. 115-I, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." FSP 115-1 provides
guidance for determining when an investment is considered impaired, whether
impairment is other-than-temporary, and measurement of an impairment loss. An
investment is considered impaired if the fair value of the investment is less
than its cost. If, after consideration of all available evidence to evaluate the
realizable value of its investment, impairment is determined to be
other-than-temporary, then an impairment loss should be recognized equal to the
difference between the investment's cost and its fair value. FSP 115-1 nullifies
certain provisions of Emerging Issues Task Force (EITF) Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments," while retaining the disclosure requirements of EITF 03-1 which
were adopted in 2003. FSP 115-1 is effective for reporting periods beginning
after December 15, 2005. The Company does not expect FSP 115-1 will
significantly impact its financial statements upon its adoption on January 1,
2006.
There were no other accounting standards issued during 2005 that are expected to
have a material impact on the Company's consolidated financial statements.
Significant Accounting Policies
- -------------------------------
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
certain assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. While every effort is made to
ensure the integrity of such estimates, actual results could differ.
Management believes the Company's current critical accounting policies comprise
the following:
Losses and Loss Adjustment Expenses
-----------------------------------
The preparation of the Company's financial statements requires judgments and
estimates. The most significant is the estimate of loss reserves as required by
Statement of Financial Accounting Standards No. 60 (SFAS No. 60), "Accounting
and Reporting by Insurance Enterprises" and Statement of Financial Accounting
Standards No. 5 (SFAS No. 5), "Accounting for Contingencies." 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
30
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.
Reinsurance
-----------
The Company's receivable from reinsurers represents an estimate of the amount of
our future loss payments that will be recoverable from the Company's reinsurers.
These estimates are based upon our estimates of the ultimate losses that the
Company expects to incur and the portion of those losses that are expected to be
allocable to reinsurers based upon the terms of the reinsurance agreements.
Given the uncertainty of the ultimate amounts of our losses, the estimates may
vary significantly from the eventual outcome. The Company's estimate of the
amounts receivable from reinsurers is regularly reviewed and updated by
management as new data becomes available. The Company's assessment of the
collectibility of the recorded amounts receivable from reinsurers is based
primarily upon public financial statements and rating agency data. Any
adjustments necessary are reflected in then current operations. We evaluate each
of our ceded reinsurance contracts at their inception to determine if there is
sufficient risk transfer to allow the contract to be accounted for as
reinsurance under current accounting literature. At December 31, 2005, all such
ceded contracts are accounted for as risk transfer reinsurance.
Investments
-----------
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.
The Company's fixed maturity investments are classified as available-for-sale
and are stated at market value. Although all of the Company's investments are
classified as available-for-sale and the Company may sell investment securities
from time to time in response to economic and market conditions, its investment
guidelines place primary emphasis on buying and holding high-quality investments
to maturity. Short-term investments are carried at cost, which approximates
market value. Investments in equity securities are carried at market value. The
unrealized gains or losses from fixed maturities and equity securities are
reported as accumulated other comprehensive income (loss), which is a separate
component of stockholders' equity, net of any deferred tax effect. When a
decline in value of a fixed maturity or equity security is considered other than
temporary, a loss is recognized in the consolidated statements of operations.
Realized gains and losses are included in the consolidated statements of
operations based on the specific identification method.
Related Party Transactions
- --------------------------
The Company presently occupies a 46,000 square foot building located at 23251
Mulholland Drive, Woodland Hills, California, under a master lease expiring
March 31, 2007. The lease provides for an annual gross rent of $1,025,952. Erwin
Cheldin, the Company's president, chairman and principal stockholder, is the
owner of the building. On February 22, 1995, the Company signed an extension to
the lease with no increase in rent to March 31, 2007. The Company believes that
the terms of the lease at inception and at the time the lease extension was
signed were at least as favorable to the Company as could have been obtained
from non-affiliated third parties. The Company utilizes for its own operations
approximately 100% of the space it leases.
On September 29, 2003, the Company borrowed $1,000,000 from Erwin Cheldin, the
Company's president, chairman and principal stockholder. As of April 29, 2005,
the note was paid in full.
31
Forward Looking Statements
- --------------------------
Certain statements contained herein, including the Sections entitled "Business,"
"Legal Proceedings" and "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," "appears," "believe," "estimates," "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 those
described under Item 1 - "Business - Competition" and Item 1A - "Risk Factors";
premium rate adequacy relating to competition or regulation; actual versus
estimated claim experience; the outcome of rate change filings with regulatory
authorities; acceptance by insureds of rate changes; adequacy of rate changes;
changes in Crusader's A.M. Best rating; regulatory changes or developments; the
outcome of regulatory proceedings; unforeseen calamities; general market
conditions; and the Company's ability to introduce new profitable products.
Item 7A. 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 at December 31, 2005 and 2004 consisted of the
following:
2005 2004
---- ----
Fixed maturity bonds (at amortized cost) $135,628,428 $128,489,658
Short-term cash investments (at cost) 4,475,162 3,118,118
Certificates of deposit - over 1 year (at cost) 500,000 500,000
----------- -----------
Total invested assets $140,603,590 $132,107,776
=========== ===========
The Company's interest rate risk is primarily in its fixed maturity bond
portfolio. As market interest rates decrease, the value of the portfolio
increases with the opposite holding true in rising interest rate environments.
In addition, the longer the maturity, the more sensitive the asset is to market
interest rate fluctuations. The Company limits this risk by investing in
securities with maturities no greater than eight years. In addition, although
fixed maturity bonds are classified as available-for-sale, the Company's
investment guidelines place primary emphasis on buying and holding high-quality
bonds to maturity. Because fixed maturity bonds are primarily held to maturity,
the change in the market value of these bonds resulting from interest rate
movements is unrealized and no gains or losses are recognized in the
consolidated statements of operations. Unrealized gains and losses are reported
as separate components of stockholders' equity, net of any deferred tax effect.
As of December 31, 2005, the Company's unrealized losses (net of unrealized
gains) before income taxes on its fixed maturity bond portfolio were $579,128
compared to unrealized gains (net of unrealized losses) before income taxes of
$569,957 as of December 31, 2004. Given a hypothetical parallel increase of 100
basis points in interest rates, the fair value of the fixed maturity bond
portfolio as of December 31, 2005, would decrease by approximately $1,536,000.
This decrease would not be reflected in the statements of operations except to
the extent that the securities were sold.
The Company's short-term investments and certificates of deposit have only
minimal interest rate risk.
32
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
------
Report of Independent Registered Public Accounting Firm 34
Consolidated Balance Sheets as of December 31, 2005, and
December 31, 2004 35
Consolidated Statements of Operations for the years ended
December 31, 2005, December 31, 2004, and December 31, 2003 36
Consolidated Statements of Comprehensive Income for the years
ended December 31, 2005, December 31, 2004, and December 31, 2003 37
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 2005, December 31, 2004, and December 31, 2003 38
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, December 31, 2004, and December 31, 2003 39
Notes to Consolidated Financial Statements 40
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
The Board of Directors and Stockholders
Unico American Corporation
We have audited the accompanying consolidated balance sheets of Unico American
Corporation and subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of operations, comprehensive income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Unico American
Corporation and subsidiaries as of December 31, 2005 and 2004, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2005, in conformity with U.S. generally accepted
accounting principles.
KPMG LLP
Los Angeles, California
March 23, 2006
34
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31 December 31
2005 2004
---- ----
ASSETS
------
Investments
Available for sale:
Fixed maturities, at market value (amortized cost: December 31,
2005 $136,128,428; December 31, 2004 $128,989,658) $135,549,300 $129,559,615
Short-term investments, at cost 4,475,162 3,118,118
----------- -----------
Total Investments 140,024,462 132,677,733
Cash 13,472 15,016
Accrued investment income 1,207,278 1,047,278
Premiums and notes receivable, net 6,740,793 7,770,560
Reinsurance recoverable:
Paid losses and loss adjustment expenses 1,711,710 18,512
Unpaid losses and loss adjustment expenses 25,679,081 20,119,011
Deferred policy acquisition costs 7,356,179 8,203,238
Property and equipment (net of accumulated depreciation) 824,504 278,404
Deferred income taxes 1,769,286 1,667,195
Other assets 970,414 773,329
----------- -----------
Total Assets $186,297,179 $172,570,276
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
- -----------
Unpaid losses and loss adjustment expenses $101,914,548 $87,469,000
Unearned premiums 31,212,433 35,656,393
Advance premium and premium deposits 867,404 1,067,224
Income taxes payable - 227,551
Notes payable - related parties - 500,000
Accrued expenses and other liabilities 3,908,421 5,224,783
----------- -----------
Total Liabilities $137,902,806 $130,144,951
----------- -----------
STOCKHOLDERS' EQUITY
- --------------------
Common stock, no par - authorized 10,000,000 shares, issued and outstanding
shares 5,496,315 at December 31, 2005, and 5,492,315
at December 31, 2004 $2,720,487 $2,708,047
Accumulated other comprehensive income (loss) (382,224) 376,172
Retained earnings 46,056,110 39,341,106
---------- ----------
Total Stockholders' Equity $48,394,373 $42,425,325
---------- ----------
Total Liabilities and Stockholders' Equity $186,297,179 $172,570,276
=========== ===========
See accompanying notes to consolidated financial statements.
35
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
2005 2004 2003
---- ---- ----
REVENUES
- --------
Insurance Company Revenues
Premium earned $64,712,764 $67,890,808 $53,754,119
Premium ceded 14,234,844 17,784,240 16,648,020
---------- ---------- ----------
Net premium earned 50,477,920 50,106,568 37,106,099
Net investment income 4,248,399 4,204,573 4,801,133
Other income 107,193 103,806 98,242
---------- ---------- ----------
Total Insurance Company Revenues 54,833,512 54,414,947 42,005,474
Other Revenues from Insurance Operations
Gross commissions and fees 5,508,031 6,503,880 8,109,392
Investment income 68,828 38,250 47,010
Finance charges and fees earned 758,325 933,529 952,543
Other income 13,826 12,704 16,020
---------- ---------- ----------
Total Revenues 61,182,522 61,903,310 51,130,439
---------- ---------- ----------
EXPENSES
- --------
Losses and loss adjustment expenses 31,513,732 34,450,738 31,720,533
Policy acquisition costs 10,512,688 10,319,186 7,941,199
Salaries and employee benefits 5,140,973 4,869,166 4,960,766
Commissions to agents/brokers 674,674 934,452 1,460,684
Other operating expenses 2,874,025 2,657,310 2,897,886
---------- ---------- ----------
Total Expenses 50,716,092 53,230,852 48,981,068
---------- ---------- ----------
Income Before Taxes 10,466,430 8,672,458 2,149,371
Income Tax 3,751,426 2,990,958 1,080,721
--------- --------- ---------
Net Income $6,715,004 $5,681,500 $1,068,650
========= ========= =========
PER SHARE DATA:
- --------------
Basic Shares Outstanding 5,495,948 5,490,346 5,489,604
Basic Earnings Per Share $1.22 $1.03 $0.19
Diluted Shares Outstanding 5,612,426 5,581,295 5,533,112
Diluted Earnings Per Share $1.20 $1.02 $0.19
See accompanying notes to consolidated financial statements.
36
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
2005 2004 2003
---- ---- ----
Net income $6,715,004 $5,681,500 $1,068,650
Other changes in comprehensive income, net of tax:
Unrealized (losses) on securities classified as
available-for-sale arising during the period (758,396) (1,734,807) (1,006,783)
--------- --------- ---------
Comprehensive Income $5,956,608 $3,946,693 $61,867
========= ========= ======
See accompanying notes to consolidated financial statements.
37
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 and 2003
Accumulated
Common Shares Other
------------------------- Comprehensive
Issued and Income Retained
Outstanding Amount (Losses) Earnings Total
----------- ------ ------ -------- -----
Balance - December 31, 2002 5,489,533 $2,700,272 $3,117,762 $32,590,956 $38,408,990
Shares canceled or adjusted 282 - - - -
Change in comprehensive income,
net of deferred income tax - - (1,006,783) - (1,006,783)
Net income - - - 1,068,650 1,068,650
--------- --------- --------- ---------- ----------
Balance - December 31, 2003 5,489,815 $2,700,272 $2,110,979 $33,659,606 $38,470,857
Net shares issued for exercise of
stock options 2,500 7,775 - - 7,775
Change in comprehensive income,
net of deferred income tax - - (1,734,807) - (1,734,807)
Net income - - - 5,681,500 5,681,500
--------- --------- ------- ---------- ----------
Balance - December 31, 2004 5,492,315 $2,708,047 $376,172 $39,341,106 $42,425,325
Net shares issued for exercise of
stock options 4,000 12,440 - - 12,440
Change in comprehensive income,
net of deferred income tax - - (758,396) - (758,396)
Net income - - - 6,715,004 6,715,004
--------- --------- ------- ---------- ----------
Balance - December 31, 2005 5,496,315 $2,720,487 $(382,224) $46,056,110 $48,394,373
========= ========= ======= ========== ==========
See accompanying notes to consolidated financial statements.
38
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
2005 2004 2003
---- ---- ----
Cash flows from operating activities:
Net income $6,715,004 $5,681,500 $1,068,650
Adjustments to reconcile net income to net cash from operations
Depreciation and amortization 160,571 95,084 89,821
Bond amortization, net 109,840 251,318 317,389
Changes in assets and liabilities
Premium, notes and investment income receivable 869,767 723,457 (1,371,053)
Reinsurance recoverable (7,253,268) (259,330) 4,235,194
Deferred policy acquisition costs 847,059 (148,875) (2,107,353)
Other assets (197,085) 156,375 147,792
Reserve for unpaid losses and loss adjustment expenses 14,445,548 9,329,910 3,233,806
Unearned premium reserve (4,443,960) 981,213 10,293,597
Advance premium and premium deposits (199,820) (51,394) (488,654)
Accrued expenses and other liabilities (1,316,362) (1,750,505) (1,658,188)
Income taxes current/deferred 61,048 (184,916) 215,558
Federal income tax recoverable - - 1,548,827
--------- ---------- ----------
Net Cash Provided from Operations 9,798,342 14,823,837 15,525,386
--------- ---------- ----------
Cash flows from investing activities:
Purchase of fixed maturity investments (59,444,701) (51,447,350) (55,234,166)
Proceeds from maturity of fixed maturity investments 52,196,090 33,530,817 37,228,000
Proceeds from sale of fixed maturity investments - - -
Net (increase) decrease in short-term investments (1,357,044) 4,112,347 1,807,719
Additions to property and equipment (706,671) (50,398) (58,717)
--------- ---------- ----------
Net Cash (Used) by Investing Activities (9,312,326) (13,854,584) (16,257,164)
--------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 12,440 7,775 -
Proceeds from notes payable - related parties - - 1,500,000
Repayment of notes payable - related parties (500,000) (1,000,000) (750,000)
------- --------- -------
Net Cash Provided (Used) by Financing Activities (487,560) (992,225) 750,000
------- ------- -------
Net increase (decrease) in cash (1,544) (22,972) 18,222
Cash at beginning of year 15,016 37,988 19,766
------ ------ ------
Cash at End of Year $13,472 $15,016 $37,988
====== ====== ======
Supplemental cash flow information Cash paid during the period for:
Interest $6,330 $13,666 $124,788
Income taxes $3,740,922 $3,383,876 $370,520
See accompanying notes to consolidated financial statements.
39
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 consolidated financial statements include the accounts of Unico American
Corporation and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Basis of Presentation
- ---------------------
The consolidated financial statements have been prepared in conformity with U.S.
generally accepted accounting principles (GAAP). As described in Note 14, the
Company's insurance subsidiary also files financial statements with regulatory
agencies prepared on a statutory basis of accounting that differs from GAAP.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
certain assets, liabilities, and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. While every effort is made to ensure
the integrity of such estimates, actual results may differ.
Investments
- -----------
All of the Company's fixed maturity investments are classified as
available-for-sale and are stated at market value. Although all of the Company's
investments are classified as available-for-sale and the Company may sell
investment securities from time to time in response to economic and market
conditions, its investment guidelines place primary emphasis on buying and
holding high-quality investments to maturity. Short-term investments are carried
at cost, which approximates market value. The unrealized gains or losses from
fixed maturities are reported as "accumulated other comprehensive income
(loss)," which is a separate component of stockholders' equity, net of any
deferred tax effect. When a decline in value of a fixed maturity or equity
security is considered other than temporary, a loss is recognized in the
consolidated statements of operations. Realized gains and losses, if any, are
included in the consolidated statements of operations based on the specific
identification method.
The Company had unrealized investment losses, net of deferred taxes, of $382,224
as of December 31, 2005, and unrealized investment gains, net of deferred taxes,
of $376,172 as of December 31, 2004.
Property and Equipment
- ----------------------
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using straight line methods over the estimated useful
lives of the related assets.
Income Taxes
- ------------
The provision for federal income taxes is computed on the basis of income as
reported for financial reporting purposes. Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes, and are measured using the enacted tax rates and laws expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Income tax expense provisions increase or
decrease in the same period in which a change in tax rates is enacted.
40
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
- -----------------------------------
The Company has used the following methods and assumptions in estimating its
fair value disclosures:
o Investment Securities - Fair values for fixed maturity securities are
obtained from a national quotation service. The fair values for equity
securities are based on quoted market prices.
o Cash and Short-Term Investments - The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
o Premiums and Notes Receivable - The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Earnings Per Share
- ------------------
Basic earnings per share exclude the impact of common share equivalents and are
based upon the weighted average common shares outstanding. Diluted earnings per
share utilize the average market price per share when applying the treasury
stock method in determining common share dilution. When dilutive, outstanding
stock options are treated as common share equivalents for purposes of computing
diluted earnings per share and represent the difference between basic and
diluted weighted average shares outstanding. In loss periods, options are
excluded from the calculation of diluted earnings per share, as the inclusion of
such options would have antidilutive effect.
Revenue Recognition
- -------------------
a. General Agency Operations
-----------------------------
Commissions and policy fees due the Company are recognized as income on the
effective date of the insurance policies.
b. Insurance Company Operations
--------------------------------
Premiums are earned on a pro-rata basis over the terms of the policies.
Premiums applicable to the unexpired terms of policies in force are
recorded as unearned premiums. The Company earns a commission on policies
that are ceded to its reinsurers. This commission is considered earned on a
pro-rata basis over the terms of the policies.
c. Insurance Premium Financing Operations
------------------------------------------
Premium finance interest is charged to policyholders who choose to finance
insurance premiums. Interest is charged at rates that vary with the amount
of premium financed. Premium finance interest is recognized using a method
that approximates the interest (actuarial) method.
Losses and Loss Adjustment Expenses
- -----------------------------------
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.
There is a high level of uncertainty inherent in the evaluation of the required
loss and loss adjustment expense reserves for the Company. The long-tailed
nature of liability claims and the volatility of jury awards exacerbate that
uncertainty. The Company sets loss and loss adjustment expense reserves at each
balance sheet date at 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. The ultimate
cost of claims is dependent upon future events, the outcomes of which are
affected by many factors. Company claim reserving procedures and settlement
philosophy, current and perceived social and economic inflation, current and
future court rulings and jury attitudes, improvements in medical technology, and
many other economic, scientific, legal, political, and social factors all can
have significant effects on the ultimate costs of claims. Changes in Company
operations and management philosophy also may cause actual developments to vary
from the past. 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.
41
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Funds
- ----------------
Restricted funds are as follows:
Year ended December 31
----------------------
2005 2004
---- ----
Premium trust funds (1) $265,668 $773,404
Cash deposited in lieu of bond (2) 200,000 752,659
Assigned to state agencies (3) 700,000 700,000
--------- ---------
Total restricted funds $1,165,668 $2,226,063
========= =========
(1) As required by law, the Company segregates from its operating
accounts the premiums collected from insurers which are payable to
insurance companies into separate trust accounts. These amounts are
included in cash and short-term investments.
(2) Included in short-term investments are two deposits assigned and held
by Travis County and the Los Angeles Superior courts. These deposits
are filed with the superior courts in lieu of a bond in order to stay
execution of judgments and to allow the Company to appeal the
judgment in these matters.
(3) Included in fixed maturity investments are statutory deposits
assigned to and held by the California State Treasurer and the
Insurance Commissioner of the State of Nevada. These deposits are
required for writing certain lines of business in California and for
admission in states other than California.
Deferred Policy Acquisition Costs
- ---------------------------------
Policy acquisition costs consist of costs associated with the production of
insurance policies such as commissions, premium taxes, and certain other
underwriting expenses that vary with and are primarily related to the production
of the insurance policy. Policy acquisition costs are deferred and amortized as
the related premiums are earned and are limited to their estimated realizable
value based on the related unearned premiums plus investment income less
anticipated losses and loss adjustment expenses. Ceding commission applicable to
the unexpired terms of policies in force is recorded as unearned ceding
commission, which is included in deferred policy acquisition costs.
Reinsurance
- -----------
The Company cedes reinsurance to provide for greater diversification of
business, to allow management to control exposure to potential losses arising
from large risks by reinsuring certain levels of risk in various areas of
exposure, to reduce the loss that may arise from catastrophes, and to provide
additional capacity for growth. Prepaid reinsurance premiums and reinsurance
receivables are reported as assets and represent ceded unearned premiums and
reinsurance recoverable on both paid and unpaid losses, respectively. Amounts
recoverable from reinsurers are estimated in a manner consistent with the claim
liability associated with the reinsured policies.
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 identified its insurance company operation
as its primary reporting segment. Revenues from this segment comprised 90% of
consolidated revenues in the year ended December 31, 2005, 88% of consolidated
revenues in the year ended December 31, 2004, and 82% for the year ended
December 31, 2003. The Company's remaining operations constitute a variety of
specialty insurance services, each with unique characteristics and individually
insignificant to consolidated revenues.
The insurance company operation is conducted through the Company's wholly owned
subsidiary Crusader Insurance Company (Crusader), which as of December 31, 2005,
was licensed as an admitted insurance carrier in the states of Arizona,
California, Montana, Nevada, Oregon, and Washington. Crusader is a multiple-line
property and casualty insurance company, which began transacting business on
January 1, 1985. As of December 31, 2005, 97% of Crusader's business was
commercial multiple peril insurance policies. Commercial multiple peril
42
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
policies provide a combination of property and liability coverage for
businesses. Commercial property coverages insure against loss or damage to
buildings, inventory and equipment from natural disasters, including hurricanes,
windstorms, hail, water, explosions, severe winter weather and other events such
as theft and vandalism, fires and storms and financial loss due to business
interruption resulting from covered property damage. Commercial liability
coverages insure against third party liability from accidents occurring on the
insured's premises or arising out of its operations, such as injuries sustained
from products sold or operation of the insured premises. In addition to
commercial multiple peril policies, Crusader also writes separate policies to
insure commercial property and commercial liability risks on a mono-line basis.
Revenues, income before income taxes and assets by segment are as follows:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Revenues
- --------
Insurance company operation $54,833,512 $54,414,947 $42,005,474
---------- ---------- ----------
Other insurance operations 22,847,069 26,380,789 26,684,721
Intersegment elimination (1) (16,498,059) (18,892,426) (17,559,756)
---------- ---------- ---------
Total other insurance operations 6,349,010 7,488,363 9,124,965
--------- --------- ---------
Total revenues $61,182,522 $61,903,310 $51,130,439
========== ========== ==========
Income (loss) before income taxes
- ---------------------------------
Insurance company operation $9,615,682 $5,333,273 $(3,208,657)
Other insurance operations 850,748 3,339,185 5,358,028
---------- --------- ---------
Total income before income taxes $10,466,430 $8,672,458 $2,149,371
========== ========= =========
Assets
- ------
Insurance company operation $166,911,366 $151,963,707 $138,247,845
Intersegment eliminations (2) (2,180,548) (2,285,589) (2,302,224)
----------- ----------- -----------
Total insurance company operation 164,730,818 149,678,118 135,945,621
Other insurance operations 21,566,361 22,892,158 25,548,074
---------- ----------- -----------
Total assets $186,297,197 $172,570,276 $161,493,695
=========== =========== ===========
(1) Intersegment revenue eliminations reflect commissions paid by Crusader to
Unifax.
(2) Intersegment asset eliminations reflect the elimination of Crusader
receivables and Unifax payables.
Concentration of Risks
- ----------------------
In 2005 100% of Crusader's gross premium written was derived from California. In
2005 approximately 72% of the $1,628,062 commission and fee income from the
Company's health and life insurance program was from CIGNA HealthCare medical
and dental plan programs.
At December 31, 2005, the Company's reinsurance recoverable on paid and unpaid
losses and loss adjustment expenses of $27,390,791 were as follows:
A.M. Best Amount
Name of Reinsurer Rating Recoverable
- ----------------- ------ -----------
Platinum Reinsurance A $13,163,454
Partners Reinsurance of the U.S. A+ 4,779,820
Hannover Ruckversicherungs AG A 6,866,748
General Reinsurance Corporation A++ 1,725,709
QBE Reinsurance Corporation A 855,060
----------
Total $27,390,791
==========
43
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
- ------------------------
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 15).
On December 30, 2005, the Company accelerated the vesting of all of its
outstanding stock-based compensation awards granted under the Company's 1999
Omnibus Stock Plan. All accelerated options were "in the money." The number
shares covered by the options accelerated totaled 67,500 of which 37,500 were
originally scheduled to vest on January 1, 2006 and 30,000 were originally
scheduled to vest on January 1, 2007. The Company accelerated vesting of the
options in order to minimize the compensation costs associated with the adoption
of SFAS 123R. All accelerated options were granted to long-term management
employees who were not expected to leave the Company prior to the originally
scheduled vesting date. The estimated compensation cost that will be excluded
from future periods as a result of the acceleration of the vesting of the
options is approximately $89,100.
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:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Net income
As reported $6,715,004 $5,681,500 $1,068,650
Deduct:
Total stock-based employee compensation
expense determined under fair value
based method for all awards,
net of related tax effects - 43,604 51,639
Estimated stock-based employee compensation
expense due to the acceleration of future
stock options net of related tax effects 89,100 - -
--------- --------- ---------
Pro forma $6,625,904 $5,637,896 $1,017,011
========= ========= =========
Income per share
As reported $1.22 $1.03 $0.19
Pro forma $1.21 $1.03 $0.19
Income per share - assuming dilution:
As reported $1.20 $1.02 $0.19
Pro forma $1.18 $1.01 $0.18
44
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
---- ----
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
Recently Issued Accounting Standards
- ------------------------------------
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R") that will require compensation costs related to
share-based payment transactions to be recognized in the financial statements.
With limited exceptions, the amount of compensation cost will be measured based
on the grant-date fair value of the equity instrument issued. Compensation cost
will be recognized over the period that an employee provides service in exchange
for the award. SFAS No. 123R replaces Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and its related
implementation guidance; the principles that the Company currently employs to
account and report its employee stock option awards. On April 14, 2005, the
Securities and Exchange Commission issued a Final Rule amending Regulation S-X
to revise the date for compliance with SFAS No. 123R so that each registrant
that is not a small business issuer will be required to prepare financial
statements in accordance with SFAS No. 123R beginning with the first interim
reporting period of the registrant's first fiscal year beginning on or after
June 15, 2005. The Company will adopt the provisions of SFAS No. 123R in January
2006. The Company does not believe that the adoption of SFAS No. 123R will have
a material impact on its consolidated financial statements.
In May 2005, the FASB issued Statement of Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections" ("SFAS No. 154"). SFAS No. 154
establishes, unless impracticable, retrospective application as the required
method for reporting a change in accounting principle in the absence of explicit
transition requirements specific to a newly adopted accounting principle. The
statement will be effective for the Company for all accounting changes and any
error corrections occurring after January 1, 2006.
FASB Staff Position (FSP) No. 115-I, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." FSP 115-1 provides
guidance for determining when an investment is considered impaired, whether
impairment is other-than-temporary, and measurement of an impairment loss. An
investment is considered impaired if the fair value of the investment is less
than its cost. If, after consideration of all available evidence to evaluate the
realizable value of its investment, impairment is determined to be
other-than-temporary, then an impairment loss should be recognized equal to the
difference between the investment's cost and its fair value. FSP 115-1 nullifies
certain provisions of Emerging Issues Task Force (EITF) Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments," while retaining the disclosure requirements of EITF 03-1 which
were adopted in 2003. FSP 115-1 is effective for reporting periods beginning
after December 15, 2005. The Company does not expect FSP 115-1 will
significantly impact its financial statements upon its adoption on January 1,
2006.
There were no other accounting standards issued during 2005 that are expected to
have a material impact on the Company's consolidated financial statements.
NOTE 2 - ADVANCE PREMIUM AND PREMIUM DEPOSITS
- ---------------------------------------------
Some of the Company's health and life programs require payments of premium prior
to the effective date of coverage; and, accordingly, invoices are sent out as
early as two months prior to the coverage effective date. Insurance premiums
received for coverage months effective after the balance sheet date are recorded
as advance premiums. The Company received deposits to guarantee the payment of
premiums for past coverage months on its daily automobile rental program. These
deposits are required when information such as gross receipts or
45
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
number of rental cars is required to compute the actual premium due, but is not
available until after the coverage month.
NOTE 3 - INVESTMENTS
- --------------------
The amortized cost and estimated fair values of investments in fixed maturities
by categories are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
December 31, 2005
- -----------------
Available for sale:
Fixed maturities
----------------
Certificates of deposit $500,000 - - $500,000
U.S. treasury securities 107,290,653 - $727,741 106,562,912
U.S. government sponsored enterprise securities 6,000,000 - 66,570 5,933,430
State and municipal tax-exempt bonds 934,536 - 12,551 921,985
Industrial and miscellaneous taxable bonds 21,403,239 $262,912 35,178 21,630,973
----------- ------ ------- -----------
Total fixed maturities $136,128,428 $262,912 $842,040 $135,549,300
=========== ======= ======= ===========
December 31, 2004
- -----------------
Available for sale:
Fixed maturities
----------------
Certificates of deposit $500,000 - - $500,000
U.S. treasury securities 77,765,616 $47,620 $514,331 77,298,905
U.S. government sponsored enterprise securities 11,998,772 - 145,712 11,853,060
State and municipal tax-exempt bonds 970,343 - 12,024 958,319
Industrial and miscellaneous taxable bonds 37,754,927 1,194,404 - 38,949,331
----------- --------- ------- -----------
Total fixed maturities $128,989,658 $1,242,024 $672,067 $129,559,615
=========== ========= ======= ===========
A summary of the unrealized appreciation (depreciation) on investments carried
at fair value and the applicable deferred federal income taxes are shown below:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Gross unrealized appreciation of fixed maturities: $262,912 $1,242,024 $3,236,623
Gross unrealized (depreciation) of fixed maturities: (842,040) (672,067) (38,169)
------- ------- ---------
Net unrealized appreciation (depreciation) on investments (579,128) 569,957 3,198,454
Deferred federal tax income (expense) 196,904 (193,785) (1,087,475)
------- ------- ---------
Net unrealized appreciation (depreciation), net of deferred income taxes $(382,224) $376,172 $2,110,979
======= ======= =========
The amortized cost and estimated fair value of fixed maturity investments at
December 31, 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.
Amortized Estimated
Cost Fair Value
---------- ----------
Due in one year or less $62,721,805 $62,292,261
Due after one year through five years 73,406,623 73,257,039
Due after five years through ten years - -
----------- -----------
Total fixed maturities $136,128,428 $135,549,300
=========== ===========
46
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table illustrates the gross unrealized losses included in the
Company's investment portfolio and the fair value of those securities,
aggregated by investment category. The table also illustrates the length of time
that they have been in a continuous unrealized loss position as of December 31,
2005.
Amortized Gross
Cost Fair Value Unrealized Loss
---- ---------- ---------------
0-6 months $46,834,903 $46,585,392 $249,511
7-12 months 14,327,095 14,166,247 160,848
Over 12 months 50,421,376 49,989,695 431,681
----------- ----------- -------
Total $111,583,374 $110,741,334 $842,040
=========== =========== =======
At December 31, 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. The unrealized loss is primarily due to rising interest rates.
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 $842,040 at December 31, 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 Company did not sell any fixed maturity investment in the years ended
December 31, 2005 and 2004.
Short-term investments have an initial maturity of one year or less and consist
of the following:
Year ended December 31
----------------------
2005 2004
---- ----
Certificates of deposit $100,000 $400,000
Cash deposited in lieu of bond* 200,000 752,659
Commercial paper 1,830,000 1,005,000
Bank money market accounts 182,673 803,949
U.S. government obligation money market fund 2,150,671 144,925
Bank savings accounts 11,818 11,585
--------- ---------
Total short-term investments $4,475,162 $3,118,118
========= =========
*Deposits with superior courts to stay execution of judgment pending appeal of
Crusader claims.
The Company manages its own investment portfolio. A summary of net investment
and related income is as follows:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Fixed maturities $4,218,302 $4,200,190 $4,742,204
Short-term investments 98,925 42,633 105,939
--------- --------- ---------
Total investment income $4,317,227 $4,242,823 $4,848,143
========= ======== =========
47
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PROPERTY AND EQUIPMENT (NET OF ACCUMULATED DEPRECIATION)
- ----------------------------------------------------------------
Property and equipment consist of the following:
Year ended December 31
----------------------
2005 2004
---- ----
Furniture, fixtures, computer, office,
and transportation equipment $2,197,041 $1,599,077
Accumulated depreciation 1,372,537 1,320,673
--------- ---------
Net property and equipment $824,504 $278,404
======= =======
NOTE 5 - PREMIUMS, COMMISSIONS AND NOTES RECEIVABLE, NET
- --------------------------------------------------------
Premiums, commissions and notes receivable, net are as follows:
Year ended December 31
----------------------
2005 2004
---- ----
Premiums and commission receivable $2,690,402 $2,947,130
Premium finance notes receivable 4,057,137 4,843,060
--------- ---------
Total premiums and notes receivable 6,747,539 7,790,190
Less allowance for doubtful accounts 6,746 19,630
--------- ---------
Net premiums and notes receivable $6,740,793 $7,770,560
========= =========
Premiums and notes receivable are substantially secured by unearned premiums and
funds held as security for performance.
Bad debt expense for the year ended December 31, 2005, and the year ended
December 31, 2004, were $8,927 and $29,402, respectively. Premium finance notes
receivable represent the balance due to the Company's premium finance subsidiary
from policyholders who elect to finance their premiums over the policy term.
These notes are net of unearned finance charges.
NOTE 6 - NOTES PAYABLE - RELATED PARTIES
- ----------------------------------------
Notes payable - related parties consist of the following:
Year ended December 31
----------------------
2005 2004
---- ----
Note payable - Erwin Cheldin - $500,000
-------
Notes payable - related parties - $500,000
=======
In 2003, Unico made capital contributions totaling $3,000,000 to its Crusader
subsidiary. The contributions were made to ensure that Crusader's capital
remained above $25,000,000. The funding of Unico's capital contribution to
Crusader was derived from available cash from the Company's other operations and
the proceeds of two notes. 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, and $500,000 from The Cary
and Danielle Cheldin Family Trust. Cary L. Cheldin is a director and the
Company's executive vice president. As of December 31, 2004, the Company repaid
the note from The Cary and Danielle Cheldin Family Trust in full and repaid
$500,000 of the Erwin Cheldin note. On April 29, 2005, the note to Erwin Cheldin
was paid in full.
48
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
- ---------------------------------------------------
The following table provides an analysis of the roll forward of Crusader's
losses and loss adjustment expenses, including a reconciliation of the ending
balance sheet liability for the periods indicated:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Reserve for unpaid losses and loss adjustment expenses
at beginning of year - net of reinsurance $67,349,989 $58,883,861 $53,596,945
---------- ---------- ----------
Incurred losses and loss adjustment expenses
Provision for insured events of current year 35,338,196 35,286,172 28,968,948
Increase (decrease) in provision for events of prior years (3,824,464) (835,434) 2,751,585
---------- ---------- ----------
Total losses and loss adjustment expenses 31,513,732 34,450,738 31,720,533
---------- ---------- ----------
Payments
Losses and loss adjustment expenses attributable to
insured events of the current year 8,001,808 7,438,331 5,106,929
Losses and loss adjustment expenses attributable to
insured events of prior years 14,626,446 18,546,279 21,326,688
---------- ---------- ----------
Total payments 22,628,254 25,984,610 26,433,617
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses
at end of year - net of reinsurance 76,235,467 67,349,989 58,883,861
Reinsurance recoverable on unpaid losses and loss
adjustment expenses at end of year 25,679,081 20,119,011 19,255,229
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses at
end of year per balance sheet, gross of reinsurance* $101,914,548 $87,469,000 $78,139,090
=========== ========== ==========
* In accordance with Financial Accounting Standards Board Statement No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts", reinsurance recoverable on unpaid losses and loss adjustment
expenses are reported for GAAP as assets rather than netted against the
corresponding liability for such items on the balance sheet.
Loss and loss adjustment expense reserves by line of business before reinsurance
are as follows:
Year ended December 31
----------------------
Line of Business 2005 2004 2003
- ---------------- ------------------ ----------------- -------------------
CMP $98,758,298 96.9% $83,677,560 95.7% $73,708,553 94.3%
Other Liability 2,967,804 2.9% 3,592,719 4.1% 4,279,021 5.5%
Other 188,446 0.2% 198,721 0.2% 151,516 0.2%
----------- ----- ---------- ----- ---------- -----
Total $101,914,548 100.0% $87,469,000 100.0% $78,139,090 100.0%
=========== ====== ========== ===== ========== =====
The Company`s consolidated financial statements include estimated reserves for
unpaid losses and related claim settlement or loss adjustment expenses of our
insurance company operation. Crusader sets loss and loss adjustment expense
reserves at each balance sheet date at 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. The process of estimating loss and loss adjustment reserves involves
significant judgment and is complex and imprecise due to the number of variables
and assumptions inherent in the estimating process. Crusader establishes
reserves for reported losses based on historical experience, upon case-by-case
evaluation of facts surrounding each known loss and the related policy
provisions. The amount of reserves for unreported losses is estimated by
analysis of historical and statistical information. Reserves are monitored and
adjusted when appropriate and reflected in the statement of operations in the
period of adjustment.
Losses and loss adjustment expenses were $31,513,732 or 62% of net premium
earned for the year ended December 31, 2005, compared to $34,450,738 or 69% of
net premium earned for the year ended December 31, 2004, and compared to
$31,720,533 or 85% of net premium earned for the year ended December 31, 2003.
Incurred losses of prior years were $3,824,464 (favorable development) for the
year ended December 31, 2004,
49
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
compared to incurred losses of prior years of $835,434 (favorable development)
for the year ended December 31, 2004, and incurred losses of prior years of
$2,751,585 (adverse development) for the year ended December 31, 2003.
NOTE 8 - DEFERRED POLICY ACQUISITION COSTS
- ------------------------------------------
The following table provides an analysis of the roll forward of Crusader's
deferred policy acquisition costs:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Deferred policy acquisition costs at beginning of year $8,203,238 $8,054,363 $5,947,010
Policy acquisition costs incurred during year 9,665,629 10,468,061 10,048,552
Policy acquisition costs amortized during year (10,512,688) (10,319,186) (7,941,199)
--------- ---------- ---------
Deferred policy acquisition costs at end of year $7,356,179 $8,203,238 $8,054,363
========= ========= =========
Deferred policy acquisition costs consist of commissions (net of ceding
commission), premium taxes, inspection fees, and certain other underwriting
costs, which are related to and vary with the production of Crusader policies.
Policy acquisition costs are deferred and amortized as the related premiums are
earned. Deferred acquisition costs are reviewed to determine if they are
recoverable from future income, including investment income.
The 8% decrease in policy acquisition incurred during the year ended December
31, 2005, is a direct result of the 5% decrease in direct earned premium during
the year ended December 31, 2005, compared to the year ended December 31, 2004.
The 30% increase in policy acquisition amortized during the year ended December
31, 2004, is a direct result of the 26% increase in direct earned premium during
the year ended December 31, 2004, compared to the year ended December 31, 2003.
NOTE 9 - LEASE COMMITMENT TO RELATED PARTY
- ------------------------------------------
The lease commitment provides for the following minimum annual rental
commitments:
Year ending
December 31, 2006 1,025,952
December 31, 2007 (through March 31, 2007) 256,488
---------
Total minimum payments $1,282,440
=========
The Company presently occupies a 46,000 square foot building located at 23251
Mulholland Drive, Woodland Hills, California, under a master lease expiring
March 31, 2007. The total rent expense under this lease agreement was $1,025,952
for the year ended December 31, 2005; $1,025,952 for the year ended December 31,
2004; and $1,025,952 for the year ended December 31, 2003.
Erwin Cheldin, the Company's president, chairman, and principal stockholder, is
the owner of the building. On February 22, 1995, the Company signed an extension
to the lease with no increase in rent to March 31, 2007. The Company believes
that the terms of the lease at inception and at the time the lease extension was
signed were at least as favorable to the Company as could have been obtained
from non-affiliated third parties. The Company utilizes for its own operations
100% of the space it leases.
50
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - ACCRUED EXPENSES AND OTHER LIABILITIES
- ------------------------------------------------
Accrued expenses and other liabilities consist of the following:
Year ended December 31
----------------------
2005 2004
---- ----
Premium payable $2,494,285 $3,394,181
Unearned claim administration income 30,000 100,000
Profit sharing contributions 645,000 636,186
Accrued salaries 333,354 331,054
Commission payable 210,451 333,525
Other 195,331 429,837
--------- ---------
Total accrued expenses and other liabilities $3,908,421 $5,224,783
========= =========
NOTE 11 - COMMITMENT AND CONTINGENCIES
- --------------------------------------
The Company, by virtue of the nature of the business conducted by it, becomes
involved in numerous legal proceedings as either plaintiff or defendant. The
Company is also required to resort to legal proceedings from time to time in
order to enforce collection of premiums, commissions, or fees for the services
rendered to customers or to their agents. These routine items of litigation do
not materially affect the Company and are handled on a routine basis by the
Company through its general counsel.
Likewise, the Company is sometimes named as a cross-defendant in litigation,
which is principally directed against that insurer who was issued a policy of
insurance directly or indirectly through the Company. Incidental actions are
sometimes brought by customers or others, which relate to disputes concerning
the issuance or non-issuance of individual policies. These items are also
handled on a routine basis by the Company's general counsel, and they do not
materially affect the operations of the Company. Management is confident that
the ultimate outcome of pending litigation should not have an adverse effect on
the Company's consolidated operation or financial position.
NOTE 12 - REINSURANCE
- ---------------------
A reinsurance transaction occurs when an insurance company transfers (cedes) a
portion of its exposure on policies written by it to a reinsurer that assumes
that risk for a premium (ceded premium). Reinsurance does not legally discharge
the Company from primary liability under its policies. If the reinsurer fails to
meet its obligations, the Company must nonetheless pay its policy obligations.
Crusader's primary excess of loss reinsurance agreements are as follows:
Loss Annual Aggregate
Year Reinsurer Company(s) Rating Retention Deductible
- ---- ----------------------------------------- ------ --------- ----------
2005 Platinum Underwriters Reinsurance, Inc. & A
Hannover Ruckversicherungs AG A $300,000 $500,000
- ---- ----------------------------------------- ------ ------- -------
2004 Platinum Underwriters Reinsurance, Inc. & A
Hannover Ruckversicherungs AG A $250,000 $500,000
- ---- ----------------------------------------- ------ ------- -------
2003 Platinum Underwriters Reinsurance, Inc. & A
Hannover Ruckversicherungs AG & A
QBE Reinsurance Corporation A $250,000 $500,000
- ---- ----------------------------------------- ------ ------- -------
2002 Partner Reinsurance Company of the U.S. A+ $250,000 $675,000
- ---- ----------------------------------------- ------ ------- -------
2001 Partner Reinsurance Company of the U.S. A+ $250,000 $500,000
- ---- ----------------------------------------- ------ ------- -------
2000 Partner Reinsurance Company of the U.S. A+ $250,000 $500,000
- ---- ---------------------------------------- ------ ------- -------
1999 General Reinsurance Corporation A++ $250,000 $750,000
- ---- ----------------------------------------- ------ ------- -------
1998 General Reinsurance Corporation A++ $250,000 $750,000
- ---- ----------------------------------------- ------ ------- -------
51
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to January 1, 1998, National Reinsurance Corporation (acquired by General
Reinsurance Corporation in 1996) 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 and replaced by a flat rated treaty
on January 1, 1998. In 2005, Crusader retained a participation in its excess of
loss reinsurance treaties of 10% in its 1st layer ($700,000 in excess of
$300,000), 10% in its 2nd layer ($1,000,000 in excess of $1,000,000), and 30% in
its property and casualty clash treaties. In 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), 10% in its 2nd layer ($1,000,000 in excess of
$1,000,000), and 30% in its property and casualty clash treaties. In 2003
Crusader retained a participation in its excess of loss reinsurance treaties of
5% in its 1st layer ($750,000 in excess of $250,000), 10% in its 2nd layer
($1,000,000 in excess of $1,000,000), and 30% in its property and casualty clash
treaties. Crusader also has catastrophe reinsurance from various highly rated
California admitted and Bermuda reinsurance companies. These reinsurance
agreements help protect Crusader against liabilities in excess of certain
retentions, including major or catastrophic losses that may occur from any one
or more of the property and/or casualty risks which Crusader insures. The
Company has no reinsurance recoverable balances in dispute.
Crusader's 2004 and 2003 1st layer primary excess of loss treaty provides for a
contingent commission to the Company equal to 45% of the net profit, if any,
accruing to the reinsurer. The first accounting period for the contingent
commission covers the period from January 1, 2003, through December 31, 2005.
The Company will calculate and report to the reinsurer its net profit, if any,
within 90 days after 36 months following the end of the first accounting period
and within 90 days after the end of each 12 month period thereafter until all
losses subject the to agreement have been finally settled. Based on losses and
loss adjustment expenses ceded (including incurred but not reported losses) as
of December 31, 2005, no contingent commission has been accrued. The 2005 1st
layer primary excess of loss treaty does not provide for a contingent
commission.
On most of the premium that Crusader cedes to the reinsurer, the reinsurer pays
a commission to Crusader, which includes a reimbursement of the cost of
acquiring the portion of the premium, which is ceded. Ceding commission was
$4,647,748 in 2005, $6,031,987 in 2004, and $5,429,330 in 2003. Crusader does
not currently assume any reinsurance. The Company intends to continue obtaining
reinsurance although the availability and cost may vary from time to time. The
unpaid losses ceded to the reinsurer are recorded as an asset on the balance
sheet.
The effect of reinsurance on premiums written, premiums earned, and incurred
losses is as follows:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Premiums written:
Direct business $60,268,784 $68,872,021 $64,047,717
Reinsurance assumed - - -
Reinsurance ceded (14,238,077) (17,782,448) (16,627,560)
---------- ---------- ----------
Net premiums written $46,030,707 $51,089,573 $47,420,157
========== ========== ==========
Premiums earned:
Direct business $64,712,764 $67,890,808 $53,754,119
Reinsurance assumed - - -
Reinsurance ceded (14,234,844) (17,784,240) (16,648,020)
---------- ---------- ----------
Net premiums earned $50,477,920 $50,106,568 $37,106,099
========== ========== ==========
Incurred losses and loss adjustment expenses:
Direct $43,901,853 $40,436,295 $39,036,895
Assumed - - -
Ceded (12,388,121) (5,985,557) (7,316,362)
---------- ---------- ----------
Net incurred losses and loss adjustment expenses $31,513,732 $34,450,738 $31,720,533
========== ========== ==========
Reinsurance ceded premium as a percentage of direct earned premium was 22% in
2005, 26% in 2004 and 31% in 2003. The decrease in the ratio is primarily the
result of rate decreases by the Company's reinsurers due to the Company's
improving ceded loss experience.
52
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - RETIREMENT PLANS
- --------------------------
Profit Sharing Plan
- -------------------
During the fiscal year ended March 31, 1986, the Company adopted the Unico
American Corporation Profit Sharing Plan. Company employees who are at least 21
years of age and have been employed by the Company for at least two years are
participants in such Plan. Pursuant to the terms of such Plan, the Company
annually contributes for the account of each participant an amount equal to a
percentage of the participant's eligible compensation as determined by the Board
of Directors. Participants must be employed by the Company on the last day of
the plan year to be eligible for contribution. Participants are entitled to
receive distribution of benefits under the Plan upon retirement, termination of
employment, death or disability.
Money Purchase Plan
- -------------------
During the year ended December 31, 1999, the Company adopted the Unico American
Corporation Money Purchase Plan. This plan covers the present executive officers
of the Company. Pursuant to the terms of such Plan, the Company annually
contributes for the account of each participant an amount equal to a percentage
of the participant's eligible compensation as determined by the Board of
Directors. However, amounts contributed to the Unico American Corporation Profit
Sharing Plan will be considered first in determining the actual amount available
under the Internal Revenue Service maximum contribution limits. Participants
must be employed by the Company on the last day of the plan year to be eligible
for contribution. Participants are entitled to receive distribution of benefits
under the Plan upon retirement, termination of employment, death or disability.
Retirement plans expense was as follows:
Year ended December 31, 2005 $867,532
Year ended December 31, 2004 $759,482
Year ended December 31, 2003 $674,977
NOTE 14 - STATUTORY CAPITAL AND SURPLUS
- ---------------------------------------
Crusader is required to file an annual statement with insurance regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory). Statutory accounting practices differ in certain
respects from GAAP. The more significant of these differences for statutory
accounting are (a) premium income is taken into earnings over the periods
covered by the policies, whereas the related acquisition and commission costs
are expensed when incurred; (b) fixed maturity securities are reported at
amortized cost, or the lower of amortized cost or market value, depending on the
quality of the security as specified by the NAIC; (c) equity securities are
valued by the NAIC as required by Statutory Accounting Principles; d)
non-admitted assets are charged directly against surplus; (e) loss reserves and
unearned premium reserves are stated net of reinsurance; and (f) federal income
taxes are recorded when payable and deferred taxes, subject to limitations, are
recognized but only to the extent that they do not exceed 10% of statutory
surplus; changes in deferred taxes are recorded directly to surplus as regards
policyholders. Additionally, the cash flow presentation is not consistent with
U.S. generally accepted accounting principles and reconciliation from net income
to cash provided by operations is not presented. Comprehensive income is not
presented under statutory accounting.
Crusader Insurance Company statutory capital and surplus are as follows:
As of December 31, 2005 $36,586,441
As of December 31, 2004 $29,436,343
Crusader Insurance Company statutory net income (loss) is as follows:
Year ended December 31, 2005 $6,817,451
Year ended December 31, 2004 $3,343,859
Year ended December 31, 2003 $(3,106,103)
53
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The insurance department also conducts periodic financial examinations of
Crusader. The insurance department has completed its financial examination of
Crusader's December 31, 2004, statutory financial statements. A preliminary
report on the examination was issued by the department of insurance on January
13, 2006. No significant issues were reported in the preliminary report.
The Company believes that Crusader's statutory capital and surplus were
sufficient to support the insurance premiums written based on guidelines
established by the NAIC.
Crusader is restricted in the amount of dividends it may pay to its parent in
any twelve (12) month period without prior approval of the California Department
of Insurance. Presently, without prior approval, Crusader may pay a dividend in
any twelve (12) month period to its parent equal to the greater of (a) 10% of
Crusader's statutory policyholders' surplus or (b) Crusader's statutory net
income for the preceding calendar year. There were no dividends paid by Crusader
to Unico in 2005, 2004, or in 2003. Based on Crusader's statutory surplus as
regards policyholders as of December 31, 2005, the maximum dividend that could
be made by Crusader to Unico without prior regulatory approval in 2006 is
$3,658,644.
In December 1993, the National Association of Insurance Commissioners (NAIC)
adopted a Risk-Based Capital (RBC) Model Law for property and casualty
companies. The RBC Model Law is intended to provide standards for calculating a
variable regulatory capital requirement related to a company's current
operations and its risk exposures (asset risk, underwriting risk, credit risk
and off-balance sheet risk). These standards are intended to serve as a
diagnostic solvency tool for regulators that establishes uniform capital levels
and specific authority levels for regulatory intervention when an insurer falls
below minimum capital levels. The RBC Model Law specifies four distinct action
levels at which a regulator can intervene with increasing degrees of authority
over a domestic insurer if its RBC is equal to or less than 200% of its computed
authorized control level RBC. A company's RBC is required to be disclosed in its
statutory annual statement. The RBC is not intended to be used as a rating or
ranking tool nor is it to be used in premium rate making or approval. Crusader's
adjusted capital at December 31, 2005, was 400% of authorized control level
risk-based capital.
Insurance Regulatory Information System (IRIS) was developed by a committee of
state insurance regulators primarily to assist state insurance departments in
executing their statutory mandate to oversee the financial condition of
insurance companies. IRIS helps those companies that merit highest priority in
the allocation of the regulators' resources on the basis of 12 financial ratios
that are calculated annually. The analytical phase is a review of annual
statements and the financial ratios. The ratios and trends are valuable in
pointing to companies likely to experience financial difficulties, but are not
themselves indicative of adverse financial condition. The ratio and benchmark
comparisons are mechanically produced and are not intended to replace the state
insurance department's own in-depth financial analysis or on-site examinations.
An unusual range of ratio results has been established from studies of the
ratios of companies that have become insolvent or have experienced financial
difficulties. In the analytical phase, companies that receive four or more
financial ratio values outside the usual range are analyzed in order to identify
those companies that appear to require immediate regulatory action.
Subsequently, a more comprehensive review of the ratio results and an insurer's
annual statement is performed to confirm that an insurer's situation calls for
increased or closer regulatory attention. In 2005, the Company was not outside
the usual values on any of the twelve IRIS ratio tests.
NOTE 15 - STOCK PLANS
- ---------------------
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 on
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 December 31, 2005. These options expire 10 years from the date
of the grant.
On December 18, 2002, the Company granted 182,000 incentive stock options under
the Company's 1999 Omnibus Stock Plan. On December 30, 2005, the Company
accelerated the vesting of 37,500 options that were originally schedule to vest
on January 1, 2006, and 30,000 options that were originally schedule to vest on
January 1, 2007 (see Note 1). As of December 31, 2005, 173,000 of those options
were outstanding and exercisable,
54
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6,500 options had been exercised and 2,500 options had been terminated. These
options expire 10 years from the date of the grant.
The changes in the number of common shares under option are summarized as
follows:
Weighted Average
Options Exercise Price
------- --------------
Outstanding at December 31, 2002 287,000 $5.356
Options granted - -
Options exercised - -
Options terminated (10,000) 9.250
-------
Outstanding at December 31, 2003 277,000 5.216
Options granted - -
Options exercised (2,500) 3.110
Options terminated (2,500) 3.110
-------
Outstanding at December 31, 2004 272,000 5.254
Options granted - -
Options exercised (4,000) 3.110
Options terminated - -
-------
Outstanding at December 31, 2005 268,000 $5.286
=======
Options exercisable were 268,000 at December 31, 2005, at a weighted average
exercise price of $5.286; 149,500 at December 31, 2004, at a weighted average
exercise price of $7.01; 95,000 at December 31, 2003, at a weighted average
exercise price of $9.25.
The following table summarizes information regarding the stock options
outstanding at December 31, 2005:
Weighted Weighted Weighted
Average Average Average
Number of Remaining Exercise Price Number of Exercise Price
Exercise Options Contractual Life of Outstanding Options of Exercisable
Price Outstanding (Years) Options Exercisable Options
----- ----------- ----- ------- ----------- -------
$9.25 95,000 3.65 9.25 95,000 $9.25
$3.11 173,000 6.96 3.11 173,000 $3.11
NOTE 16 - TAXES ON INCOME
- -------------------------
The provision for taxes on income consists of the following:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Current provision:
Federal $3,319,904 $2,947,668 $703,663
State 142,923 64,400 572,822
--------- --------- ---------
Total federal and state 3,462,827 3,012,068 1,276,485
Deferred 288,599 (21,110) (195,764)
--------- --------- ---------
Provision for taxes $3,751,426 $2,990,958 $1,080,721
========= ========= =========
55
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax provision reflected in the consolidated statements of operations
is different than the expected federal income tax on income as shown in the
table below:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Computed income tax expense $3,558,586 $2,948,636 $730,786
Tax effect of:
State tax, net of federal tax benefit 272,789 65,237 370,784
Tax exempt income (4,166) (10,612) (34,071)
Other (75,783) (12,303) 13,222
--------- --------- ---------
Income tax per financial statements $3,751,426 $2,990,958 $1,080,721
========= ========= =========
The components of the net federal income tax asset included in the financial
statements as required by the assets and liability method are as follows:
Year ended December 31
----------------------
2005 2004
---- ----
Deferred tax assets:
Discount on loss reserves $2,270,225 $2,368,238
Unearned premiums 2,116,186 2,418,595
Unrealized loss on investments 196,904 -
State income tax deductible in future periods 145,270 152,306
Other 112,072 104,644
--------- ---------
Total deferred tax assets $4,840,657 $5,043,783
--------- ---------
Deferred tax liabilities:
Deferred acquisition costs $2,501,101 $2,789,102
Unrealized gain on investments - 193,785
State tax on undistributed insurance company earnings 283,663 157,249
Tax depreciation in excess of book depreciation 112,758 66,913
Other 173,849 169,539
--------- ---------
Total deferred tax liabilities $3,071,371 $3,376,588
--------- ---------
Net deferred tax assets $1,769,286 $1,667,195
========= =========
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax assets will be realized. The amount of the
deferred tax assets considered realizable could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
The Company and its wholly owned subsidiaries file consolidated federal and
combined California income tax returns. Pursuant to the tax allocation
agreement, Crusader and American Acceptance Corporation are allocated taxes or
(in the case of losses) tax credits at current corporate rates based on their
own taxable income or loss.
As a California insurance company, Crusader is obligated to pay a premium tax on
gross premiums written in all states that Crusader is admitted. Premium taxes
are deferred and amortized as the related premiums are earned. The premium tax
is in lieu of state franchise taxes and is not included in the provision for
state taxes.
NOTE 17 - 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 year ended
December 31, 2005, the Company did not purchase any shares of the Company's
common stock. As of December 31, 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.
56
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - EARNINGS PER SHARE
- ----------------------------
A reconciliation of the numerator and denominator used in the basic and diluted
earnings per share calculation is presented below:
Year ended December 31
----------------------
2005 2004 2003
---- ---- ----
Basic Earnings Per Share
- ------------------------
Net income numerator $6,715,004 $5,681,500 $1,068,650
========= ========= =========
Weighted average shares outstanding denominator 5,495,948 5,490,346 5,489,604
========= ========= =========
Per share amount $1.22 $1.03 $0.19
Diluted Earnings Per Share
- --------------------------
Net income numerator $6,715,004 $5,681,500 $1,068,650
========= ========= =========
Weighted average shares outstanding 5,495,948 5,490,346 5,489,604
Effect of diluted securities 116,478 90,949 43,508
--------- --------- ---------
Diluted shares outstanding denominator 5,612,426 5,581,295 5,533,112
========= ========= =========
Per share amount $1.20 $1.02 $0.19
NOTE 19 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------
Summarized unaudited quarterly financial data for each of the calendar years
2005 and 2004 is set forth below:
Comparable Period by Quarter Ended
----------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Calendar Year 2005
- ------------------
Total revenues $15,481,114 $15,662,323 $15,204,435 $14,834,650
Income before taxes 2,356,327 2,643,991 2,585,017 2,881,095
Net income 1,505,180 1,693,313 1,661,458 1,855,053
Earnings per share: Basic $0.27 $0.31 $0.30 $0.34
Diluted $0.27 $0.30 $0.30 $0.33
Calendar Year 2004
- ------------------
Total revenues $15,680,191 $15,243,414 $15,477,954 $15,501,751
Income before taxes 1,968,444 1,945,412 2,119,372 2,639,230
Net income 1,257,997 1,233,390 1,426,213 1,763,900
Earnings per share: Basic $0.23 $0.22 $0.26 $0.32
Diluted $0.23 $0.22 $0.26 $0.32
57
Item 9. Changes in and Disagreements With Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
--------------------
None
Item 9A. 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
December 31, 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.
Item 9b. Other Information
- ---------------------------
None
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Information in response to Item 10 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
Item 11. Executive Compensation
- --------------------------------
Information in response to Item 11 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
- ----------------------------------------------------------------------------
Related Stockholder Matters
---------------------------
Information in response to Item 12 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Information in response to Item 13 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
Item 14. Principal Accountant Fees and Services
- ------------------------------------------------
Information in response to Item 14 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
58
PART IV
-------
Item 15. Exhibits and Financial Statement Schedules
- ----------------------------------------------------
(a) Financial Statements, Schedules and Exhibits:
1. Financial statements:
The consolidated financial statements for the fiscal year ended December
31, 2005, are contained herein as listed in the index to consolidated
financial statements on page 34.
2. Financial schedules:
Index to Consolidated Financial Statements
------------------------------------------
Independent Registered Public Accounting Firms' Report on Financial
Statement Schedules
Schedule II - Condensed Financial Information of Registrant
Schedule III - Supplemental Insurance Information
Schedules other than those listed above are omitted, since they are not
applicable, not required, or the information required being set forth is
included in the consolidated financial statements or notes.
3. Exhibits:
3.1 Articles of Incorporation of Registrant, as amended. (Incorporated
herein by reference to Exhibit 3.1 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1984.)
3.2 By-Laws of Registrant, as amended. (Incorporated herein by reference
to Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1991.)
10.1 Unico American Corporation Profit Sharing Plan & Trust. (Incorporated
herein by reference to Exhibit 10.1 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1985.)*
10.2 The Lease dated July 31, 1986, between Unico American Corporation and
Cheldin Management Company. (Incorporated herein by reference to
Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1987.)
10.3 The Lease Amendment #1 dated February 22, 1995, between Unico American
Corporation and Cheldin Management amending the lease dated July 31,
1986. (Incorporated herein by reference to Exhibit 10.5 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1995.)
10.4 1999 Omnibus Stock Plan of Unico American Corporation (Incorporated
herein by reference to Exhibit A to Registrant's Proxy Statement for
its Annual Meeting of Shareholders held June 4, 2000.)*
21 Subsidiaries of Registrant. (Incorporated herein by reference to
Exhibit 22 to Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1984.)
23 Consent of Independent Registered Public Accounting Firm - KPMG LLP.
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.
* Indicates management contract or compensatory plan or arrangement.
59
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 28, 2006
UNICO AMERICAN CORPORATION
By: /s/ Erwin Cheldin
-----------------
Erwin Cheldin
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Erwin Cheldin Chairman of the Board, March 28, 2006
- ----------------- President and Chief
Erwin Cheldin Executive Officer,
(Principal Executive Officer)
/s/ Lester A. Aaron Treasurer, Chief Financial March 28, 2006
--------------- Office and Director
Lester A. Aaron (Principal Accounting and
Principal Financial Officer)
/s/ Cary L. Cheldin Executive Vice President March 28, 2006
--------------- and Director
Cary L. Cheldin
/s/ George C. Gilpatrick Vice President, Secretary March 28, 2006
-------------------- and Director
George C. Gilpatrick
/s/ David A. Lewis Director March 28, 2006
--------------
David A. Lewis
/s/ Warren D. Orloff Director March 28, 2006
--------------------
Warren D. Orloff
/s/ Donald B. Urfrig Director March 28, 2006
- --------------------
Donald B. Urfrig
60
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
The Board of Directors and Stockholders
Unico American Corporation:
Under date of March 23, 2006, we reported on the consolidated balance sheets of
Unico American Corporation and subsidiaries as of December 31, 2005 and 2004,
and the related consolidated statements of operations, comprehensive income,
changes in stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 2005, as contained in the 2005 annual
report to stockholders. These consolidated financial statements and our report
thereon are incorporated by reference in the annual report on Form 10-K for the
year 2005. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial statement schedules
as listed under Item 15(a)2. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG LLP
Los Angeles, California
March 23, 2006
61
SCHEDULE II
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS - PARENT COMPANY ONLY
December 31 December 31
2005 2004
---- ----
ASSETS
------
Investments
Short-term investments $9,358 $9,147
----- -----
Total Investments 9,358 9,147
Cash 7,017 8,317
Accrued investment and other income 12,902 6,000
Investments in subsidiaries 67,740,804 61,038,810
Property and equipment (net of accumulated depreciation) 824,504 278,404
Other assets 470,442 456,787
---------- ----------
Total Assets $69,065,027 $61,797,465
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
- -----------
Accrued expenses and other liabilities $156,352 $149,797
Payables to subsidiaries (net of receivables) (1) 20,514,302 18,494,793
Income taxes payable - 227,550
Notes Payable - related parties - 500,000
---------- ----------
Total Liabilities $20,670,654 $19,372,140
---------- ----------
STOCKHOLDERS' EQUITY
- --------------------
Common stock $2,720,487 $2,708,047
Net unrealized investment gains (losses) (382,224) 376,172
Retained earnings 46,056,110 39,341,106
---------- ----------
Total Stockholders' Equity $48,394,373 $42,425,325
---------- ----------
Total Liabilities and Stockholders' Equity $69,065,027 $61,797,465
========== ==========
(1) The Company and its wholly owned subsidiaries file consolidated federal and
combined California income tax returns. Pursuant to a tax allocation
agreement, Crusader Insurance Company and American Acceptance Corporation
are allocated taxes or (in the case of losses) tax credits at current
corporate rates based on their own taxable income or loss. The payable to
subsidiaries includes their income tax receivable or liability included in
the consolidated return.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
62
SCHEDULE II (continued)
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS - PARENT COMPANY ONLY
FOR THE YEARS ENDED DECEMBER 31,
2005 2004 2003
---- ---- ----
REVENUES
- --------
Net investment income $6,120 $9,293 $9,315
Other income 13,820 11,981 15,974
------ ------ ------
Total Revenue 19,940 21,274 25,289
EXPENSES
- --------
General and administrative expenses 6,930 9,257 18,670
----- ----- ------
Income before equity in net income of
of subsidiaries 13,010 12,017 6,619
Equity in net income of subsidiaries 6,701,994 5,669,483 1,062,031
--------- --------- ---------
Net Income $6,715,004 $5,681,500 $1,068,650
========= ========= =========
The Company and its subsidiaries file a consolidated federal income tax return.
Unico received cash dividends from American Acceptance Corporation of $500,000
in the year ended December 31, 2005, and $200,000 in the year ended December 31,
2004.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
63
SCHEDULE II (continued)
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS - PARENT COMPANY ONLY
FOR THE YEARS ENDED DECEMBER 31
2005 2004 2003
---- ---- ----
Cash flows from operating activities: Cash flows from operating activities:
Net income $6,715,004 $5,681,500 $1,068,650
Adjustments to reconcile net income to net cash
from operations
Undistributed equity in net (income) of subsidiaries (6,701,994) (5,669,483) (1,062,031)
Depreciation and amortization 160,571 95,084 89,821
Accrued expenses and other liabilities 6,555 (138,543) (44,338)
Accrued investment and other income (6,902) 6,000 (6,000)
Income taxes receivable (payable) (227,550) - 1,548,427
Other assets (13,655) (298,227) (20,963)
------ ------- ---------
Net cash provided (used) from operations (67,971) (323,669) 1,573,566
------ ------- ---------
Cash flows from investing activities
(Increase) in short-term investments (211) (50) (35)
Additions to property and equipment (706,671) (50,398) (58,717)
------- ------ -------
Net cash (used) by investing activities (706,882) (50,448) (58,752)
------- ------ ------
Cash flows from financing activities
Proceeds from issuance of common stock 12,440 7,775 -
Proceeds from notes payable - related parties - - 1,500,000
Repayment of notes payable - related parties (500,000) (1,000,000) (750,000)
Net change in payables and receivables from subsidiaries 1,261,113 1,357,540 (2,256,145)
--------- --------- ---------
Net cash provided (used) by financing activities 773,553 365,315 (1,506,145)
------- ------- ---------
Net increase (decrease) in cash (1,300) (8,802) 8,669
Cash at beginning of year 8,317 17,119 8,450
----- ------ -------
Cash at end of year $7,017 $8,317 $17,119
===== ===== ======
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
64
SCHEDULE III
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Future
Benefits, Benefits, Amortization
Deferred Losses, Claims, of Deferred
Policy and Loss Net Losses and Policy Other Net
Acquisition Adjustment Unearned Premium Investment Settlement Acquisition Operating Premium
Cost Expenses Premiums Revenue Income Expenses Costs Costs Written
---- -------- -------- ------- ------ -------- ----- ----- -------
Year Ended
December 31, 2005
Property &
Casualty $7,356,179 $101,914,548 $31,212,433 $50,477,920 $4,248,399 $31,513,732 $10,512,688 $2,402,397 $46,030,707
Year Ended
December 31, 2004
Property &
Casualty $8,203,238 $87,469,000 $35,656,393 $50,106,568 $4,204,573 $34,450,738 $10,319,186 $1,746,815 $51,089,573
Year Ended
December 31, 2003
Property &
Casualty $8,054,363 $78,139,090 $34,675,180 $37,106,099 $4,801,133 $31,720,533 $7,941,199 $2,418,935 $47,420,157
65
EXHIBIT INDEX
-------------
Exhibit
No. Description
-- -----------
3.1 Articles of Incorporation of Registrant, as amended. (Incorporated
herein by reference to Exhibit 3.1 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1984.)
3.2 By-Laws of Registrant, as amended. (Incorporated herein by
reference to Exhibit 3.2 to Registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 1991.)
10.1 Unico American Corporation Profit Sharing Plan & Trust.
(Incorporated herein by reference to Exhibit 10.1 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1985.)*
10.2 The Lease dated July 31, 1986, between Unico American Corporation and
Cheldin Management Company. (Incorporated herein by reference to
Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1987.)
10.3 The Lease Amendment #1 dated February 22, 1995, between Unico
American Corporation and Cheldin Management amending the lease dated
July 31, 1986. (Incorporated herein by reference to Exhibit 10.5 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1995.)
10.4 1999 Omnibus Stock Plan of Unico American Corporation (Incorporated
herein by reference to Exhibit A to Registrant's Proxy Statement for
its Annual Meeting of Shareholders held June 4, 2000.)*
21 Subsidiaries of Registrant. (Incorporated herein by reference to
Exhibit 22 to Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1984.)
23 Consent of Independent Registered Public Accounting Firm - KPMG LLP.
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.
* Indicates management contract or compensatory plan or arrangement.