SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report under Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the quarterly period ended March 31, 2006 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-3978
UNICO AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 95-2583928
(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification No.)
23251 Mulholland Drive, Woodland Hills, California 91364
(Address of Principal Executive Offices) (Zip Code)
(818) 591-9800
(Registrant's telephone number, Including Area Code)
No Change
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerator
filer and large accelerator in Rule 12b-2 of the Exchange Act. (Check one):
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
--- ---
5,582,065
Number of shares of common stock outstanding as of May 11, 2006
1
PART 1 - FINANCIAL INFORMATION
------------------------------
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31 December 31
2006 2005
---- ----
ASSETS
- ------
Investments
Available for sale:
Fixed maturities, at market value (amortized cost:
March 31, 2006 $139,029,188; December 31, 2005 $136,128,428) $138,088,391 $135,549,300
Short-term investments, at cost 4,578,317 4,475,162
----------- -----------
Total Investments 142,666,708 140,024,462
Cash 112,475 13,472
Accrued investment income 1,148,308 1,207,278
Premiums and notes receivable, net 6,353,636 6,740,793
Reinsurance recoverable:
Paid losses and loss adjustment expenses 906,609 1,711,710
Unpaid losses and loss adjustment expenses 25,671,758 25,679,081
Deferred policy acquisition costs 6,928,590 7,356,179
Property and equipment (net of accumulated depreciation) 798,087 824,504
Deferred income taxes 1,802,259 1,769,286
Other assets 626,869 970,414
----------- -----------
Total Assets $187,015,299 $186,297,179
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
- -----------
Unpaid losses and loss adjustment expenses $101,742,757 $101,914,548
Unearned premiums 29,134,005 31,212,433
Advance premium and premium deposits 783,572 867,404
Income taxes payable 874,454 -
Accrued expenses and other liabilities 4,357,207 3,908,421
----------- -----------
Total Liabilities $136,891,995 $137,902,806
----------- ===========
STOCKHOLDERS' EQUITY
- --------------------
Common stock, no par - authorized 10,000,000 shares; issued and outstanding
shares 5,522,065 at March 31, 2006, and 5,496,315 at
December 31, 2005 $2,800,570 $2,720,487
Accumulated other comprehensive (loss) (620,926) (382,224)
Retained earnings 47,943,660 46,056,110
---------- ----------
Total Stockholders' Equity $50,123,304 $48,394,373
---------- ----------
Total Liabilities and Stockholders' Equity $187,015,299 $186,297,179
=========== ===========
See notes to unaudited consolidated financial statements.
2
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31
--------
2006 2005
---- ----
REVENUES
- --------
Insurance Company Revenues
Premium earned $14,844,899 $16,675,645
Premium ceded 3,630,589 3,849,687
---------- ----------
Net premium earned 11,214,310 12,825,958
Net investment income 1,333,663 1,035,847
Other income 27,531 25,824
---------- ----------
Total Insurance Company Revenues 12,575,504 13,887,629
Other Revenues from Insurance Operations
Gross commissions and fees 1,299,706 1,373,325
Investment income 21,253 13,421
Finance charges and fees earned 173,012 203,042
Other income 4,200 3,697
---------- ----------
Total Revenues 14,073,675 15,481,114
---------- ----------
EXPENSES
- --------
Losses and loss adjustment expenses 6,518,454 8,372,112
Policy acquisition costs 2,450,848 2,605,672
Salaries and employee benefits 1,284,891 1,287,357
Commissions to agents/brokers 157,693 185,040
Other operating expenses 747,646 674,606
---------- ----------
Total Expenses 11,159,532 13,124,787
---------- ----------
Income Before Taxes 2,914,143 2,356,327
Income Tax Provision 1,026,593 851,147
--------- ---------
Net Income $1,887,550 $1,505,180
========= =========
PER SHARE DATA
- --------------
Basic Shares Outstanding 5,505,663 5,494,847
Basic Earnings Per Share $0.34 $0.27
Diluted Shares Outstanding 5,625,523 5,615,644
Diluted Earnings Per Share $0.34 $0.27
See notes to unaudited consolidated financial statements.
3
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended
March 31
--------
2006 2005
---- ----
Net Income $1,887,550 $1,505,180
Other changes in comprehensive income, net of tax:
Unrealized gains (losses) on securities classified
as available-for-sale arising during the period (238,702) (632,834)
--------- -------
Comprehensive Income $1,648,848 $872,346
========= =======
See notes to unaudited consolidated financial statements.
4
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31
---------------------------
2006 2005
---- ----
Cash Flows from Operating Activities:
Net Income $1,887,550 $1,505,180
Adjustments to reconcile net income to net cash from operations
Depreciation 57,204 23,877
Bond amortization, net 5,007 47,540
Changes in assets and liabilities
Premium, notes and investment income receivable 446,127 796,712
Reinsurance recoverable 812,424 (1,250,090)
Deferred policy acquisitions costs 427,589 461,803
Other assets 343,545 (32,377)
Reserve for unpaid losses and loss adjustment expenses (171,791) 3,493,233
Unearned premium reserve (2,078,428) (2,566,069)
Funds held as security and advanced premiums (83,832) (138,431)
Accrued expenses and other liabilities 448,787 2,419,939
Income taxes current/deferred 964,447 576,147
--------- ---------
Net Cash Provided from Operations 3,058,629 5,337,464
--------- ---------
Investing Activities
Purchase of fixed maturity investments (20,905,767) (7,488,163)
Proceeds from maturity of fixed maturity investments 18,000,000 2,500,000
Net (increase) in short-term investments (103,155) (75,948)
Additions to property and equipment (30,787) (29,309)
--------- ---------
Net Cash (Used) by Investing Activities (3,039,709) (5,093,420)
--------- ---------
Financing Activities
Proceeds from issuance of common stock 80,083 12,440
Repayment of notes payable - related parties - (250,000)
------ -------
Net Cash Provided (Used) by Financing Activities 80,083 (237,560)
------ -------
Net increase in cash 99,003 6,484
Cash at beginning of period 13,472 15,016
------ ------
Cash at End of Period $112,475 $21,500
======= ======
Supplemental Cash Flow Information Cash paid during the period for:
Interest - $5,000
Income taxes - $275,000
See notes to unaudited consolidated financial statements.
5
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
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 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.
Principles of Consolidation
- ---------------------------
The accompanying unaudited consolidated financial statements include the
accounts of Unico American Corporation and its subsidiaries. All significant
inter-company accounts and transactions have been eliminated in consolidation.
Basis of Presentation
- ---------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with U.S. generally accepted accounting principles (GAAP) for
interim financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 2006, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2006. Quarterly financial statements should be read in conjunction with the
consolidated financial statements and related notes in the Company's 2005 Annual
Report on Form 10-K as filed with the Securities and Exchange Commission.
Use of Estimates in the Preparation of the Financial Statements
- ---------------------------------------------------------------
The preparation of financial statements in conformity with GAAP requires the
Company to make estimates and assumptions that affect its reported amounts of
assets and liabilities and its disclosure of any contingent assets and
liabilities at the date of its financial statements, as well as its reported
amounts of revenues and expenses during the reporting period. Actual results
could differ materially from those estimates.
NOTE 2 - Stock-Based Compensation
- ---------------------------------
Prior to January 1, 2006, the Company applied 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 had elected to
continue to apply the intrinsic-value based method of accounting described above
and had adopted only the disclosure requirements of SFAS 123, as amended through
December 31, 2005. On January 1, 2006, the Company adopted FASB Statement No.
123R "Share-Based Payment" (SAFS 123R) on a modified prospective basis.
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 of
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
6
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
that will be excluded from current and future periods as a result of the
acceleration of the vesting of the options is approximately $89,100.
On adoption of SFAS 123R on the modified prospective basis on January 1, 2006,
there were no unvested stock options or awards and therefore there was no
adjustment recorded upon adoption. Prospectively grants of share-based payment
awards will be accounted for in accordance with SFAS 123R and compensation
expense recognized based on an estimate of the number of awards expected to
actually vest based on the estimate of fair value of the awards.
Had compensation cost for the Company's stock-based compensation plan been
reflected in the accompanying consolidated financial statements based on the
fair value at the grant dates for option awards consistent with the method of
SFAS 123, the Company's net income would have been reduced to the pro forma
amounts indicated below:
Three Months Ended
March 31
--------
2006 2005
---- ----
Net Income
As reported $1,887,550 $1,505,180
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects - 7,432
--------- ---------
Pro forma $1,887,550 $1,497,748
========= =========
Income Per Share
As reported $0.34 $0.27
Pro forma $0.34 $0.27
Income Per Share - Assuming Dilution:
As reported $0.34 $0.27
Pro forma $0.34 $0.27
Calculations of the fair value under the method prescribed by SFAS No. 123 were
made using the Black-Scholes Option-Price Model with the following weighted
average assumptions used for the 1999 and 2002 grants:
2002 1999
Grant Grant
----- -----
Dividend yield 1.40% 2.46%
Expected volatility 34% 43%
Expected lives 10 Years 10 Years
Risk-free interest rates 4.05% 6.09%
Fair value of options granted $1.32 $4.30
NOTE 3 - REPURCHASE OF COMMON STOCK - EFFECT ON STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------
The Company has previously announced that its Board of Directors had authorized
the repurchase in the open market from time to time of up to an aggregate of
945,000 shares of the common stock of the Company. During the three months ended
March 31, 2006, the Company did not repurchase any shares of the Company's
common stock. As of March 31, 2006, the Company had purchased and retired under
the Board of Directors' authorization an aggregate of 868,958 shares of its
common stock at a cost of $5,517,465.
NOTE 4 - EARNINGS PER SHARE
- ---------------------------
The following table represents the reconciliation of the numerators and
denominators of the Company's basic earnings per share and diluted earnings per
share computations reported on the Consolidated Statements of Operations for the
three months ended March 31, 2006 and 2005:
7
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
Three Months Ended
March 31
--------
2006 2005
---- ----
Basic Earnings Per Share
- ------------------------
Net income numerator $1,887,550 $1,505,180
========= =========
Weighted average shares outstanding denominator 5,505,663 5,494,847
========= =========
Basic Earnings Per Share $0.34 $0.27
Diluted Earnings Per Share
- --------------------------
Net income numerator $1,887,550 $1,505,180
========= =========
Weighted average shares outstanding 5,505,663 5,494,847
Effect of diluted securities 119,860 120,797
--------- ---------
Diluted shares outstanding denominator 5,625,523 5,615,644
========= =========
Diluted Earnings Per Share $0.34 $0.27
NOTE 5 - RECENTLY ISSUED ACCOUNTING STANDARDS
- ---------------------------------------------
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. FSP 115-1 did not significantly impact the Company's
financial statements upon its adoption on January 1, 2006.
NOTE 6 - SEGMENT REPORTING
- --------------------------
Statement of Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures
about Segments of an Enterprise and Related Information," became effective for
fiscal years effective after December 15, 1997. SFAS No. 131 establishes
standards for the way information about operating segments is reported in
financial statements. The Company has adopted SFAS No. 131 and has identified
its insurance company operation, Crusader Insurance Company (Crusader), as its
primary reporting segment. Revenues from this segment comprised 89% of
consolidated revenues for the three months ended March 31, 2006, and 90% of
revenues for the three months ended March 31, 2005. The Company's remaining
operations constitute a variety of specialty insurance services, each with
unique characteristics and individually insignificant to consolidated revenues.
8
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
Revenues, income before income taxes, and assets by segment are as follows:
Three Months Ended
March 31
--------
2006 2005
---- ----
Revenues
- --------
Insurance company operation $12,575,504 $13,887,629
Other insurance operations 4,991,057 5,462,244
Intersegment elimination (1) (3,492,886) (3,868,759)
--------- ---------
Total other insurance operations 1,498,171 1,593,485
--------- ---------
Total Revenues $14,073,675 $15,481,114
========== ==========
Income Before Income Taxes
Insurance company operation $3,236,608 $2,398,193
Other insurance operations (322,465) (41,866)
--------- ---------
Total Income Before Income Taxes $2,914,143 $2,356,327
========= =========
As of March 31
--------------
2006 2005
---- ----
Assets
- ------
Insurance company operation $167,901,164 $157,219,525
Intersegment eliminations (2) (1,994,565) (1,770,109)
----------- -----------
Total insurance company operation 165,906,599 155,449,416
Other insurance operations 21,108,700 21,327,261
---------- ----------
Total Assets $187,015,299 $176,776,677
=========== ===========
(1) Intersegment revenue eliminations reflect commission paid by Crusader to
Unifax Insurance Systems, Inc., (Unifax) a wholly owned subsidiary of the
Company.
(2) Intersegment asset eliminations reflect the elimination of Crusader
receivables and Unifax payables.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Overview
- --------
General
- -------
Unico American Corporation is an insurance holding company that underwrites
property and casualty insurance through its insurance company subsidiary;
provides property, casualty, health and life insurance through its agency
subsidiaries; and through its other subsidiaries provides insurance premium
financing and membership association services.
The Company had a net income of $1,887,550 for the three months ending March 31,
2006, compared to net income of $1,505,180 for the three months ended March 31,
2005, an increase in net income of $382,370 (25%).
This overview discusses some of the relevant factors that management considers
in evaluating the Company's performance, prospects, and risks. It is not
all-inclusive and is meant to be read in conjunction with the entirety of the
management discussion and analysis, the Company's financial statements and notes
thereto, and all other items contained within the report on this Form 10-Q.
Revenue and Income Generation
- -----------------------------
The Company receives its revenue primarily from earned premium derived from the
insurance company operations, commission and fee income generated from the
insurance agency operations, finance charges and
9
fee income from the premium finance operations, and investment income from cash
generated primarily from the insurance operation. The insurance company
operation generates approximately 89% of the Company's total revenue. The
Company's remaining operations constitute a variety of specialty insurance
services, each with unique characteristics and individually not material to
consolidated revenues.
Insurance Company Operation
- ---------------------------
The property and casualty insurance industry is highly competitive and includes
many insurers, ranging from large companies offering a wide variety of products
worldwide to smaller, specialized companies in a single state or region offering
only a single product. Many of the Company's existing or potential competitors
have considerably greater financial and other resources, have a higher rating
assigned by independent rating organizations such as A.M. Best Company, have
greater experience in the insurance industry, and offer a broader line of
insurance products than the Company. Currently, Crusader is writing primarily
Commercial Multiple Peril business only in the state of California. Crusader's
A.M. Best Company rating is B+ (Very Good) with a rating outlook of stable.
A primary challenge of the property and casualty insurance company operation is
contending with the fact that the Company sells its products before the ultimate
costs are actually known. When pricing its products, the Company projects the
ultimate losses and loss adjustment expenses that it anticipates will be
incurred after the policy is sold. In addition, factors such as changes in,
among other things, regulations, the legal environment, and inflation can all
impact the ultimate cost.
The 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.
Crusader's underwriting results are as follows:
Three Months Ended March 31
---------------------------
Increase
2006 2005 (Decrease)
---- ---- --------
Net premium earned $11,214,310 $12,825,958 $(1,611,648)
Less:
Losses and loss adjustment expenses 6,518,454 8,372,112 (1,853,658)
Policy acquisition costs 2,450,848 2,605,672 (154,824)
--------- --------- ---------
Total 8,969,302 10,977,784 (2,008,482)
--------- ---------- ---------
Underwriting Profit
(Before Income Taxes) $2,245,008 $1,848,174 $396,834
========= ========= =======
The improved underwriting results for the three months ended March 31, 2006, as
shown in the above table, is primarily the result of a decrease in losses and
loss adjustment expenses. As a result of underwriting losses in 2000 through
2002, management analyzed and acted upon various components of its underwriting
activity. The Company believes that the implementation of those actions
contributed to the improved underwriting results. Losses and loss adjustment
expenses of all prior accident years were approximately $1,347,000 (favorable
development) in the three months ended March 31, 2006, compared to losses and
loss adjustment expenses of all prior accident years of approximately $739,000
(favorable development) in the three months ended March 31, 2005.
Premium written before reinsurance decreased $1,343,085 (10%) to $12,766,471 for
the three months ended March 31, 2006 compared to $14,109,556 for the three
months ended March 31, 2005. Policies issued decreased 722 (15%) to 3,973 for
the three months ended March 31, 2006, compared to 4,695 for the three months
ended March 31, 2005. The decrease in written premium before reinsurance for the
three months ended March 31, 2006, is primarily a result of the decrease in the
number of policies issued during the period. Despite the increased competition
in the property and casualty marketplace, the Company believes that rate
adequacy is more important than premium growth and underwriting profit is the
Company's primary goal. Average written premium per policy increased $208 to
$3,213 as of March 31, 2006, compared to $3,005 as of March 31, 2005.
10
Other Operations
- ----------------
The Company's other revenues from insurance operations consists of commissions,
fees, finance charges, and investment and other income. Excluding investment and
other income, these operations accounted for approximately 10% of total revenues
in the three months ended March 31, 2006 and March 31, 2005.
Investments and Liquidity
- -------------------------
The Company generates revenue from its investment portfolio, which consisted of
approximately $143.6 million (at amortized cost) at March 31, 2006, compared to
$140.6 million (at amortized cost) at December 31, 2005. Although the portfolio
slightly increased in 2006, investment income increased $305,648 (29%). The
increase in investment income is primarily a result of the increase in the
Company's annualized weighted average investment yield from 3.1% in the three
months ended March 31, 2005, to 3.8% in the current period. Due to the current
interest rate environment, the Company continues to purchase fixed maturity
investments with approximately two-year maturities and with minimal credit risk.
Liquidity and Capital Resources
- -------------------------------
Due to the nature of the Company's business (insurance and insurance services)
and whereas Company growth does not normally require material reinvestments of
profits into property or equipment, the cash flow generated from operations
usually results in improved liquidity for the Company.
Crusader generates a significant amount of cash as a result of its holdings of
unearned premium reserves, reserves for loss payments, and its capital and
surplus. Crusader's loss and loss adjustment expense payments are the most
significant cash flow requirement of the Company. These payments are continually
monitored and projected to ensure that the Company has the liquidity to cover
these payments without the need to liquidate its investments. As of March 31,
2006, the Company had cash and investments of $143,719,980 (at amortized cost)
of which $140,225,687 (98%) were investments of Crusader.
As of March 31, 2006, the Company had invested $139,029,188 (at amortized cost)
or 97% of its invested assets in fixed maturity obligations. In accordance with
Statement of Financial Accounting Standard No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the Company is required to classify
its investments in debt and equity securities into one of three categories:
held-to-maturity, available-for-sale, or trading securities. Although all of the
Company's investments are classified as available-for-sale, the Company's
investment guidelines place primary emphasis on buying and holding high-quality
investments.
The Company's investments in fixed maturity obligations of $139,029,188 (at
amortized cost) include $925,707 (0.7%) of pre-refunded state and municipal
tax-exempt bonds, $113,237,560 (81.4%) of U.S. treasury securities, $3,000,000
(2.2%) of U.S. government sponsored enterprise securities, $21,365,921 (15.3%)
of industrial and miscellaneous securities, and $500,000 (0.4%) of long-term
certificates of deposit.
The balance of the Company's investments is in short-term investments that
include U.S. treasury bills, bank money market accounts, certificates of
deposit, commercial paper, and a short-term treasury money market fund.
The Company's investment guidelines on equity securities limit investments in
equity securities to an aggregate maximum of $2,000,000. The Company's
investment guidelines on fixed maturities limit those investments to high-grade
obligations with a maximum term of eight years. The maximum investment
authorized in any one issuer is $2,000,000 and the maximum in any one U.S.
government agency or U.S. government sponsored enterprise is $3,000,000. This
dollar limitation excludes bond premiums paid in excess of par value and U.S.
government or U.S. government guaranteed issues. Investments in municipal
securities are primarily pre-refunded and secured by U.S. treasury securities.
The short-term investments are either U.S. government obligations, FDIC insured,
or are in an institution with a Moody's rating of P2 and/or a Standard & Poor's
rating of A1. All of the Company's fixed maturity investment securities are
rated and readily marketable and could be liquidated without any materially
adverse financial impact.
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 March 31, 2006, the Company had incurred approximately $665,000
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. In addition, the Company is in the
process of enhancing its technology related to its underwriting procedures to
better accommodate its customer's needs and to improve operating efficiencies.
11
The Company has previously announced that its Board of Directors had authorized
the repurchase in the open market from time to time of up to an aggregate of
945,000 shares of the common stock of the Company (see Note 3). No shares were
repurchased in the three months ended March 31, 2006.
Although material capital expenditures may also be funded through borrowings,
the Company believes that its cash and short-term investments as of the date of
this report, net of trust restriction of $270,941, statutory deposits of
$700,000, cash of $200,000 deposited with superior courts in lieu of bonds, and
the dividend restriction between Crusader and Unico plus the cash to be
generated from operations, should be sufficient to meet its operating
requirements during the next twelve months without the necessity of borrowing
funds.
Results of Operations
- ---------------------
All comparisons made in this discussion are comparing the three months ended
March 31, 2006, to the three months ended March 31, 2005, unless otherwise
indicated.
The Company had net income of $1,887,550 for the three months ending March 31,
2006, compared to net income of $1,505,180 for the three months ended March 31,
2005, an increase in net income of $382,370 (25%). Total revenue for the three
months ended March 31, 2006, decreased $1,407,439 (9%) to $14,073,675, compared
to total revenue of $15,481,114 for the three months ended March 31, 2005.
PREMIUM WRITTEN before reinsurance decreased $1,343,085 (10%) to $12,766,471 for
the three months ended March 31, 2006, compared to $14,109,556 for the three
months ended March 31, 2005. The Company primarily writes commercial multiple
peril business package policies in California. This line of business represents
approximately 98% of Crusader's total written premium for the three months ended
March 31, 2006 and 2005, respectively.
The $1,343,085 decrease in written premium in the three months ended March 31,
2006, compared to the three months ended March 31, 2005, was primarily the
result of the increased competition in the property and casualty 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 average gross written premium per policy issued is as follows:
Gross
Quarter Ended Written Policies Average Gross
March 31 Premium Issued Written Premium
------- ------- ------ ---------------
2006 $12,766,471 3,973 $3,213
2005 $14,109,556 4,695 $3,005
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 current plan to expand
into additional states or to expand its marketing channels. Instead, the Company
intends to continue to allocate its resources toward improving its California
business rates, rules, and forms. The Company continues to believe that it can
compete effectively and profitably by offering better service and by marketing
its policies through its current independent agents and brokers.
PREMIUM EARNED before reinsurance decreased $1,830,746 (11%) to $14,844,899 for
the three months ended March 31, 2006, compared to $16,675,645 for the three
months ended March 31, 2005. The Company writes annual policies and, therefore,
earns written premium over the one-year policy term. The decrease in earned
premium is a direct result of the related decrease in written premium previously
discussed.
Premium ceded decreased $219,098 (6%) to $3,630,589 for the three months ended
March 31, 2006, compared to ceded premium of $3,849,687 in the three months
ended March 31, 2005. Earned premium ceded consists of both premium ceded under
the Company's current reinsurance contracts and premium ceded to the Company's
provisionally rated reinsurance contracts. Prior to January 1, 1998, the
Company's reinsurer charged a provisional rate on exposures up to $500,000 that
was subject to adjustment and was based on the amount of losses ceded, limited
by a maximum percentage that could be charged. That provisionally rated treaty
was cancelled on a runoff basis in 1997. Direct earned premium, earned ceded
premium, and ceding commission are as follows:
12
Three Months Ended March 31
---------------------------
Increase
2006 2005 (Decrease)
---- ---- --------
Direct earned premium $14,844,899 $16,675,645 $(1,830,746)
Earned ceded premium
Excluding provisionally rated ceded premium 3,599,580 3,650,109 (50,529)
Provisionally rated ceded premium 31,009 199,578 (168,569)
--------- --------- -------
Total earned ceded premium 3,630,589 3,849,687 (219,098)
Ceding commission 1,145,967 1,198,403 (52,436)
--------- --------- -------
Earned ceded premium, net of ceding commission $2,484,622 $2,651,284 $(166,662)
========= ========= =======
Total earned ceded premium was 24% of direct earned premium in the three months
ended March 31, 2006, compared to 23% in the three months ended March 31, 2005.
There was no change in the ceding commission rate.
In 2006 and 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.
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 2006 and
2005 1st layer primary excess of loss treaties do not provide for a contingent
commission.
INVESTMENT INCOME, excluding realized investment gains, increased $305,648 (29%)
to $1,354,916 for the three months ended March 31, 2006, compared to investment
income of $1,049,268 for the three months ended March 31, 2005. The increase in
investment income in the current period as compared to the prior year period is
a result of an increase in the company's annualized weighted average yield from
3.1% in the prior year period to 3.8% in the current period. The increase in the
annualized weighted average yield is a result of the reinvestment of maturing
investments and cash generated from operations at higher yields.
The average yield on the Company's investments is as follows:
Three Months Ended March 31
---------------------------
2006 2005
---- ----
Average Invested Assets $142,105,548 $134,616,062
Total Investment Income $1,354,916 $1,049,268
Annualized Yield on Average Invested Assets 3.8% 3.1%
The par value, amortized cost, estimated market value and weighted average yield
of fixed maturity investments at March 31, 2006, by contractual maturity are as
follows. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
penalties.
Weighted
Maturities by Par Average
Calendar Year Value Amortized Cost Market Value Yield
------------- ----- -------------- ------------ -----
December 31, 2006 $45,672,000 $45,699,951 $45,404,782 3.2%
December 31, 2007 67,775,000 67,663,696 67,081,217 4.2%
December 31, 2008 18,410,000 18,437,938 18,368,397 4.7%
December 31, 2009 7,000,000 7,127,603 7,133,995 5.3%
December 31, 2010 100,000 100,000 100,000 4.4%
----------- ----------- ----------- ---
Total $138,957,000 $139,029,188 $138,088,391 4.0%
=========== =========== ===========
13
The weighted average maturity of the Company's fixed maturity investments was
1.2 years as of March 31, 2006 compared to 1.3 years as of March 31, 2005. Due
to the current interest rate environment, management believes it is prudent to
purchase fixed maturity investments with maturities of three years or less and
with minimal credit risk.
At March 31, 2006, the Company held fixed maturity investments with unrealized
appreciation of $122,861 and fixed maturity investments with unrealized
depreciation of $1,063,658. 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 $1,063,658
at March 31, 2006, were temporary in nature. However, facts and circumstances
may change which could result in a decline in market value considered to be
other than temporary. The following table summarizes, all fixed maturities in an
unrealized loss position at March 31, 2006, the aggregate fair value and gross
unrealized loss by length of time those fixed maturities have been continuously
in an unrealized loss position:
Market Gross
Value Unrealized Loss
----- ---------------
0-6 months $70,178,440 $481,643
7-12 months 15,477,079 229,580
Over 12 months 38,398,819 352,435
---------- ---------
Total $125,054,338 $1,063,658
=========== =========
As of March 31, 2006, the fixed maturity investments with a gross unrealized
loss for a continuous period of 0 to 6 months consisted of U.S. treasury
securities and investment grade industrial securities. The fixed maturity
investments with a gross unrealized loss position for a continuous period of 7
to 12 months consisted of U.S. treasury securities and investment grade
industrial securities. The fixed maturity investments with a gross unrealized
loss position for a continuous period over 12 months consisted of U.S. treasury
securities, U.S. government sponsored enterprise securities, and pre-refunded
municipal bonds.
GROSS COMMISSION AND FEE INCOME decreased $73,619 (5%) to $1,299,706 for the
three months ended March 31, 2006, compared to commission and fee income of
$1,373,325 for the three months ended March 31, 2005. The decrease in gross
commission and fee income for the three months ended March 31, 2006, compared to
the three months ended March 31, 2005, are as follows:
Three Months Ended March 31
---------------------------
Increase
2006 2005 (Decrease)
---- ---- --------
Policy fee income $674,922 $738,021 $(63,099)
Health and life insurance program commission income 404,480 416,174 (11,694)
Membership and fee income 78,460 83,287 (4,827)
Other commission and fee income 8,931 14,967 (6,036)
Daily automobile rental insurance program:
Commission income (excluding contingent commission) 79,275 120,876 (41,601)
Contingent commission 53,638 - 53,638
--------- --------- ------
Total $1,299,706 $1,373,325 $(73,619)
========= ========= ======
Unifax primarily sells and services insurance policies for Crusader. The
commissions paid by Crusader to Unifax are eliminated as intercompany
transactions and are not reflected as income in the financial statements. Unifax
also receives policy fee income that is directly related to the Crusader
policies it sells. Policy fee income decreased $63,098 (9%) in the three months
ended March 31, 2006, compared to the three months ended March 31, 2005. The
decrease is the result of the 15% decrease in the number of Crusader policies
sold by Unifax, offset in part by an approximate 8% increase in the policy fee
for policies effective on or after June 26, 2005.
14
American Insurance Brokers, Inc. (AIB), a wholly owned subsidiary of the
Company, sells and services health insurance policies for individual/family and
small business groups and receives commission and fee income based on the
premiums that it writes. Commission income in this program decreased $11,694
(3%) in the three months ended March 31, 2006 compared to the three months ended
March 31, 2005. 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. Membership and fee income decreased $4,827 (6%) in the three months
ended March 31, 2006, compared to the three months ended March 31, 2005.
Beginning in May 2006, CIGNA HealthCare is offering new small group medical
insurance policies in the state of California. Currently, all new CIGNA small
group medical insurance policies are written through AIB and all CIGNA small
group medical insurance policyholders are members of AAQHC. The new programs are
competitively priced and are being actively marketed.
The daily automobile rental insurance program is produced by Bedford Insurance
Services, Inc., a wholly owned subsidiary of the Company. Bedford receives a
commission from a non-affiliated insurance company based on premium written.
Commission in the daily automobile rental insurance program (excluding
contingent commission) decreased $41,601 (34%) in the three months ended March
31, 2006, compared to the three months ended March 31, 2005. The decrease is
primarily due to the continued intense price competition in the daily automobile
rental insurance program. Bedford continues to produce business only at rates
that it believes to be adequate. Primarily due to declining sales, in April 2006
the Company hired for its Bedford division a new general manager who has
substantial experience in the daily automobile rental insurance business
Currently, the daily automobile rental insurance program operation is in the
course of developing and implementing a new business plan to better compete in
the market place.
LOSSES AND LOSS ADJUSTMENT EXPENSES were 58% of net premium earned for the three
months ended March 31, 2006, compared to 65% of net premium earned for the three
months ended March 31, 2005. In the quarter ended March 31, 2006, current year
losses incurred were 70% of net premium earned and the Company incurred
favorable development of prior years' losses of approximately $1,347,000. In the
quarter ended March 31, 2006, current year losses incurred were 71% of net
premium earned and the Company incurred favorable development of prior years'
losses of approximately $739,000.
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.
POLICY ACQUISITION COSTS consist of commissions, premium taxes, inspection fees,
and certain other underwriting costs, which are related to the production of
Crusader insurance policies. These costs include both Crusader expenses and
allocated expenses of other Unico subsidiaries. Crusader's reinsurers pay
Crusader a ceding commission, which is primarily a reimbursement of the
acquisition cost related to the ceded premium. Policy acquisition costs, net of
ceding commission, are deferred and amortized as the related premiums are
earned. These costs were approximately 22% of net premium earned for the three
months ended March 31, 2006, and 20% of net premium earned for the three months
ended March 31, 2005.
SALARIES AND EMPLOYEE BENEFITS decreased $2,466 (0.2%) to $1,284,891 for the
three months ended March 31, 2005, compared to salary and employee benefits of
$1,287,357 for the three months ended March 31, 2005.
15
COMMISSIONS TO AGENTS/BROKERS decreased $27,347 (15%) to $157,693 for the three
months ended March 31, 2006, compared to commission expense of $185,040 for the
three months ended March 31, 2005. The decrease is primarily the result of a
decrease in premiums written in the daily automobile rental insurance program
and the health and life insurance program and is related to the decrease in
commission income from both programs.
OTHER OPERATING EXPENSES increased $73,040 (11%) to $747,646 for the three
months ended March 31, 2006, compared to $674,606 for the three months ended
March 31, 2005.
INCOME TAX PROVISION was an expense of $1,026,593 (36% of pre-tax income) for
the three months ended March 31, 2006, compared to an income tax expense of
$851,147 (36% of pre-tax income) for the three months ended March 31, 2005. The
increase in tax expense was primarily due to a pre-tax income of $2,914,143
(including tax-exempt investment income of $3,724) in the three months ended
March 31, 2006, compared to pre-tax income of $2,356,326 (including tax-exempt
investment income of $3,724) in the three months ended March 31, 2005.
The effect of inflation on net income of the Company during the three months
ended March 31, 2006, and the three months ended March 31, 2005, was not
significant.
FORWARD LOOKING STATEMENTS
- --------------------------
Certain statements contained herein, including the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," that are not historical facts are forward-looking. These
statements, which may be identified by forward-looking words or phrases such as
"anticipate," "believe," "expect," "intend," "may," "should," and "would,"
involve risks and uncertainties, many of which are beyond the control of the
Company. Such risks and uncertainties could cause actual results to differ
materially from these forward-looking statements. Factors which could cause
actual results to differ materially include underwriting actions not being
effective, rate increases for coverages not being sufficient, premium rate
adequacy relating to competition or regulation, actual versus estimated claim
experience, regulatory changes or developments, unforeseen calamities, general
market conditions and the Company's ability to introduce new profitable
products.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company's consolidated balance sheet includes a substantial amount of
invested assets whose fair values are subject to various market risk exposures
including interest rate risk and equity price risk.
The Company's invested assets consist of the following:
March 31 December 31
2006 2005 Increase
---- ---- --------
Fixed maturity bonds (at amortized value) $138,529,188 $135,628,428 $2,900,760
Short-term cash investments (at cost) 4,578,317 4,475,162 103,155
Certificates of deposit (over 1 year, at cost) 500,000 500,000 -
----------- ----------- ---------
Total invested assets $143,607,505 $140,603,590 $3,003,915
=========== =========== =========
There have been no material changes in the composition of the Company's invested
assets or market risk exposures since the end of the preceding fiscal year
end.
ITEM 4 - CONTROLS AND PROCEDURES
- --------------------------------
An evaluation was carried out by the Company's management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
March 31, 2006, (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.
16
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1A. RISK FACTORS
- ---------------------
There were no material changes from risk factors as previously disclosed in the
Company's Form 10-K for the year ended December 31, 2005 in response to Item 1A
to Part I of Form 10-K.
ITEM 6 - EXHIBITS
- -----------------
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNICO AMERICAN CORPORATION
--------------------------
Date: May 12, 2006 By: /s/ ERWIN CHELDIN
----------------------
Erwin Cheldin
Chairman of the Board, President and Chief
Executive Officer, (Principal Executive Officer)
Date: May 12, 2006 By: /s/ LESTER A. AARON
------------------------
Lester A. Aaron
Treasurer, Chief Financial Officer, (Principal
Accounting and Principal Financial Officer)
EXHIBIT INDEX
- -------------
Exhibit No. Description
- ---------- -----------
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)